The UK has a coalition government between the Conservatives and the Liberal Democrats. Having called for such an outcome (“Britain can love hung parliaments”, February 11), I am happy with the result. This coalition is more likely to grapple effectively with its grim inheritance than any alternative: it not only has a decent majority, but obtained close to 60 per cent of the vote in the general election. This gives it the legitimacy it needs. I wish it success.
Yet before the government starts, it is important to ask just why its inheritance is so grim. In a column on May 9, my friend, Niall Ferguson, referred to Gordon Brown's stewardship as a “disaster”. But was Mr Brown alone responsible? Hardly. I would argue his big underlying mistake was to put too much trust in the orthodoxies of contemporary economists and financiers.
The Brown era started with hubris about ending Tory “boom and bust” and duly finished with an even bigger bust. But the underlying belief in what economists called “the Great Moderation” was held on both sides of the Atlantic. Mr Brown trusted such economists, poor man.
It is evident, again, that the “light touch” regulatory regime promoted by the Financial Services Authority was a huge error. Adair Turner, who became FSA chairman in September 2008, made this quite explicit in his review. The Tories have concluded from this that regulation of banks should be handed back to the Bank of England. On balance, I think this is correct. But, given the temper of the times, would the Bank have done better as a regulator? I doubt it. In retrospect, the government also trusted too readily in the stability of contemporary finance. Would a Tory government have been much more distrustful? If you believe that, I have a bridge to sell you.
Mr Brown also followed the best professional opinion in making the Bank operationally independent in pursuing an inflation target. I agree that this was a wise decision. Yet belief in a tight link between control over inflation and macroeconomic stability turned out to be false. Mr Brown bought this remedy from top economists, who, again, exaggerated the efficacy of their ideas.
Mr Brown evidently failed to foresee the possibility of a huge recession. The compound annual rate of growth between the first quarter of 1997 (before Labour won power) and the first quarter of 2008 was 2.9 per cent. Then came the slump, with gross domestic product in the first quarter of 2010 close to 11 per cent below its previous trend level. The growth rate of the economy between the first quarters of 1997 and 2010 was just 2 per cent. Did anybody else foresee such a disaster? Some had an inkling. But few realised either the size of the global downturn or how vulnerable the UK economy would be to the financial implosion.
Can we not at least blame Mr Brown for the bloated public spending and grotesque fiscal deficits? Yes, but also only up to a point. Between 1999-2000 and 2007-08, the ratio of total managed spending to GDP did rise from 36.3 per cent to 41.1 per cent. But the latter was still modest, by the standards of the previous four decades. The jump to a ratio of 48.1 per cent, forecast for this year in the 2010 Budget, is due to the recession. Nominal spending is currently forecast at 3.5 per cent higher in 2010-11 than forecast in the 2008 Budget. But nominal GDP will be 10.3 per cent lower and tax revenues 16.4 per cent lower. Critics of his fiscal policies were right, but the error was far larger than anybody imagined. It is true, however, that Mr Brown must take a share of the blame for Labour's failure to ensure the extra spending would be well managed.
Yes, Mr Brown made big errors. But more significant is how wrong the conventional wisdom on which he relied turned out to be. Mr Brown is an easy scapegoat, as a letter to the Financial Times pointed out this week. But it is dangerous to heap blame on a departed leader, without asking what caused his mistakes.
Moreover, Mr Brown made some decisions that were clearly correct. He was right in his determination to resist Tony Blair's desire to put the UK in the eurozone. I shudder to think what would have happened if the country had been in this trap. He also deserves credit for taking the correct decisions when the severity of the financial crisis at last became evident in the last quarter of 2008.
All British political careers end in failure. Mr Brown's is a grim reminder of this truth. But it is far too easy to blame him alone for the UK's current plight. The truth, I would argue, is that his biggest error was to believe in the conventional wisdom about the prospects for durable economic stability, the robustness of modern financial markets and, surprisingly perhaps, the strength of the post-Thatcher UK economy. He then doubled up on this bet by building his plans for public spending on the assumption that the good times would roll on forever.
Mr Brown's boasts of durable prosperity proved to be based on evanescent success. The inconvenient truth is that the UK economy proved far more fragile than almost anybody with influence had believed. If the new government is to succeed, it must dare to confront this sad truth.
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