Fisking Paul Krugman's Seriously Bad Ideas

A "New York Times" correspondent called Paul Krugman was in Oxford this month and write an article called "Seriously Bad Ideas," a title which is far more accurate as a description of the content of the article than of the ideas it was attacking.

For all I know he may have a good understanding of the US economy. But so far as Britain is concerned Mr Krugman is an even better candidate than Polly Toynbee if you are looking for a contrarian indicator - e.g. the main points he makes about this country, assume the opposite.

He starts with the perfectly valid point that the main cause of the crash from which we are now slowly recovering was "an inadequately regulated financial industry run wild" - although in my experience he is wrong to suggest anyone is seriously challenging that - but goes downhill from there.

He suggests that the "economic disaster" was "perpetuated by wrongheaded austerity policies"

So far as the Eurozone is concerned he has a point, though an overstated and grossly oversimplified one, because the ECB's policies did err on the side of monetary caution and were perhaps a little too rigid.

So far as Britain is concerned his statement bears no relationship whatsoever to reality. The fact, if not always the propaganda, was that the Treasury and the Bank of England were much more flexible in trying to gradually reduce the deficit without doing so in a deflationary way which might tip the economy into a worse recession than they are usually given credit for. Hence the continuation of carefully monitored Quantitative Easing and schemes like "Help to Buy."

Mr Krugman then accuses policy makers -and it's not clear whether he is talking about both sides of the Atlantic or just the States - of wrongly explaining the economic problems by arguing that

"the story must involve things like a skills gap — it’s not lack of jobs; we have the wrong workers for this high-technology globalized era, etc., etc. — even if there’s no evidence at all that such a gap is impeding recovery."

His link is to a page attacking policymakers in the USA who think there is a skills gap in that country, which he does not. The rest of his article is an attack on economic thinking in the UK, but Paul Krugman is not explicit about whether he thinks we have a skills gap here.

I think we do, and there is indeed evidence that our problems are not just macroeconomic. Indeed, Mr Krugman refers to one item of that evidence later in his own article, the fact that many parts of the British economy have a serious problem with productivity. More serious, in fact, than in any other major Western economy.

The UK's productivity problem is a big enough issue to warrant a major debate on its' own but there was a great piece on this in The Economist three weeks ago which you can read here.

Mr Krugman subtly misrepresents the way the press explained the recession, claiming that

"one important factor in the recent Conservative election triumph was the way Britain’s news media told voters, again and again, that excessive government spending under Labour caused the financial crisis."

No. Everyone accepts that what triggered the crisis was mismanagement by the world's financials services industry, particularly investment banking, and the first criticism of the previous Labour government was that the regulatory institutions Gordon Brown had put in place failed to stop this.

However, the burden of ballooning government debt did exacerbate and prolong the recession, and in turn the recession increased the problem of excessive debt which was already a problem in its' own right. That is the criticism of Labour overspending which was rightly made during the election.

Mr Krugman argues, based on comparisons published by the Bank of England over three centuries, that "Britain does not have a public debt problem."

Oh please. Historical comparisons like that one can occasionally be useful in explaining things you don't already understand. They are of no use whatsoever in trying to pretend that problems you obviously do have do not matter.

You can see an up-to-date figure for Britain's national debt at http://www.debtbombshell.com/

That page was written five years ago and most of the text is old but the graphics were updated in Feb 2015 and the figures on the ticking clock on the bombshell are up to date. As I write this post in June 2015 the UK public debt excluding bank bailouts, to the nearest billion pounds, is £1.496 trillion.

You can see the figure including bank bailouts at http://www.nationaldebtclock.co.uk/ and this is currently £1.549 trillion.

And the reason Britain does have a public debt problem is that the interest we have to pay on all that debt is enormous.

Even with interest rates at rock bottom levels, interest on the national debt is expected to be over £46 billion this year. It is expected to stay over £50 billion p.a. for at least the rest of the decade as you can read in a parliamentary report at

 http://researchbriefings.files.parliament.uk/documents/SN05745/SN05745.pdf

So even with interest rates at miniscule levels, the cost of interest on the government's debts is far more than we are spending on defence.

A modest rise in interest rates such as will be extremely likely as the economy recovers will see that cost quickly outstrip the combined total of present spending of the Home office and Department for Education.

In other words, with debt at the present level and at normal interest rates you can expect to pay more on interest on that debt than we are spending on schools, universities and policing put together.

And although the present government has cut the deficit by a third in absolute terms or by 50% as a proportion of GDP, it is still too large and consequently total debt is still going up.

The suggestion that we can afford to ignore this problem is the real Seriously Bad Idea.

This is what happens if you follow that policy indefinitely ...

Comments

Jim said…
There are times when borrowing can be a really good idea, the thing is you need to borrow for the right reasons not the wrong ones.

Let me explain using examples people can relate to.

I have a job offer, Its going to pay me £1000 per month, and is permanent, but I need a car in order to do the job and I have no car and am pretty skint. So I find a car for sale that costs me £2000, the only way I can buy the car is to borrow the £2000, so i could fear the debt and miss out on the job, or i could borrow the money from a bank willing to lend me 2 grand (mugs). I choose to borrow and I know over the year I have borrowed the debt for the will cost me £200 per month.

You see I, take the loan get the car, get the job, pay off the debt and live on the £800 per month i have left. (forget tax and fuel and stuff for now) - this is an example of a good debt.

I choose to borrow to invest in a goods i can use for production.


A bad debt.

I need a car to take my new girlfriend to the pictures and to go on holiday, I dont earn enough to save for a car and I need it now. so i borrow £2000 from a bank, and buy the car. The car costs me £200 per month in debt repayments (forget fuel and tax). Now you see this is a bad debt, it means I have £200 less each month for consumption (which is why i needed the car in the first place) and the car does not help me increase my monthly wage.

In this case I borrowed to consume, not to produce. Now my lifestyle has to change to pay off the debt, Unless of course I make things much much worse by "living off the credit card" whilst I repay the bank debt, but in the end all i will end up with is a very heavy credit card statement of which i cant afford to repay, and the bailifs taking away my beloved car. The girlfriend dumped me as I dont go anywhere with her since i hit my credit limit.

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