Brown’s tattered legacy (And a warning for Obama?)

Continuing with my theme of searching for the “New Deal,” consider the following:

Britain’s net debt/GDP:

1997  42.5%

2001  29.5%

2007  36.0%

The US net debt/GDP (see page 2):

1997   46.1%

2001:  33.0%

2007   36.9%

The path of the US and UK national debts has been eerily similar since the late 1990s.  Both governments followed virtuous fiscal policies in the late 1990s, and both turned on the spigot around 2001.  There are a couple important differences however.  The UK did not have a recession in the period when its debt rose, while the US did have a recession.  In addition, the rise in the US debt was much smaller.  So can we agree that fiscal policy under Bush was far more responsible than that of Gordon Brown in the period since 2001?

Mr Krugman has certainly been scathing in his attacks of Bush’s reckless fiscal policies, but I can only recall him saying good things about Gordon Brown.

[Yes, I know that Blair was PM at the time, but the UK system is different.  It was viewed as Brown’s policy; an explicit decision to pump much more money into government social services, without paying for it in taxes.]

Here’s how The Economist describes the fiscal policies of Krugman’s favorite European leader:

Mr Brown pins the main blame on the global financial collapse; but his own recklessness with the public finances as chancellor, for which there has been no acknowledgment of responsibility, also hurt Britain grievously. His performance on the economic front has been better since he has been prime minister. He deserves credit for convening the G20 meeting in London, and for Britain’s pioneering bank rescues and useful budgetary stimulus (in noted contrast to the Tories’ proposals). Yet even his economic management has lately seemed directed by self-interest: his most recent budget relied on over-optimistic growth forecasts and an implicit promise that higher taxes on the rich would bridge the fiscal gap.

A mixed bag, but if you feel as I do that the fiscal stimulus was a mistake, then even The Economist is being too kind.  But one could at least understand Krugman’s praise for Brown’s recent performance.  Two weeks later, however, The Economist provided what I regard as a more realistic appraisal:

For their part, some of Gordon Brown’s colleagues know the game is up. Some talk sheepishly about “efficiencies”. Alistair Darling, the chancellor of the exchequer, refuses to be drawn about future spending allocations. Yet the prime minister himself seems trapped by his view of national psychology, apparently reinforced by his reading of the crisis as a left-wing moment, in which voters have an infinite yearning for spending rises (if not for commensurate tax hikes). He and some of his acolytes are imprisoned also, perhaps, by a notion of themselves as guardians of the public realm, a part of their political identities too vital to be revised. So they perform absurd statistical gymnastics to avoid admitting the squeeze that is inevitable. And Mr Brown bellows time-warped incantations about “how many doctors, how many teachers” the Tories would massacre.

Something for the Obama people to think about.



8 Responses to “Brown’s tattered legacy (And a warning for Obama?)”

  1. Gravatar of Tim Keese Tim Keese
    2. July 2009 at 08:34

    If I’ve been reading and hearing Krugman correctly, he’s only been praising Brown’s reaction to the crisis. Even if Brown were entirely responsible for the mess, how he brings the UK out of it is certainly more relevant now.

  2. Gravatar of Current Current
    2. July 2009 at 08:39

    It’s also worth mentioning that the UK Parliament is mired in sleaze. A record of MPs expenses was leaked to the Daily Telegraph. They ran front page stories exposing dodgy expenses claims for three weeks solid. I think this has cause mistrust in politics to become more widespread.

    It’s worth mentioning too that the net debt/GDP figure from the statistics office is open to question. Many think that it understate the real extent of debts and present good reasons for that. The real debt is probably ~130% of GDP, some say ~250% but I think that’s an exaggeration.

  3. Gravatar of ssumner ssumner
    2. July 2009 at 08:48

    Tim, Yes, you are right. But I still think there is a double standard. I think he is silent about fiscal policies much more reckless than Bush’s as long as the money goes for social services. Admittedly that’s a judgment call, and someone who likes Krugman might have a different perspective. It is possible that he correctly thought Brown’s policies were much more reckless than Bush’s from 2001-07, and just kept silent about it.

    I should add that The Economist quotations are in part about Brown’s current performance, so they are not completely irrelevant to Krugman’s views, even according to your interpretation.

    But there is a broader concern as well. Obama’s policies (plus the last year of Bush) will cause the US national debt to explode. One wonders why there was all the sound and fury from Krugman about Bush’s increasing the national debt from 33% to 37% between 2001-07, and then Krugman saying that the coming explosion to 80% is trivial and doesn’t much matter at all. I recall in his Robbin’s lectures he argued that a 50 percentage point increase in the US national debt ratio wasn’t that bad because at 2% real interest rates the cost of servicing the added debt was only 1% of GDP forever. So if 50% is not big deal, why is 4% a reckless fiscal policy?

    The real point of my post is that Obama and his supporters should be worried about what happened to Brown—it’s a cautionary tale. Krugman’s wrong, 50% of GDP in extra debt is a big deal.

  4. Gravatar of ssumner ssumner
    2. July 2009 at 13:38

    Thanks Current, There is no perfect way of measuring debt. But I think the best method is the stock of government bonds held outside the government.

  5. Gravatar of Current Current
    3. July 2009 at 00:22

    Scott: “I think the best method is the stock of government bonds held outside the government.”

    The problem with that traditional view is that governments have got very creative. Especially the UK government.

    In the UK we have something called the “Private Finance Initiative” – PFI. Under this scheme something like a school or hospital will be built by a private company and leased back to the state. Normally bonds would be issued instead. However, by doing it this way the government can take the debt off their books. This is how much of Blairs expansion of state services has been financed.

    The nationalized banks are similar. It is well known they have a lot of bad debt on their books, that’s why they were nationalized. Perhaps *all* of their outstanding debt should not be added to the government debt, however a large portion should be.

    Folks should remember the real lesson of Fannie and Freddie. That is – governments setup SIVs. It isn’t just a private sector thing. Any organization will go to great lengths to fudge downwards the amount of debt it owes.

  6. Gravatar of ssumner ssumner
    3. July 2009 at 11:31

    Current, Thanks, you are right and I am wrong. I have to admit that I have never studied fiscal policy carefully. Take everything I say on the topic with a grain of salt.

  7. Gravatar of Current Current
    4. July 2009 at 04:17

    Just so folks don’t think I’m being unfair I’ll clarify a little.

    The UK state doesn’t just put bonds on it’s books. It isn’t that dishonest, many of it’s other debts are in it’s capital accounts too.

    Several important ones though are not. As I said above the PFI funded programs are technically rented and don’t appear as debt. Just like a consol bond (a perpetual bond) though they represent an ongoing commitment.

    The state pension liability is not present. In this regard the situation is just like social security in the US. The UK pension system has no fund of bonds like the US one does but since it also not in any way separate from the state.

    What may be more significant though is that the pension of many state sector employees doesn’t appear either. (Some do but not all I think pensions for local council employees and
    some QUANGO employees is missing).

    Many of the estimates of the real debt are probably exaggerated and inaccurate. But they contain a nub of truth in that the real debts are much larger than the accounts show. I’ve read that the same is true of some european countries.

  8. Gravatar of ssumner ssumner
    4. July 2009 at 07:22

    Current, There are arguments both ways on Social Security. Political decisions to cut benefits, like the 1982 decision to raise the retirement age to 67, are not viewed as “default” in the same sense as not paying off a Treasury bond. But I agree it is a matter of degree.

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