Krugman’s Anti-Cameron Contradiction
NEW YORK – It is truly odd to read Paul Krugman rail, time and again, against the British government. His latest screed begins with the claim that “Britain’s economic performance since the financial crisis struck has been startlingly bad.” He excoriates Prime Minister David Cameron’s government for its “poor economic record,” and wonders how he and his cabinet can possibly pose “as the guardians of prosperity.”
Hmm. In recent months, Krugman has repeatedly praised the US economic recovery under President Barack Obama, while attacking the United Kingdom’s record. But when we compare the two economies side by side, their trajectories are broadly similar, with the UK outperforming the United States on certain indicators.
Consider, first, the unemployment rate. In the fourth quarter of 2007, the UK’s rate was 5.2%. When Cameron’s government took office in May 2010, it was 7.9%. In the most recent reporting period (November 2014-January 2015), it was 5.7%. In the US, the unemployment rate in the fourth quarter of 2007 was 4.8%, 9.8% in March-May 2010, and 5.7% in November 2014-January 2015. In both countries, the unemployment rate is therefore slightly above the pre-crisis (end-2007) level, with no significant net difference over the business cycle from the end of 2007 until now.
Next, let’s look at the employment rate, which in the UK stood at 72.9% of the population aged 16-64 at the end of 2007. It fell to 70.4% by the time the Cameron government came to power, but since then has risen strongly, to 73.3% in November 2014-January 2015, an all-time high. In the US, by contrast, the employment rate was 62.8% at the end of 2007, 58.6% in March-May 2010, and then only slightly higher, at 59.2%, during November 2014-January 2015 – still below the pre-crisis level. This suggests that there are more discouraged workers in the US than in the UK.
Finally, there is output growth. In the UK, real (inflation-adjusted) GDP fell by 3.8% from the fourth quarter of 2007 to the second quarter of 2010. It then rose by 8.1% from that point until the fourth quarter of 2014. In the US, real GDP fell by 1.6% from the fourth quarter of 2007 to the second quarter of 2010, and then rose by 10.5% from then until the fourth quarter of 2014. Thus, both countries have experienced moderately high and broadly similar growth rates since May 2010, when Cameron’s government took power.
Yes, UK growth has been slightly slower, but the British economy has also faced, among other factors, the headwind of sharply falling North Sea oil production during this period, whereas the US benefited from a shale-oil boom. Obviously, neither of these long-term trends can be fairly attributed to the governments currently in office. In any case, during the past two years, from the fourth quarter of 2012 to the fourth quarter of 2014, the US economy grew by a cumulative 5.6% while the UK economy grew by 5.4%, essentially the same as the US.
Krugman seems to make much of the fact that the UK did not bounce back even more strongly from a larger output decline between the fourth quarter of 2007 and the fourth quarter of 2010 – a fall that occurred before the Cameron government took office. That is true, and measured UK productivity growth has remained low, but nobody can be sure why.
Perhaps the unsustainable pre-2008 bubble was larger in the UK; perhaps the UK’s structure (particularly the larger share of finance in its GDP and the continued decline in energy output) made the initial downturn less reversible. The UK has been more vulnerable than the US to the eurozone’s prolonged crisis. Moreover, subtle differences between the US and UK in national income accounting should be taken into account in comparing productivity trends.
The International Monetary Fund’s estimate of the output gap (see its World Economic Outlook database) for both countries does not suggest that, as of 2014, the UK is more cyclically depressed than the US. Indeed, in the IMF’s estimates at least, the opposite is the case. The IMF puts the UK output gap (as a percent of potential GDP) at 1.2%, compared to 3.5% in the US. Of course, both estimates are subject to questions of interpretation; the IMF assumes, for example, that the UK was operating well above potential GDP in 2006-8.
The fact is that the US and UK economies look rather alike in their overall cyclical patterns, with sharp downturns from 2007 to 2010 followed by recoveries in both jobs and GDP since then, and with a fairly rapid pace of recovery in the past two years. So, if Krugman praises the Obama recovery, he should also praise the Cameron recovery. They are very similar.
Perhaps more notable is that both the US and UK economies have cast considerable doubt on Krugman’s oft-repeated view that a robust recovery would require further fiscal stimulus, a position that he maintained at least until 2013. The post-2010 recoveries in both countries came despite significant cuts in the structural (cyclically adjusted) budget deficit, suggesting that both recoveries occurred in the face of fiscal contraction. According to the IMF estimates, the structural budget deficit was cut from 8.4% of potential GDP in 2010 to 4.1% in 2014 in the UK, and from 9.1% to 4% in the US during the same period.
Rather than lambasting Cameron while lauding Obama, Krugman should be praising both countries for their recoveries. The truth is that – barring another Greek tragedy – both the UK and US are finally out of the post-2008 crisis. It is time for both countries to move beyond short-term macroeconomic policy and turn their attention to the challenges of long-term sustainable development.
http://www.project-syndicate.org/commentary/krugman-us-uk-recovery-contradiction-by-jeffrey-d-sachs-2015-04