The British economy is of enduring interest to American economists. This isn’t out of tender concern for the mother country, but because the UK is a testing ground for the economics of austerity.
It’s a role that’s fallen to us by default – because just about every other major western economy is too much of a special case. The US, for instance, has the exceptional advantage of controlling the world’s reserve currency; Japan has been stuck in a demographic funk for the last twenty years; Germany, France, Italy and Spain are embroiled in the Eurozone mess; and Canada and Australia inhabit an economic world of their own – thanks to global demand for their abundant resources.
So that just leaves us – a sizeable economy that’s been fully exposed to the financial crisis, but with comparatively few complicating side-factors. Given the last five years of Coalition economic policy, we’re the go-to example on austerity economics.
Naturally, it suits the opponents of austerity – i.e. the proponents of debt-funded stimulus – to portray the UK as an economic disaster zone. For instance, in the New York Times, Paul Krugman has this to say about us:
“Britain’s economic performance since the financial crisis struck has been startlingly bad… Britain has had a much worse track record since 2007 than it had during the Great Depression.
“Yet as Britain prepares to go to the polls, the leaders of the coalition government that has ruled the country since 2010 are posing as the guardians of prosperity, the people who really know how to run the economy. And they are, by and large, getting away with it.”
It’s true that the economy is one issue where the Conservatives enjoy a clear advantage over Labour – which leaves Mr Krugman with some explaining to do. Variously, he points the finger at the “short memories” of the electorate, “the fecklessness of the news media” and “the weakness of the opposition, which has done an absolutely terrible job of making its case.”
There is, however, another explanation, which is that Krugman is wrong about the British economy. This argument is advanced by his fellow US economist, Jeffrey Sachs, in a knock-out article for Project Syndicate:
“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.”
Krugman is correct in saying that the UK recovery got off to a slow start, but as Sachs explains there are reasons for this that the Coalition shouldn’t be blamed for:
“…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.”
Outside of the North Sea and financial sectors, the British economy was growing well before the turnaround in the aggregate GDP figures. Indeed, something must have been going right otherwise the rapid creation of private sector jobs wouldn’t have started while the Americans were still worrying about their ‘jobless recovery’.
The employment rate is significantly higher in Britain than America, but otherwise the two economies look pretty much the same today – with similar growth rates, unemployment figures, inflation levels and budget deficits:
“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.”
Far from escaping the ‘blame’ for Britain’s economic performance since 2010, the real question is why Cameron hasn’t received more of the credit.