Intellectual Honesty and Great Britain

Bob Murphy has a post on Free Advice that deals with the intellectually dishonest way that Paul Krugman portrays Herbert Hoover and the Andrew Mellon quote, "Liquidate the farmers, etc." Krugman clearly tries to claim that Hoover followed what Mellon said to do when, in fact, Hoover was dead set against it.

(David Henderson further exposes Krugman's dishonesty in posts here and here. Because of the intellectual environment in which he operates, Krugman does not have to worry about telling whoppers, as they fit the narratives that the people who surround him hold. Why bother with the truth when the narrative is more popular?)

Krugman no doubt would argue that because the results of the Hoover presidency saw a lot of business and farmer liquidation, that Hoover somehow must have been a closet Mellonite. After all, had Hoover actually intervened in the economy, then it would not have fallen so far, right?

Actually, this post is not about Hoover. Instead, it is about Krugman's recent blog post on Margaret Thatcher and Great Britain. Krugman asks whether or not Thatcher's policies actually had any positive effect on the British economy and concludes in a backhanded way (of course) that they did not.

Krugman's "proof" is shown on two graphs, the first showing Great Britain's GDP relative to France from 1950 to the present and the second a comparison of unemployment between the two countries from 1978 to now.

Contrary to what Krugman claims, the British economy relative to France did in fact see a GDP jump in the early 1980s following a steep recession. And while Krugman admits that when Thatcher took power in Britain in 1979, the country had "huge economic problems," but does not go on to explain what was the situation: 20 percent inflation, a huge and bloated government sector, and numerous nationalized industries better known for strikes and shoddy products. Andrew Sullivan writes:

To put it bluntly: The Britain I grew up in was insane. The government owned almost all major manufacturing, from coal to steel to automobiles. Owned. It employed almost every doctor and owned almost every hospital. Almost every university and elementary and high school was government-run. And in the 1970s, you could not help but realize as a young Brit, that you were living in a decaying museum – some horrifying mixture of Eastern European grimness surrounded by the sculptured bric-a-brac of statues and buildings and edifices that spoke of an empire on which the sun had once never set. Now, in contrast, we lived on the dark side of the moon and it was made up of damp, slowly degrading concrete.

Krugman political logic demands that once a politician takes office, the economy must immediately improve, with the rate of unemployment falling. Oh, I forgot, that didn't happen with Barack Obama's presidency, but Krugman has been willing to give a myriad of excuses for his beloved president. (And don't forget that Goldstein always has lurked in the background trying to destroy the economy and undermining Obama's efforts to subsidize more "green" industries, reflate the housing bubble, and print money out the wazoo.)

Indeed, we do see an upturn in the British economy during the early-to-mid 1980s with British unemployment falling. (The interesting thing about the unemployment graph is that during the 1980s, France was governed by a socialist government, yet unemployment also rose in that country during the early 1980s. I guess Francois Mitterand must not have believed enough in government.)

Krugman also fails to point out something that is painfully obvious in the first graph, and that is the rapid decline of the postwar British economy. Now, that should surprise any Krugman fans, given the British governments (and especially the Labor governments that Krugman so favors) were seizing industries, nationalizing medical care, and printing lots of money. The government still rationed food into the mid-1950s despite the fact that the other economies in Europe already were well on the way to recovery even though many countries had received much more physical damage from warfare. (In 1976, Great Britain received a bailout from the IMF and "60 Minutes" asked in one episode, "Will there always be an England?")

Furthermore, as invariably happens under socialism, capital deteriorated, the society became even more stratified, and many enterprising Brits left the country in hopes of doing better elsewhere. The numbers are clear, and one can see steady progress upward after Thatcher took office (with the exception of the 1990 recession, which also hit the USA).

Yet, Krugman wants us to believe that most likely Britain would have been better off with the old order in place, or at least wants us to think that nothing improved in the country until the Blair government took power in the mid-1990s. (And, don't forget that Blair did not follow his labor predecessors in nationalizing everything and reimposing socialism. His policies were not much different than those of the Tories, something that Krugman would ignore, of course.)

Like all strong politicians, Margaret Thatcher had a mixed record. Yet, she steered Great Britain away from an economic course that was strangling its once-magnificent economy. Great Britain is not the world power it was more than a century ago, but neither is it spinning off into irrelevancy as it was in 1979. That Krugman cannot recognize that fact should not surprise any reader.

Britain and Post-War France

In his never-ending quest to sanitize inflation, Paul Krugman now compares Great Britain and France in the 1920s, claiming that Britain chose the route of "virtue" while France inflated away its postwar debt, with France coming out the better. As is his M.O., Krugman does not tell the entire truth, but when one is bashing so-called virtue, I guess not telling the truth is to be expected.

He writes:

The two countries dealt with their debts very differently. Britain was a model of orthodoxy, returning to the gold standard and running huge primary surpluses to pay its debts; France, with a weaker political system, ended up inflating away much of its debt and accepting a big devaluation of the franc.

He then shows graphs that show a bigger gain in postwar GDP growth, which I guess is proof that inflation confers wonderful general economic benefits. (I am not putting the graphs on this page, so if you want to see them, go to his blog.)

First, Krugman overdoes it with the whole "virtue" thing. There was no "virtue" in Great Britain overvaluing its Pound Sterling following the war; virtue, after all, requires honesty and the Brits were not being honest about what World War I had done to its economy. (Like Krugman, they were in the "let's pretend we still are rich" mode of thinking.) Murray Rothbard in America's Great Depression noted that British financial policy was a disaster:

Great Britain, in particular, faced a grave economic problem. It was preparing to return to the gold standard at the pre-war par (the pound sterling equaling approximately $4.87), but this meant going back to gold at an exchange rate higher than the current free-market rate. In short, Britain insisted on returning to gold at a valuation that was 10-20 percent higher than the going exchange rate, which reflected the results of war and postwar inflation. This meant that British prices would have had to decline by about 10 to 20 percent in order to remain competitive with foreign countries, and to maintain her all-important export business.

However, notes Rothbard, because of the political power of Britain's labor unions, the needed wage contractions did not take place:

But no such decline occurred, primarily because unions did not permit wage rates to be lowered. Real-wage rates rose, and chronic large-scale unemployment struck Great Britain. Credit was not allowed to contract, as was needed to bring about deflation, as unemployment would have grown even more menacing—an unemployment caused partly by the postwar establishment of government unemployment insurance (which permitted trade unions to hold out against any wage cuts).

.As a result, Great Britain suffered from high unemployment during the 1920s. Indeed, had the Brits been "virtuous" instead of, well, British, they would have been willing to be honest about the real value of the pound and let it fall to market levels. To make matters worse, the USA through the actions mostly of the New York Federal Reserve Bank, actively increased the U.S. money supply, an action which did stabilize the pound at the higher price -- but at a high cost both to the British economy and ultimately to the USA itself.

Postwar France suffered from both inflation and political instability, as outlined by Benjamin Anderson in Economics and the Public Welfare. Anderson notes that by late July 1926, the French franc had fallen in value to about two cents. He writes:

Every day the housewife of Paris found that her bread and her herring and her wine were rising in price. A German housewife in the late autumn of 1925, speaking of the French housewife, said "Poor thing." The German housewife had been there herself.

That is the side of inflation Krugman claims does not exist, or is reluctant to admit. But when one writes that printing money will bring back prosperity, one is not going to admit the downside of inflation.

The Austerity Bogey

I do hope that Paul Krugman practices what he preaches, and does not have a savings account and maxes himself on credit cards. If he saves any of his money, then he really is an Enemy of the People.

The guy who recently claimed that the U.S. Government really didn't go on a spending spree now says that the British Government is channeling Andrew Mellon. I think it is important that we understand a couple of things: first, even if Britain or the U.S. Government will not be raising spending as much as Krugman claims they should be doing, nonetheless both countries are characterized by bloated public sectors.

Second, Herbert Hoover did not take Mellon's advice to "liquidate the farmers" and "purge the rottenness out of the system." This is a quote that people like Krugman are fond of laying out, but all Mellon was saying was that the government cannot and should not prop up malinvestments, and needed to let the markets take their courses. Contra Krugman, that is what happened in 1921, and the economy recovered nicely. (Notice that Krugman never speaks of that particular recession because he can't spin a Keynesian tale out of the recovery.)

Given that Krugman generally rewrites history, I find this quote to be amusing. Krugman writes:

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

From where does the British Government get all of those resources that Krugman claims it should be spending? Well, in Wonderland, governments crank up the printing press and - Voila! - create wealth. Krugman never does seem to grasp the simple fact that when governments spend, they are using real resources that have to come from somewhere; he really does believe that borrowing and printing money is the economic equivalent of serious private investment.

There is one more thing. I never have known politicians not to want to spend, spend, and spend some more. The notion that politicians are stingy with other people's money is laughable, and the notion that the only thing saving us from utter destruction is government's ability to borrow and print is a joke, a sick joke, but a joke, nonetheless.