British Fashion Victims

British Fashion Victims

Paul Krugman
New York Times
October 21, 2010

In the spring of 2010, fiscal austerity became fashionable. I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis. It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying.

And it’s a fad that has been fading lately, as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. Most notably, the confidence fairy has been exposed as a myth. There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies of historical record, including one by the International Monetary Fund, have shown that this claim has no basis in reality.

No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.

Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs.

Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

Indeed, there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks — a shift from hope to fear. In his speech announcing the budget plan, George Osborne, the chancellor of the Exchequer, seemed to have given up on the confidence fairy — that is, on claims that the plan would have positive effects on employment and growth.

Instead, it was all about the apocalypse looming if Britain failed to go down this route. Never mind that British debt as a percentage of national income is actually below its historical average; never mind that British interest rates stayed low even as the nation’s budget deficit soared, reflecting the belief of investors that the country can and will get its finances under control. Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Krugman is the left winger economist for the NYT.

Will someone please shut Krugman up

Jeremy Warner
Telegraph.co.uk
October 23rd, 2010

Sorry, a bit late on this one, but I see old Kruggers, Nobel prize winner and New York Times columnist, is at it again. Not content to lecture his own country’s administration about how they are not spending enough, Professor Krugman lambasts Britain’s coalition government in his latest column for its deficit reduction plan, which he reckons will condemn the UK to a depression.

Here’s a taste: “What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it”.

Good stuff, and who knows? Maybe he’s right. Yet the idea that you can more or less indefinitely keep putting off deficit reduction until the economy is firing on all cylinders again just looks like an excuse to me for continuing to spend at unaffordable levels. He accuses the Tories of being “ideological” in their single minded pursuit of deficit reduction, and of using the crisis to dismantle the welfare state, yet he conveniently skirts around the underlying issue, which is in essence that the country can no longer afford this expenditure.

Osborne’s fiscal consolidation is aimed only at removing the structural deficit – which is the bit that won’t go away when the economy returns to normal. The Obama Administration’s reluctance to take similar action in the US is extraordinarily irresponsible, and one of the reasons why the Democrats are so hopelessly down in the polls.

Surveys show that only about 20 per cent of Americans are Krugmanesque type liberals. Some 40 per cent count themselves as conservatives and the rest, the disenfranchised middle, reckon on being moderates. Yet as others have observed, if you asked the right questions the great bulk of Americans would say they are both liberal and conservative – socially liberal, that is, but fiscally conservative.

The striking thing about my last two visits to the US is just how worried by the deficit most Americans are. Indeed they are ashamed by it, and rightly take the view that unless it is tackled soon, it will seriously undermine America’s long term economic prospects, not to mention its positions in the world. Obama’s failure to realise this, and to continue to force a minority liberal agenda down everyone’s throat, is the reason he’s lost the plot. To restore his presidency, he needs to move towards the centre, and that includes the construction of a robust deficit reduction plan that begins with dispatch.

Professor Krugman suggests that Britain has nothing to fear from excessive public debt, which is still as things stand below its long run historical average. He’s technically right about this, but like a lot of statistics used to support a particular, ideological position, it’s completely meaningless. Looking at the path of UK public debt as a percentage of GDP, there have indeed been quite long periods when it has been much higher than it is now, but these periods mainly coincided with prolonged and all embracing war – first the Napoleonic wars, then later the Boer war and the first world war. Britain had barely recovered from the financial consequences of the first world war by the time the second world war hit.

The big point missed by those who think elevated public debt doesn’t matter is that these periods of excessive debt utterly crippled the UK economy. Indeed, Britain’s decline through the twentieth century as an economic superpower directly correlates with increased indebtedness. Fighting wars is not good for economic health

Both America and Britain are again technically at war, but these conflicts are relatively small affairs by past standards. What makes the current unsustainable trajectory of public debt so worrying is that it’s not military spending that is the problem this time around. We cannot rely on demilitarisation to come to the rescue of the public finances, as it has in the past. Public debt is excessive for entirely different reasons – the excess in public spending is not on fighting wars but on treating ourselves – and unless America does something about it soon, the US will decline economically and geo-politically over the next fifty years as surely as Britain did in the last century.

Austerity is bound to be a popular measure until the cuts start to be made and people see how they affect their own situation. Will the cuts prove to be disastrous? We'll have to wait and see. Some are saying they were too severe, others that they weren't severe enough - and then of course there are those saying that they should not have taken place at all. The government couldn't really win - and they were only going to become more unpopular when the axe fell. For some of the Tories an opportunity to cut welfare was a dream come true - but the truth is that many in this country are angry with the career benefit claimers. I think we need something far more innovative than cuts to deal with those individuals - but innovation costs money.

There's always going to be winners and losers in things like this. The winners of the cuts are those who want future solvency and are fiscally conservative. The losers when cuts are made are those who don't give a shit about future solvency (see the French debacle) and only care about themselves.

The flip side is equally the same. Just change the words in my last paragraph.