“Contrary to Paul Krugman’s bluster, Britain has experienced less fiscal austerity under Cameron than the US under Obama”
Paul Krugman is regarded as the world’s most influential economist. Since being awarded the Nobel prize in 2008, he has devoted much of his time to a widely syndicated and much quoted column in the New York Times. If someone is recognised as able to mould beliefs and attitudes, and therefore as highly effective in altering the policy debate, it is important to check whether he respects the evidence. Does Krugman inspect data before launching into print?
On March 23, he was rude about Britain. According to his column, “This Snookered Isle”, our problem is that we live with a “terrible, no-good economic discourse”. More precisely, the policy debate here suffers from “a misleading fixation on budget deficits”, so that “media organisations” routinely present as facts propositions that are “contentious if not just plain wrong”. Articles in British newspapers say that fears of excessive debt are “driving up interest rates”, although — according to Krugman — “zero evidence” can be cited for “such claims”.
By contrast, the United States has, in Krugman’s view, become more enlightened in the past few years. Commentators have moved in a Keynesian direction, abandoning the barbaric view that governments should control their expenditure and limit their deficits. It is clear that Krugman derides the shift towards deficit reduction that began under the Conservatives after they were elected in May 2010. The Cameron government opted for “harsh austerity”, to use a Krugman phrase, even if it “backed off” at some point from the harshest of the medicine. It is also clear that Krugman thinks that the Cameron government has pursued a much tighter fiscal policy than the US under Obama. Indeed, the Anglo-American policy difference has been so marked as to justify the condemnation of our “no-good economic discourse” with its “plain wrong” propositions.
But is it true that in the five years since 2010 the UK’s fiscal policy has been more restrictive than that of the US? The International Monetary Fund prepares statistics on fiscal policy in its 188 member states. It applies the same methodology in all countries, and tries to be an impartial and objective source of information. The usually accepted measure of fiscal policy is the change in the cyclically-adjusted (or “structural”) budget balance. What does the latest IMF database (used for its October 2014 World Economic Outlook) say about the change in the general government structural balance for the UK and the US in the five years from 2011 to 2015?
I give the numbers for the UK first. In 2011 the structural deficit was reduced by 2.4 per cent of GDP, in 2012 by 0.2 per cent and in 2013 by 2.0 per cent. A small increase of 0.3 per cent in 2014 is to be followed by a small reduction of 0.4 per cent in 2015. So overall the government deficit has been curbed, on a so-called “structural” basis, by almost 5 per cent of GDP during the reputed fiscal severity of the Cameron government.
What about the US? In 2011 the structural deficit was reduced by 1.3 per cent of GDP, in 2012 by 1.5 per cent, in 2013 by 1.6 per cent and in 2014 by 0.8 per cent, while in 2015 the figure is again a reduction, of 0.6 per cent of GDP. Krugman’s coterie may kid themselves that the left-liberal Obama administration has been much influenced by the advocacy of big deficits in Krugman’s journalism and, more generally, by a new Keynesian enlightenment. But the truth is that in the last five years Obama has overseen a cut in America’s structural deficit of nearly 6 per cent of GDP.
In short, “this snookered isle” has experienced less fiscal austerity under Cameron than the US under Obama. Further, both the American and British governments have been anxious that excessive budget deficits might be punished by financial markets, with potential investors demanding higher interest rates for extra risk. Krugman states that “zero evidence” is available that Greek-style crises lead to surges in interest costs on the public debt and, hence, to the need to slash non-interest spending to meet creditors’ requirements. But obvious evidence that a Greek-style crisis can have exactly these effects has now emerged. It comes, indeed, from Greece! A barmy left-wing government has denounced austerity, embarked on a Krugmanite increase in public spending, pushed up borrowing costs against itself and aggravated its own plight. Has the top columnist for the New York Times not noticed some of the recent headlines in the newspaper to which he contributes?
Paul Krugman writes well. The New York Times is lucky to have an economist who presents opinions with verbal panache, ideological fervour and no doubts. All the same, too much of his influence comes from an indulgence in abuse and bluster. Krugman does not check data, is cavalier in his attitude towards facts and events, and has been thoroughly wrong in his prognoses about the UK’s “deficit fetishism”.