Someone needs to tell that to the NYT. The NYT has an article on the current problems in the United Kingdom's economy in which it fails the connect the current problems with the housing bubble that laid its basis. At one point the article refers to the "the remarkable run of prosperity over the previous decade," saying that it "seems to have hit a wall." Well, it was not remarkable, it was irresponsible. The UK government and central bank decided to pursue a policy to promote short-term prosperity by allowing a housing bubble to grow out of control. The bubble is almost certainly much worse in the UK than in the U.S.. According to the article, the price of the median home peaked at almost $370,000. This would be more than 60 percent higher than the price peak in the United States. It is inevitable that bubbles burst and when they do, they leave governments and central banks with really bad options. The article notes that the Central Bank of England is now torn between trying to fight inflation or fight recession. This was a totally predictable outcome of the crash that the bank should have anticipated. At one point the article includes the bizarre phrase "unions are agitating for higher wages, even as inflation rose at a 3.3 percent annual rate in May, above the 3 percent upper limit of the Bank of England’s comfort zone (emphasis added)." Unions are presumably pushing for higher wages because inflation is high, that is how workers maintain their living standards. The article also tells readers that: "The British government has little leeway to spend its way out of any slump. The public purse is constrained by two rules — the so-called 'golden rule,' in which the government borrows only to invest and not to finance current spending, and the sustainable investment rule, in which public sector debt is to be held stable at 'a stable and prudent level.'” Most governments don't adopt such rules because they are irresponsible -- they can prevent governments from responding effectively to crises such as this one. The article should have presented the view of an analyst who could have made this point. This situation is comparable to a government that was running its economy into the ground because it had a rule that it would always spend 5 percent of GDP on defense and never raise taxes. Obviously a government can elect to adhere to such rules, but it would be appropriate to present the view of almost any serious economist that such behavior is irresponsible from the standpoint of maintaining a stable economy.
--Dean Baker
