Capacity Utilization: Worse than a Poke in the Eye with a Sharp Stick
links for 2010-05-14

Martin Wolf on the Legacy of Gordon Brown

A smart man, a dedicated public servant, a guy whom history will judge much more favorably than the press is judging him now.

Martin Wolf on Gordon Brown:

The economic legacy of Mr Brown: 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.... 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....

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.... 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.... 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... right in his determination to resist... the eurozone... deserves credit for taking the correct decisions when the severity of the financial crisis at last became evident in the last quarter of 2008....

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...