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I Think Paul Krugman is Mistaken - Spectator Blogs

4 September 2012

6:03 PM

4 September 2012

6:03 PM

The great sage – once described to me by someone who attended a (highly) derivative speech he made on the Scottish economy as Woody Allen with statistics and no jokes – blogs that George Osborne is “Britain’s Paul Ryan”. Remarkably, this seems unfair on both Mr Osborne and Mr Ryan.

Anyway, Krugman writes:

Osborne’s big idea was that Britain should turn to fiscal austerity now now now, even though the economy remained deeply depressed; it would all work out, he insisted, because the confidence fairy would come to the rescue. Never mind those whining Keynesians who said that premature austerity would send Britain into a double-dip recession.

Strange to say, Britain’s recovery stalled soon after Cameron/Osborne began their new policies, and the country is now in a double-dip recession.

Up to a point, Lord Copper. You’d be hard pressed to make a case for Osborne’s success but, as the chart above demonstrates, you’d be just as hard-pressed to make the case that the programme of fiscal austerity that Osborne has actually delivered – which should not be confused with that which he promised – is markedly different from that which his predecessor, Alistair Darling, proposed prior to the last election.

It’s true that, over the course of the whole parliament Osborne hopes to achieve a small reduction in total spending whereas Darling planned to keep spending flat but, really, this is a difference of degree not kind.

In other words, you can make a plausible case that just as, in broad terms, Gordon Brown stuck to Ken Clarke’s spending plans for his first two years as Chancellor (not coincidentally his most accomplished years at the Treasury) so, again broadly speaking, Osborne has kept faith with his predecessor’s plans. He may not have wanted to but, so far, that’s what he has actually done.

Which might suggest, surely, that if Osborne is Britain’s Paul Ryan then, at the very least, Alistair Darling is some kind of mini-Ryan too.

Alternatively neither of them are anything of the sort and Krugman is, perhaps clumsily, trying to use British politics to make a domestic political point. Maybe so but it doesn’t seem a very useful point (even if you accept it).

Now perhaps Darling’s prognosis was mistaken (and might, of course, have changed had he remained in office) but that’s a different matter too. Osborne is not, however congenial it may to pretend otherwise, some kamikaze budget-slasher or coked-up austerity fiend. There was, though it suited both parties to deny it, quite a dollop of common ground between the rival Treasury teams before the last election and this appears to have been confirmed by events. At least in this we’re all in it together.

UPDATE: On the other hand, I may also be mistaken! Jonathan Portes emails to say I am:

Your graph (and hence the blog) is highly misleading, in the sense that it’s clearly not a comparison of the different stances of fiscal policy as outlined by Darling 2010, Osborne 2010 and Osborne  now.  There are two reasons for this:

a) GDP in the future is now considerably lower than forecast in 2010 – in part, as I and Paul [Krugman] would argue, because of the mistaken stance of fiscal policy. So not surprisingly spending as a proportion of GDP is higher than it would otherwise have been.  If things had turned out even worse the spending/GDP ratio would have been even higher. This is just not a meaningful measure; it’s an arithmetic sleight of hand.

b) you ignore taxes. The macro impacts of fiscal policy come primarily from the difference between taxes and spending.  I wouldn’t argue that fiscal policy was too tight if taxes were 4% of GDP lower and spending the same (that might not be optimal for other reasons but it would certainly represent looser fiscal policy).

[According to the IMF]  “On the side of the public sector, large and frontloaded fiscal adjustment has, as expected, been an important headwind. Consolidation amounting to a cumulative 4¾ percent of potential GDP in FY10/11 and FY11/12 is estimated to have subtracted roughly 2½ percentage points from growth during these two years.”



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