British Fashion Vtctims

One of the maddening things about Krugman's columns is how devoid of serious argument they are. He virtually never deigns to actually discuss anything with any degree of depth. This column is a perfect example:

http://www.nytimes.com/2010/10/22/opinion/22krugman.html?_r=1&partner=rssnyt&emc=rss

"Britain, like America, is suffering from the aftermath of a housing and debt bubble."

OK, so Krugman agrees that the recession was caused by a "debt bubble", which is another way of saying there were massive, unsustainably high levels of public and private debt at the outset of the recession.


"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."

Let me summarize, in a nutshell, what happened in Britain and the United States. There was a massive housing and finance bubble, that briefly caused a surge in government revenue. Rather than saving this money, or using it to pay down existing debts, the British and American governments, in a breathtaking display of irresponsibility, spent it all, and then some, leading to a bizarre paradox of surging revenue and deepening indebtedness. The table above illustrates that the British government just kept on spending and borrowing.

Lets be clear on what Krugman is advising: Britian spent wildly, relying on revenue from what even Krugman acknowledges to be bubble. Of course, the bubble burst. Rather than acknowledge the reality that the revenues over time would be insufficient to support the expenditures that the government foolishly made and place spending in line with actual revenues, Krugman advocates perpetuating and institutionalizing spending that simply can't be sustained. In Krugman's world, mistakes should not be undone.

"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."

A little misleading -- during the boom Britain's public debt actually increased, again indicating gross mismanagement. So, its debt, even if "low", whatever that means, was much, much higher than one would expect given the boom Britain had just enjoyed.

"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."

More on this later -- I just wanted to include it as it is the heart of Krugman's argument.

"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."

Unfair on a lot of levels.

First, Mellon was a brilliant businessmen, succeeding in three businesses (banking, oil, and aluminum), which is three more businesses than Geithner, Bernake, et al. have succeeded in, combined. So, Mellon understood business.

Second, Mellon oversaw the economy's massive growth in the 1920s. Sure, there was a recession, but, Mellon oversaw an extremely robust economy marred by a recession. In contrast, FDR and his Keynesian advisers had control over the economy for the better part of a decade, and had nothing to show for it but massive unemployment and debt. Mellon, at a minimum, was generally successful. FDR in contrast was an unremitting failure.

Third, Mellon's philosophy -- free-markets -- had succeeded in turning a small collection of states into the greatest industrial power in the world in less than 150 years. So, unlike Keynesian successes, which are always around the corner, Mellon advocated a philosophy that actually produced results.

Fourth, Mellon's advice was ignored. His advocacy of free markets and sound money was ignored by Hoover and FDR in favor of deficit spending, fiat currencies, massive regulation, tightened money, and a suicidal round of protectionism (Smoot-Hawley). To simultaneously ignore Mellon's advice and then blame the same policies for failing to end the Depression is the height of dishonesty.

"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."

Krugman misses a simple point -- there is no money to pay these government workers. The British debt is on the cusp of surging to close to 90% of GDP, or 2-2.5 times its historical average (see tables above). There is no demand for these workers because they simply cannot be afforded.

Krugman also has this pernicious idea, common on the left, that somehow, government workers should not ever have to share in economic pain. Of course, government benefit during the good times, with increased hiring, pay, benefits, etc. But, when the economy contracts, when people are struggling, our nominal public servants shouldn't see their standing of living diminished at all.

"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."

Yes, the Tories are governing according to the principles that they were recently elected on. Like every political party in history, the Tories are using electoral victory to implement their goals. This is what is known as "democratic governance."

"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."

Viewing questions of fiscal policy in terms of "hope" and "fear" is an adolescent approach to economics, viewing it as a morality play, thereby obviating the need for reasoned analysis. Its an example of make-believe, embodied by Obama, in which invocation of magic words like "hope" and charisma can overcome economic and arithmetic realities and the need to make difficult decisions. And, for what its worth, I would argue that incurring massive debt, hamstringing future generations, far from hopeful, is an exceptionally cynical, selfish, and nihlistic thing to do.

"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."


What an irresponsible son-of-a-bitch for candidly discussing a bleak situation. Public officials have no right to publicly acknowledge that we live in a world of finite resources.

On a related note, Obama, the author of our nation's hopes and dreams, supported the stimulus bill by saying:

“We could lose a generation of potential and promise, as more young Americans are forced to forgo dreams of college or the chance to train for the jobs of the future.”

This is scary, scary stuff, designed by Obama to frighten people into supporting his policies by painting a horrific picture -- an entire lost generation -- of what will happen if people don't listen to him. I look forward to reading Krugman's criticisms of Obama as a fear-monger; Krugman is much too honest to have a double-standard.

"Never mind that British debt as a percentage of national income is actually below its historical average."

Remarkably, 2/3 of the way through a column ostensibly on British public finances, Krugman mentions their actual state for the first time. Unfortunately, his comment is basically wrong, and misleading. First, the historical average of debt to GDP is about 40%; its currently 60%, much higher than average. More fundamentally, as Krugman so often forgets, the world will not end on December 31, 2010. In very short order, by around 2015, public debt will surge to close to 90% of GDP (and come claim higher, if pensions are taken into account) -- see tables above. So, if there is an apocalypse in the next few months, killing us all, Krugman was wise. But, if we actually have to plan for the future, Krugman is at best being foolish, and at worst lying in pretending that Britain doesn't have an exceptional debt situation on its hands that is far, far worse than peacetime Britain has experienced in her history.

Since Krugman is fond of citing IMF studies, I will cite one of my own. According the IMF "the UK and the US also constrained in their degree of fiscal manoeuvre the more so owing to the run-up in public debt projected in coming years" and UK gross debt to GDP ratio will rise to 83.9% in 2015 from 61.5% in 2009. Of course, IMF stands "I Manufacture Fear", because anybody who suggests a limit to government debt is nothing but a fear-monger. Just kidding, the IMF really has released studies showing that the UK's public debt will explode over the next five years. Krugman of course makes no mention of this fact.


"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."

Taking fiscal cues from the bond markets is like getting personal financial advice from Visa. It is going to tell you to put more money on your Visa card and less in your 401(k). But, as should be blindingly obvious, what's good for creditors is not always good, and is often harmful, for debtors.

And, the low interest rates also stem in large part from central banks deciding to keep interest rates very low, meaning there is no return in private lending. There is something very, very perverse about governments keeping interest rates artificially low, and then using the low interest rates as proof that they are well-governed. Its not exactly objective, disinterested analysis.

"Britain, declared Mr. Osborne, was on the “brink of bankruptcy.”"

I want to reaffirm that I am not omitting anything from Krugman's column here. The head of Britain's finances is warning of bankruptcy, and Krugman literally doesn't respond. I think we all can agree that if Britain is literally bankrupt, new borrowing is a bad idea. But Krugman doesn't even discuss the fact that Britain may in fact be bankrupt, which seems like a highly relevant issue. Its just axiomatic that Britain should borrow, so Krugman doesn't bother to get into the messy details of Britain's actual finances. But, as they say, you may not be interested in reality, but reality is interested in you.

"What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy.

Dynamite analysis -- I'm hoping I can turn my paper on "something lucky" happening to economies into my PhD thesis.

"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."

I don't know anything about 1931 Britain, so I am agnostic on that issue, but in America in 1937 and Japan in 1997, both countries had been engaged in heavy-duty, Keynesian-inspired deficit spending for 5-6 years at least. This continues Krugman's bizarre habit of citing past Keynesian failures in support of future Keynesian policies.

To be fair, Krugman always cites 1937/1997 as examples of premature fiscal austerity. But, by 1937, America had been running a deficit (Hoover, much to his discredit, adopted deficit spending in 1930 or 1931) for 6 years. Nevertheless, according to Krugman and other Keynesian/FDR apologists, the fiscal austerity of the 1937 budget ruined the recovery. But, this precisely illustrates that the economic "growth" that Keynesians cite is totally illusory -- its nothing more than unsustainable borrowing, not actual growth. Its economically the same as an unemployed guy who spends $50,000 on his Visa card and pretends that he earns a $50,000 salary. Once the artificial prop of deficit spending -- which is unsustainable -- is removed, the "growth" disappears, underscoring that Keynesian polices offer no sustainable growth, and leave only a legacy of crippling debt.

Japan's Keynesian policies were extremely aggressive -- see the table above for how deeply indebted the Japanese government became. I'm not sure what happened in Japan in 1997 -- from context I assume that Japan committed the grievous sin of temporarily balancing its budget -- but Japan enacted at least six stimulus packages in the 1990s, including ones in 1995, 1998, and 1999. But, according to Krugman, this still wasn't enough, because for one year, 1997, Japan balanced its budget. Apparently, according to Krugman, a single balanced budget, even in the midst of a decade of massive borrowing, can destroy a Keynesian economy. But, if a Keynesian paradigm cannot, in the midst of a decade of deficits and stimuli, survive a single balanced budget, it is so fragile as to be illusory. Again, all we get from Krugman are excuses as to why Japan -- a country that by any standard was orthodox Keynesian -- has nothing to show for its massive debts.

Circling back, Krugman pays lip service to "eventually" balancing the British (and presumably American) budget. But, by criticizing 1937 America and especially 1997 Japan, he is showing that he really has no interest in ever balancing budgets; in fact, he has never identified when or how budgets should be balanced. Krugman has, as far as I can tell, never articulated a standard for determining when a recovery has occurred, or an instance when government spending should be cut.

Impliedly, Krugman advocates deficit spending for at least a decade. But, a decade of massive deficits, combined with the preexisting debt that was the actual cause of the recession and the looming liabilities stemming from the Baby Boomers' imminent retirement, will literally bankrupt Britain and the U.S.