He’s at it again. From across the Atlantic comes yet more rubbish from the rock star economist and commentator Paul Krugman. The lesson of Corbyn’s victory, he says, is that the Labour moderates surrendered on the supposed austerity orthodoxy.
In the New York Times, he writes:
“The false accusations against Labour involve fiscal policy, specifically claims that the Labour governments that ruled Britain from 1997 to 2010 spent far beyond their means, creating a deficit and debt crisis that caused the broader economic crisis. The fiscal crisis, in turn, supposedly left no alternative to severe cuts in spending, especially spending that helps the poor.”
That is not, I repeat not, the accusation against New Labour and its poor handling of the economy. No-one says that the substantial increases in public spending after 2001 caused the broader economic crisis. Really, no-one serious in the UK says it. Only people such as Krugman and some Labour MPs say that others say it.
What is true is that Labour’s increases in spending in the 2000s were dangerously reliant on the proceeds of a crazy credit boom in the private sector, which was encouraged (and hailed as a new paradigm) by the government because it was popular with voters. But the increased spending, paid for by an unstable, mad boom, left Britain badly exposed for any downturn. Yet so deluded were policy-makers that the central claim of the government was that the problem of boom and bust had been solved. When the crash duly came, tax revenues plummeted and business experienced the effects of a sudden credit drought.
Why did it hit the UK so hard? In large part, it happened because the banking system had been allowed to get out of control, thanks to poor regulation and Brownite hubris. The balance sheets of the UK’s five clearing banks hit 450% of UK GDP around the time of the crisis. The equivalent figure in 2000 had been 143%. The UK had gone on a credit binge and had a deep recession, which the government (first Labour and then the Tory-led coalition) responded to by running large deficits.
But Krugman, a serious economist, is now a mono-maniac. Everything comes down to the supposedly evil, wicked, austerity orthodoxy swallowed by the Brits and the false narrative of the “neoliberal” media elite. He says:
“These claims have, one must admit, been picked up and echoed by almost all British news media. It’s not just that the media have failed to subject Conservative claims to hard scrutiny, they have reported them as facts. It has been an amazing thing to watch — because every piece of this conventional narrative is completely false.”
Again. Utter drivel from Krugman. Where is getting it from? What is he reading? The claims haven’t been echoed by almost all the British news media. If anything, the scale of Britain’s debt mountain, which stood at under £500bn when the Brown boom was its height and is now headed for £1.5trillion, is under-reported. Despite this, large numbers of British voters (talk to them, look at the polls) have quite a good instinctive understanding that the government at least needs to try to get spending under control or risk being blindsided by a future economic downturn or emergency. Hence the general election result.
The story of British economic policy in the last three decades is complex and much more interesting than the caricature. Deregulation in the 1980s is part of a much bigger international story about open markets and globalisation, which has had downsides as well as a huge upside. The centre-right and New Labour share some of the culpability for what followed here with the credit boom, although it was Brown who was Chancellor when consumer and property lending really went bonkers. Even the story of the difficulty the UK had recovering is more interesting than Krugman appears to think. It wasn’t all about government spending, and the employment situation is particularly fascinating. As Simon Nixon of the WSJ first showed in 2013, the war over bank capital with the Bank of England and the Treasury had as much to do with the faltering economy post-2010 as anything else, to say nothing of the early stages of the Eurozone crisis.
That being the case, how much longer will Krugman get away with painting a cartoonish picture of Britain’s economy?
