Mark Sadowski directed me to one of the most perplexing Paul Krugman posts that I have ever read. Krugman argues that the slow British recovery was caused by a contractionary fiscal policy, which reduced aggregate demand. Fair enough. He’s done that before. Then he presents absolutely no evidence that AD in Britain has done poorly in recent years. None. Instead he presents data for RGDP. OK, he’s done that before, many times. And I’ve criticized him for doing this, many times. And he keeps doing it.
But then something really strange happened; he said this:
The only reason Britain isn’t suffering terrifyingly high unemployment is the fact that, for reasons not clear, productivity has collapsed, so that the shrunken economy is still employing a lot of people.
Of course when productivity “collapses” one expects to see RGDP growth “collapse.” And Krugman has a graph that shows RGDP growth did collapse. So presumably the collapse in productivity growth at least partly explains the collapse in RGDP growth. But Krugman simply ignores this clear implication, and writes the rest of the post as if it’s obvious that “austerity” explains the low growth in RGDP, even as employment in Britain does much better than in America, and dramatically better than in eurozone economies that also experienced banking distress, such as Ireland and Spain.
Don’t get me wrong, I believe Britain has had both an AD problem and a productivity problem in recent years, but not due to austerity. And I believe the AD shortfall partly explains the low RGDP growth. And that productivity and AD can even interact in the short-run (but that doesn’t even come close to explaining the UK productivity data, as Krugman himself hints at with his “reasons not clear” remark.) But you’ll never catch me writing a post claiming it’s a demand side problem, where 100% of the evidence actually presented in the post points to it being a supply-side problem.
The truth is that much of the productivity problem in Britain, and hence the RGDP problem, is due to supply-side factors ranging from lower North Sea oil output to fewer gaudy bonuses paid out in the City of London. None of that has anything to do with “austerity.”
In this comment Mark Sadowski discusses all this in much more depth, and shows that Krugman’s tendency to confuse RGDP with AD also led him to make serious errors in an earlier post comparing this crisis to the Great Depression.
Krugman also ignores the fact that his own graph shows fiscal policy in Britain getting more contractionary in 2013, and yet growth picked up sharply!