Ignore Krugman: We’re not caught in another depression
Spotting and identifying new species is always exciting. And the last couple of years has seen the emergence of a new type of economic commentator, the recovery denier. Paul Krugman, the Nobel prize-winning economist, wrote a piece at the end of last year in which he compared the current situation to that of the 1930s. On Newsnight recently, another Nobel economist Joseph Stiglitz poured scorn on my assertion that the US economy has recovered.
But what does the data tell us? In the 1930s, output in America fell by nearly 30 per cent from its 1929 peak. This time, the fall was only 3 per cent, and the level of output is now higher than it was below the crash. The latest US labour market figures show continued growth in employment. Over 5m net new jobs have been created over the past three years, all of which have been in the private sector. Unemployment has just fallen to a four year low.
Elsewhere in the West, the recovery continues, although it is nowhere as strong as people would like. The crisis of 2007 to 2009 was very severe. But in the clear majority of OECD countries, the level of output is now at its highest ever. There are three geographic areas where the recovery seems to be consolidated: North America, Australasia, and what we might loosely term “Middle Europe”. The temptation to translate the phrase into German is difficult to resist, for this group comprises Switzerland, Austria, Germany, and their immediate neighbours Poland, Slovakia and the Czech Republic.
In the UK, GDP growth admittedly remains fragile, but the Office for National Statistics is in the process of revising up its recent estimates, leading to the distinct possibility that the double-dip recession was avoided. Further upward revisions to the GDP figures seem likely.
Yet another example of the exotic species of recovery deniers is David Blanchflower, briefly a member of the Monetary Policy Committee under Gordon Brown. In the autumn of 2009, Blanchflower attacked George Osborne’s proposals, if he were elected, to reduce the then £175bn public sector deficit. The plans would mean that “unemployment could easily reach 4m,” he said, and indeed that “5m unemployed or more is not inconceivable”. Our current level of unemployment is 2.5m.
Of course, economic forecasting is an inherently difficult exercise. So when Will Hutton argued in June 2008 that “a British version of Fannie Mae and Freddie Mac must be created now,” he could not have imagined that, in September of the same year, these mortgage institutions would collapse and have to be nationalised by the US authorities.
Western economies are not recovering as quickly as they normally would following a recession. The readjustment of balance sheets in the personal and public sectors is taking longer than expected, although the corporate sector is in rude good health. But it is inappropriate to deny that a recovery really does exist.
As published in City AM on Wednesday 8th May 2013