A leading British academic concludes that the last government has been tarnished by spin, while the US treasury secretary follows Gordon Brown's lead
The most dangerous chancellor of my career, one George Osborne – Jeffrey to President Obama – tells us the economy is "on the mend". I, too, am on the mend. The difference is that the fracture to my shoulder was the result of an accident, whereas the austerity policy was no accident, but deliberately inflicted on an economy that had been gently recovering from the financial crisis.
I repeat, from the financial crisis, not a fiscal crisis. The coalition, egged on, alas, by the Bank of England, made two egregious errors of judgment in 2010. In the chancellor's case, these errors were encouraged by a cynical political calculation related to the electoral timetable. In the Bank of England's case, quite apart from its errors of judgment about the nature of the crisis, there was the additional question of whether a body that had been granted independence in monetary policy should have been interfering in fiscal policy.
The first error was to compare the British economic situation to that of Greece. I have found during my travels that even lay people who had no idea of the strength of the British position as an international borrower – an average maturity on our national debt of 14 years, not 14 weeks – found comparisons to Greece risible. The second error was to accept the view that, before the onset of the financial crisis, the British fiscal position was out of control.
It has to be conceded, however, that the coalition's judgment that it could fool a lot of the people a lot of the time with this blatant misrepresentation was all too shrewd.
In which context I strongly recommend the spring issue of the Oxford Review of Economic Policy. It covers the economic record of the 1997-2010 Labour government in considerable and balanced detail, warts and all. The chapter of particular relevance to the austerity policy is the one by the economist Simon Wren-Lewis, who is widely respected in the profession, and who played a notable role in the famous "five tests" study published in 2003 – which ended in the conclusion that Britain should not join the eurozone. Wren-Lewis finds that fiscal policy (taxation and spending) was actually too tight in the early years of that administration, overcompensated in the middle period, and failed to correct sufficiently in the final years.
But in the face of the great recession, the supposed benefits of tighter policy in the latter years would have been small: "The debt-to-GDP ratio in 2007 was lower than its level in 1997, and the net borrowing requirement was fairly close to a neutral 2% deficit, so it cannot be said that fiscal policy was seriously deficient over this period."
Wren-Lewis concludes that, with the onset of the recession, "the Labour government had two key fiscal decisions to make: by how much, and by what means, to try and stimulate the economy … and how quickly to plan to correct the deficit caused by the recession and any countercyclical action it took … my own view is that the government was absolutely right to try to use fiscal policy to mitigate the impact of the recession, and it was also right to plan to correct the deficit relatively slowly."
This rigorous academic observes that is it is unfortunate, but hardly surprising, that the Labour record of this time has become highly politicised. "The line that the Labour government was responsible for leaving a disastrous fiscal position which requires great national sacrifice to put right is pure spin," he says.
Unfortunately, it was not just the British government that made the wrong diagnosis and chose the wrong policy after the crisis. Alas, most of continental Europe chose, or in many cases was forced, to go down the blind alley of austerity.
Jack Lew, the relatively new US treasury secretary, wrote recently in the Financial Times: "While long-term fiscal policy requires tough decisions, we knew we could not cut our way to prosperity."
This highlights the difference between the UK/eurozone approach and that of the US. Again, as Lew says: "To remain on the path of continued growth, we need to avoid self-inflicted wounds while we are still trying to make up lost ground."
Lew has now taken up the baton from Gordon Brown when it comes to politicians who understand the nature of the huge deficiency of demand in the world economy. People go on about the need for supply-side policies, but the fact is that there is no shortage of supply, but of demand, which continues to be constrained by the vogue for totally unnecessary and hugely destructive policies of austerity.
The wonderful summer weather has lifted the spirits, and there have been minor improvements in economic performance and the outlook for both the UK and the eurozone.
But we cannot rely indefinitely on Mario Draghi (the president of the European Central Bank) and his promise to do "whatever it takes" to save the situation … The crucial part of Draghi's statement that people ignored was the second half: "within our mandate". The ECB's mandate is far too deflationary. The irony is that, outside the eurozone, we are not bound by that mandate. What we have been bound by is the misjudgment of our policymakers.
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