Here’s a story that I can only hope our local right of centre party takes to heart: The UK Labour party should blame Keynes for their election defeat, written by Niall Ferguson no less. From yesterday’s Financial Times:
Credit where credit is due. Lynton Crosby is getting the plaudits for the Conservative party’s successful election strategy, but the real architect of this victory was surely George Osborne, the chancellor. Leave aside Labour’s collapse in Scotland, arguably the election’s most striking result. In England, the Conservatives won because Mr Osborne was right and his critics were wrong.
The comedian Russell Brand was not alone in having his celebrity endorsement of Labour roundly ignored by the voters. Even more ignominiously humbled were the Keynesian economists who have spent so much of the past five years predicting that the economic consequences of Mr Osborne’s policies would be disastrous.
In the vanguard of the Keynesian attack was Paul Krugman of The New York Times. In August 2011 he denounced the “delusions” of the chancellor whose “experiment in austerity” was “going really, really badly”.
Why? Because, in seeking to bring the government’s deficit under control, Mr Osborne was worrying needlessly about business confidence. “The confidence fairy” was the term Mr Krugman coined to ridicule anyone who argued for fiscal restraint.
Unfortunately for Mr Krugman, the more he talked about the confidence fairy, the more business confidence recovered in the UK. In fact, at no point after May 2010 did it sink back to where it had been throughout the past two years of Gordon Brown’s catastrophic premiership.
Mr Krugman was equally relentless in predicting that austerity would lead to recession; indeed, he insisted that the UK’s economic performance would be worse than during the Great Depression. In April 2012 he warned darkly that Britain would “continue on a death spiral of self-defeating austerity”.
It was, he lamented, a “policy disaster” that would cause a double-dip recession and “cripple the UK economy for many years to come”.
In fact, there was no double-dip recession. The UK had the best performing of the G7 economies last year, with a real gross domestic product growth rate of 2.6 per cent. In 2009, the last full year of Labour government, the figure was minus 4.3 per cent. Moreover, far from being in depression, the UK economy has generated more than 1.9m jobs since May 2010. UK unemployment is now 5.6 per cent, roughly half the rates in Italy and France. Weekly earnings are up by more than 8 per cent; in the private sector, the figure is above 10 per cent. Inflation is below 2 per cent and falling.
I’m not often into book burning but these Keynesian texts, with their Y=C+I+G as the cornerstone of theory and policy, are genuine candidates. If reality actually matters, which it may not actually do, Keynesian theory must now disappear. It is already disappearing from policy. Eventually economic theory must catch up, eventually.
UPDATE: Niall Ferguson has done another similar bit of writing on his blog, which he titles, The Rise and Fall of Krugmania in the UK. But it’s not Krugman, it is Keynes who remains everywhere, just as he did after the “death of Keynes” in the 1980s after the Great Inflation, which could not happen, or at least could not according to Keynesian theory. Report of Keynes’s death are greatly exaggerated, in no small part because no economist can function without aggregate demand by their side.