Worse than the Depression? On their blogs, Paul Krugman and Brad DeLong have both reproduced this graph (from here): and cited it as evidence that the UK economy is now worse than the Great Depression. I haven't been following the UK situation closely, but I'm instinctively inclined to agree with their criticisms of the Cameron government's austerity policies. Having said that, I think the graph (and implied interpretation) is a little unfair because of how Britain's experience during the interwar period differed significantly from that of the US.
While the US economy went pretty suddenly from the "roaring 20's" to the depression, the UK economy was already in bad shape throughout the 1920's, which I believe can be primarily attributed to the attempt to resume the gold standard at the pre-war parity (the infamous "Norman [Montagu] Conquest of $4.86"/ "Economic Consequences of Mr. Churchill") and the 1930's was just a further deterioration of an already dismal situation. George Osburne and Crowding-out. Paul Krugman reminds us of a June 22, 2010 speech by George Osburne where he made his case for fiscal austerity. These words jumped out at me: Higher interest rates, more business failures, sharper rises in unemployment, and potentially even a catastrophic loss of confidence and the end of the recovery ... An economy where the state does not take almost half of all our national income, crowding out private endeavour. The entirety of this speech reads like standard Republican fare with its call for cuts in government spending but no new taxes.
To be fair, however, the advice given by the members of the Council of Economic Advisors to President Lyndon Johnson back in 1966 worried about higher interest rates and crowding-out. But the UK and the US economies over the past few years have been very different. The very first meeting I ever had with the President-Elect was on exactly this topic. The one thing that has disillusioned me is the discussion of fiscal policy. Both Osborne and Balls get it wrong. The reaction of politicians to Moody's decision to put the UK's AAA rating on "negative outlook" was predictable - and predictably tendentious. The Chancellor described it as "proof that, in the current global situation, Britain cannot waver from dealing with its debts" while the Shadow Chancellor said it was a "significant warning.
" They are both wrong. It proves nothing and signifies less. The misdeeds and incompetence of the credit ratings agencies in the run-up to the financial crisis has been well documented. What is less well understood is that when it comes to rating sovereign debt, they simply do not know what they are talking about; worse than that, they do not even understand what their own credit ratings mean.
Moody's says its ratings are "opinions of relative credit risk of financial obligations...they address the possibility that a financial obligation will not be honored as promised. " The implication is obvious. So what, in fact, do Moody's think they are saying? The Purpose of Macroeconomic Policy? Chris Dillow is trying to figure out why the UK won't admit it's error in pursuing austerity.
Perhaps the answer is that for some it wasn't an error: Macro amateurs, micro geniuses? , by Chris Dillow: Simon Wren-Lewis says the coalition’s austerity is a “major macroeconomic policy error.” It’s difficult to imagine the government ever acknowledging this. Macroeconomic policy, then, is not only made by rank amateurs - not one of the five Treasury ministers in the Commons has a postgraduate qualification in economics and only one has significant experience in financial work. Which raises a paradox. Why the inconsistency? An alternative argument is that fiscal policy is not meant to be competent, but is instead meant to reflect the preferences of voters, and democracy is an intrinsic good, not an instrumental one.
There is, though, a third possibility. Suddenly, Everyone Is Realizing That The British Are Sending The US A Huge Warning. UK Growth reveals a major macroeconomic policy error.