13 June 2015

Krugman gets it wrong again


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Would Americans mind us Brits sending back Paul Krugman? This week the King of the Keynesians’ latest epistle in the New York Times, on the supposed idiocy of public spending restraint, came bylined from Oxford, where he penned his latest assault on the UK government’s economic policies. On one level, that’s fine. The new Conservative government needs to be held to account; British economic policy is hardly perfect; and the Chancellor George Osborne’s announcement of a strict new “fiscal framework” reminds me of the boom time when Gordon Brown used to bang on about “Prudence” and his “Golden Rules”. Whatever happened to those?

But what grates about Krugman’s interventions is the superior tone he adopts when he has been, so consistently, wrongheaded about the UK economy and the employment picture in particular. British unemployment was down at 5.5% in May, despite all the dire warnings from the Krugman crowd several years ago of a looming employment apocalypse.

“Seriously Bad Ideas” is the headline on his latest column on these matters, which turns out to a very appropriate summation of said article. Krugman lambasts the UK government’s focus on deficit reduction and says the economy’s performance has been relatively poor.

Yet, as the economist Jeffrey Sachs observed recently of comparisons between the UK and the US:

“Yes, UK growth has been slightly slower, but the British economy has also faced, among other factors, the headwind of sharply falling North Sea oil production during this period, whereas the US benefited from a shale-oil boom. Obviously, neither of these long-term trends can be fairly attributed to the governments currently in office. In any case, during the past two years, from the fourth quarter of 2012 to the fourth quarter of 2014, the US economy grew by a cumulative 5.6% while the UK economy grew by 5.4%, essentially the same as the US.

Krugman is having none of it. The government’s record is terrible and the Tories cheated their way back into office at the election. He writes:

“In particular, one important factor in the recent Conservative election triumph was the way Britain’s news media told voters, again and again, that excessive government spending under Labour caused the financial crisis.

No one said this during election. Really, no one seriously argued that UK government spending before 2008 was the cause of the financial crisis. A few people in the Labour party said that their opponents were saying it, but no one was actually saying it.

Instead, it was said frequently that Gordon Brown’s policies left Britain extremely badly placed when the 2008 crisis hit, because this is true. Spending had rocketed in the previous six years and when an epoch-defining crash came – caused by reckless lending, other antics by banks that had been cheered on by governments, poor regulation of the wrong stuff and cheap money – tax revenues duly plummeted and a large deficit resulted.

But there is another point that Krugman fans always miss. The boom years in the UK immediately before the crash were an illusion, rooted in over reliance on massive banks and their profits and a consumer credit explosion that produced fake prosperity. On the eve of the crisis, RBS, lauded by Brown, was announcing profits before tax of more than £10billion. Soon after that, the taxpayer was having to recapitalise RBS to the tune of £45.2bn and the losses began to flow. Seven years later, only this week, George Osborne announced that he would begin reprivatising RBS.

Incidentally, please disregard the howls of outrage that the UK taxpayer should be getting all its money back. As I wrote in the Financial Times this week, it will be sold at a loss because investors do not think much of the prospects of a tightly-regulated domestic bank called RBS. The sale price cannot magically be inflated with political hot air to suit the populist, idiotic demands made on political talkshows and radio phone-ins. It is valued the way it is – lowly – for a reason.

Back to Krugman. He also declares that the UK does not have a debt problem, by historical standards. It might look that way, although he is comparing the current situation to the aftermath of enormous global conflicts. One would hope that we’re in better shape relatively speaking than we were in the years after the Second World War, which wrecked Europe and cost tens of millions of lives.

In truth, for all the talk of austerity economics, the UK has put on roughly £1trillion of government debt in the last decade, which is fine if you like that sort of thing (I don’t). It might be fine, of course, as long as money is cheap and there is an appetite for the right government debt. Analysts see these conditions stretching out into the distant future, years and years ahead, but then some analysts in the mid-2000s used to see the seemingly benign conditions then stretching out in much the same way. Look what happened next. Whoops.

In such circumstances, with the future unknowable, caution on public finances is advisable. It is a good idea, surely, for George Osborne to try (no matter how imperfectly) to get the books into some kind of order while he has the chance rather than splurging even more borrowed money to suit Paul Krugman.

Iain Martin is Editor of CapX