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Paul Krugman and the economists who called it right

Don't forget those who warned of a double-dip as early as 2009.

By George Eaton Published 16 August 2012 15:28

New York Times columnist Paul Krugman. Photograph: Getty Images.

Paul Krugman, whose new book End This Depression Now! (reviewed by Will Hutton for the NS) should be at the top of everyone's summer reading list, has picked up on this week's NS cover story on how Osborne's supporters have turned against him. On his New York Times blog, he writes:

Good on them [the economists]. I was, however, disappointed to see so many of the prodigal economists asserting that they were responding to changed circumstances rather than admitting that they simply got it wrong.

For circumstances really haven’t changed; the UK had a depressed economy then, and it still does now. Fiscal austerity while the economy is depressed, and in particular when conventional monetary policy has reached its limits, was an obviously bad idea from day one. Not to put too fine a point on it, what I was writing about austerity back in 2010 looks just fine a couple of years later.

The fact of the matter is that the austerians chose to throw basic macroeconomics out the window. And that, not failure to anticipate negative surprises, is where they went wrong.

Another Cassandra was our economics editor, David Blanchflower, who was warning of the risk of a double-dip recession as early as October 2009:

Lesson number one in a deep recession is you don't cut public spending until you are into the boom phase. John Maynard Keynes taught us that. The euro area appears to be heading back into recession and the austerity measures being introduced in certain eurozone countries, especially those in Germany, will inevitably lower UK growth, too. It is extremely unlikely, therefore, that net trade will leap to our rescue. taught us that. The consequence of cutting too soon is that you drive the economy into a depression, with the attendant threats of rapidly rising unemployment, social disorder, rising poverty, falling living standards and even soup kitchens.

In the wake of Osborne's "emergency" Budget in June 2010, he wrote:

I am now convinced that as a result of this reckless Budget, the UK will suffer a double-dip recession or worse.

Blanchflower and Krugman are two of the few economists to have emerged from the events of recent years with their reputations enhanced, but one sympathises with Krugman's recent lament: "I'm sick of being Cassandra. I'd like to win for once".

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Tags: George Osborne Economy

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12 comments

Fri, 2012-09-07 09:18 — Forner Dag. DiplIng (not verified)

Prof Dr Paul Krugman ǁ wdr 5 ǁ 07/09/2012
Dearest Sir; It all depends on Sir Winston Churchill. He is a rather disturbing man. You are English and so you like, so you love to be proud about him. That’s clear but not fully understandable by outstanding people. It sounds funny. If you might be a polish it might be a little different. 1939 Sir Winston Churchill agreed in and managed upon the Kathyn Massacre with Mr Stalin. More than 30 thousand polish officers were massacred and brutally killed by the troupes of the Russian Secret Service under Mr Stalin control. Well, that’s the official number but a lot of people say it was about 70 thousand. Oh, what’s that, was Mr Stalin not in a close union with the dammed Hitler? Oh yes, but it shows Sir Winston Churchill and of course Mr Stalin knew at that point about the aggression of Poland, they knew about the Red Communist Troupes against Poland and the Hitler SS. That was why such a lot of the Polish went with the Hitler troupes.
And there is the so called Mr Stalin’s Torch-Men Command. That’s the Command N°0428 from the 17.Nov.1941. It says that the Russian Guerrillas in German Uniforms, especially in SS ones, had to destroy every asset, to kill any person including children in about 40 to 60 km alongside the Main Front. It had to be taken care that a few people left on every item to tell the others about the cruelties of the Germans.
The Russian Troops had a special designed carapace, or caterpillar armed vehicle designed by a very specialist out of South America. The carapace was running on normal chains like any other does. But these chains were driven of a special kind. In normal way these chains get their force from a cog wheel in the back or in the front. Not this special ones; all the rubber wheels normally only bearing the load of the carapace getting the force of moving direct from the engine. Well, what was this rather complicated construction good for? You know, carapaces run normally on uneven ground in the field or in the wood. If one of the chains is defect it is to be given up. Not this special carapace. It runs on uneven ground and then after leaving its chains it can do on streets, especially on German motorways. This carapace was not in use after the German attack.
Consequently the Red Russian Troupes kept on the other side of the river not fighting but in rest until the Polish Revolt Army lost their fight against the German troupes 1944. The rebellion would have a different end if the tactical knowledge of the Polish officers would have been present. Do you see the red Line? It’s ended a Red-Line. That was why the German SS generals accepted the Polish Rebellion Troupes as an ordinary Army and so took them as ordinary prisoners. That was why the Polish Generals, taken to the choice either to go to the Communist Army or stay with the Germans, decided to take the opportunity to remain with the Germans.
But here is the next step. One in the BRD (Germany) highly honoured Mr Prof Hc Dr Hc Marceli Reich-Ranicki; a man with a Polish, a German and an Israeli Passport; a man following the court’s decision must be called “The Eichman from Kattowitz” has been talking with the Polish Exile Government in Great Britain to come home to the Polish Home Base. The brave People of this Government in GB had been killed shortly after they got out of the aircraft on Polish Soil. Well, you know, this man, the Prof Hc Dr Hc Reich Ranicki, would be intelligent enough to invent the gasification. This man, Prof Reich Ranicki has been said to be collaborating with the Nazis by the Vienna governing major also a Jew.
Maybe that sounds curious but 1942 a book came out in the USA; ‘Germany must perish’. All the Germans were meant to be perished by sterilisation. It was said that so many Germans were there, so many women and so many men. The job would have been done by so many doctors. All Germans were to be castrated; Nazis, Democrats, Conservatives, and modern People, those who believed in Hitler, Communists, such who were fighting for the German Empire, Resistance People ... the only ones that were not talked about were the Jews. The book only needed to get known in Germany. The British BBC gave that notice time again and again. Those people who were listening to the enemy broadcast what was forbidden while the war got the knowledge first. What a pleasure for the Jews. That knowledge increased of course to the Jews right away. Figure out what it was like in the KZ? Imagine yourself what it was like to be in KZ in a KZ? Fantastic, isn’t it?
For you as a political and antifascist thinking one it notably important, after Cont Bernadotte had secured the Jews from Denmark – he had arranged for them to pass away to Stockholm by fisher boats – he was shot by the Star Tie under Shamir-Begin. Isn’t that wonderful, is it? You know Mr Wallenberg; he saved the Jewish people from Budapest. He, as a Diplomat gave them international papers and cached them in his international sick bay where even communist fighters were welcome. He was displaced by the conqueror of Budapest the Russian Jewish General Sherenkow. We have some messages that he lived a couple of decades in a prison in Russia.
You might not think about; the Russian Victors were not very faddy about the women. So they took every female into their lunacy. Yugoslavia printed a thick book – the size of a directory – with all the names of raped women. You remember, Yugoslavia were their comrades while fighting against fascism. What was with all the women in Aushwitz? Jew ore not Jew – they were all ...
Now a day there is a book on sale: “Hitler’s jüdische Soldaten” (Hitler’s Jewish Solders) Well, indeed, there is truth in it. Goring, the commanding officer of the air force is an hundred percent Jewish. In the hard-fought City of Stalingrad are about 12 generals in the leading of the military action. 12 generals, that means about 120 officers out of the General Staff. This solders fought for the victory of the German Empire. How could that happen? Didn’t this people now about Aushwitz? There granny, there whole family was killed in the same time they were fighting.
I’m getting a little disturbed. Nationalistic thinking people had given their money to the Centrum (a political party in older Germany) and the Liberals in Germany to shit the Nazis. The Nazis got their money from England. Merely poor telephone calls to England by the private Hitler brought the money for the propaganda paper of the clammy Nazi Party. Is that correct, isn’t it? There is need to be said something different. I don’t know whether you’ve had the time to inform you. Hitler had five body doubles 1933. Who did know with whom he was speaking? Three out of five photos made from the fuehrer in the Nazi regime is from the body doubles. The sightseeing of the Eifel Tower in Paris is a typical item.
We don’t understand; in the USA children were not learned about the biggest mischief in Europe. It’s a pity, they didn’t know anything about it.
Regards Dagobert R. Forner
ISBN: 0-473-10453-9 “Hitler was a British Agent” by Greeg Halle

Wed, 2012-09-05 16:58 — Will Podmore (not verified)

Stiglitz was right too - he pointed out, in The price of inequality, “The critical point to bear in mind in thinking about deficit reduction is that the recession caused the deficits, not the other way around. More austerity will only worsen the downturn, and the hoped-for improvement in the fiscal position will not emerge.”

He points out, “Europe’s crisis is not an accident, but it’s not caused by excessive long-term debts and deficits or by the ‘welfare’ state. It’s caused by excessive austerity – cutbacks in government expenditures that predictably led to the recession of 2012 – and a flawed monetary arrangement, the euro. When the euro was introduced, most disinterested economists were skeptical.” “Looking across Europe, among the countries that are doing best are Sweden and Norway, with their strong welfare states and large governments, but they chose not to join the euro.” After the crisis started, “The countries could agree only on further belt tightening, which forced Europe into a double-dip recession.”

Stiglitz warns, “cutbacks in expenditures and taxes will lead to a contraction in the economy. And if we go one step further, as the Right wants to do, to cut back expenditures even more, in a valiant if possibly fruitless attempt to reduce the deficit, the contraction will be even greater.” Simply, “cutting back on government spending destroys demand and destroys jobs.” He compares ‘austerity’ policies to medieval doctors’ bloodletting.

He notes, “The worst myths are that austerity will bring recovery and that more government spending will not. … Recessions are caused by lack of demand – total demand is less than what the economy is capable of producing. When the government cuts back on spending, demand is lowered even more, and unemployment increases. … Underlying the myth that austerity will bring confidence is often another myth – the myth that the national government’s budget is like a household’s budget. Every household, sooner or later, has to live within its means. When an economy has high unemployment, the simple rule does not apply to the national budget. This is because an expansion of spending can actually expand production by creating jobs that will be filled by people who would otherwise be unemployed. A single household, by spending more than its revenues, cannot change the macro-economy. A national government can. And the increase in GDP can be a multiple of the amount spent by the government.”

Sat, 2012-08-18 18:41 — Tony C. (not verified)

Krugman got it right? Really?

Does the author have any clue about economics, or the current trajectory of the economies of Europe, the U.S. and Japan?

Krugman is a Keynesian, and believed that it was possible to resolve the greatest credit/debt bubble in history by creating more debt. Does anyone still somehow imagine that that is possible?

Mon, 2012-08-20 06:06 — Amergin

Look its quite simple really. Osborne is having to borrow billions of pounds more than the last government ever did. Why? Because the number of people unemployed has risen and so people are spending less and no income tax. He borrows to pay for the unemployment. So what should he do borrow to have a massive infrastructure programme this will increase employment and spread outwards as people buy more and people are employed to supply what the people buy. All pay taxes, fuel, income NI. vat etc so he now has to borrow less. Simples!
But Georgie Porgie is hamstrung by ideology and will not come out to play.

Mon, 2012-08-20 05:47 — Amergin

yes.

Sun, 2012-08-19 12:33 — Red Rain (not verified)

The Labour party does-well they still pretend they do.

Fri, 2012-08-17 16:13 — Indu Pendent

"the austerity measures being introduced in certain eurozone countries, especially those in Germany, will inevitably lower UK growth"

Do you mean to say the Tories are not entirely to blame for lowering UK growth? Shows George is good at multitasker (write one thing and think another). There might be a better word for the duality.

Thu, 2012-08-16 20:22 — Agent (not verified)

The only way to end this recession is for this government to end, and I can only see two ways of this happening:

1, Osbourne changes his policy and faces the laughter and taunts of Ed Balls before losing all credibility; it will be obvious that he is not up to the job and effectively Balls will be surrogate chancellor. The coalition the limps on till the next election where it is swept aside.

2, Osbourne doesn't change his policy and Britain remains in recession (or barely out of it) until either, the end of the 'five year plan', or the government collapses under a vote of no confidence.

Perhaps Labour could reshuffle Ed Balls to spare Osbourne's blushes, if that's what it takes, they could win politically by being seen to be acting in the national interest.

Thu, 2012-08-16 19:16 — matthew fox (not verified)

@Shinsei67

Brent Crude traded at $74.94 in jun 2010. Please stop repeating the $60 figure, it is totally bogus.

Thu, 2012-08-16 18:29 — Shinsei67

"For circumstances really haven’t changed;"

When Osborne made his emergency budget in June 2010 the oil price was $60.

It has subsequently doubled. That really is a pretty major change of circumstances.

Every major analysis of the UK economy from the IMF, the OECD and the OBR has stated quite categorically that austerity has played an insignificant part in the UK's under-performing economy. Whereas very much higher inflation that expected (by pretty much anyone) has severely reduced household incomes and thus consumption.

Prof D warns of falling living standards and possible social unrest and yet every one of his policies is aimed at ramping up inflation, which is guaranteed to lower living standards. Inflation hurts the most vulnerable the hardest - those on pensions, benefits and the low paid. Only well-paid professionals have the power to demand and get higher wages from employers.

Sure, we appear to be in a recession at the moment, though a funny recessi0n that is generating jobs by the hundreds of thousands and seeing retail sales up 2.8% YoY, but we would have been in a very much worse situation had we listened to these two back in 2010. Which is why no one anticipating winning the 2010 election had any other economic plan than the current one of "cuts worse than Thatcher's" to use Alistair Darling's own economic plans. Bear in mind the current Tory cuts are merely a continuation of Darling's already prepared planned cuts to capital expenditure.

Thu, 2012-08-16 17:50 — another AJ (not verified)

Cortez
' But Danny Blanchflower, Gordon Brown's placeman on the MPC? No bias there.... /sarcasm'

The fact remains that Danny was mostly right on his predictions and Osborne and the OBR have been badly wrong.

The relatively low rate of unemployment given the depth of recession has been a surprise to everyone. I know of no one who predicted it.

I am not a fan of Gordon Brown but why is he seen so negatively that being appointed by him is seen as a criticism? If we judge based on statistics he is the most successful chancellor in my lifetime. If we judge on how he handled a genuine crisis his government did well in the aftermath of the crash. When the present government took over Britain was doing better than planned/forecast and better than most. Now we consistently do far worse than forecast and worse than the previous governments plans. It is too perhaps too early to judge Osborne but I doubt if future historians will rank him above Brown.

The depressing thing is not only that the current problems were both predicable and predicted and but that the government continues with recklessly damaging policies long past the point at which it has become incontervertible that those policies have failed.