'Austerity' To Blame?

But Where's The Austerity?

By Paul Roderick Gregory

Die-hard Keynesians bemoan that, with a few exceptions, the world’s economies are drowning in the quicksand of austerity. They preach we need more government spending and stimulus, not less. Northern Europe should bail out its less-fortunate neighbors to the South so they can pay their teachers, public employees and continue generous transfers to the poor and unemployed. If not, Europe’s South will remain mired in recession. In America, Keynesians entreat the skinflint Republicans to loosen the purse strings so we can escape sub par growth. They advise Japan to spend itself out of permanent stagnation and welcome recent steps in this direction.

The stimulationists complain that they have been overwhelmed by the defeatist austerity crowd, lead by the un-neighborly Germans and the obstructionist Republicans.  If only Germany would shift its economy into high gear while transferring its tax revenues to ailing Southern Europe, and the rascally Republicans drop the sequester cuts, we would be sailing along to a healthy worldwide recovery. We don’t need spending restraint. Instead, we need stimulus, stimulus, and more stimulus to revive economic growth. We’ll deal with the growing deficits later, the stimulation crowd tells us, but we must first get our economies growing again.

The Keynesian stimulus crowd blames austerity for the world’s economic woes without bothering to examine facts. I advise them first to consult my colleague at the German Institute for Economic Research (Georg Erber, I See Austerity Everywhere But in the Statistics), who, unlike them,  has actually taken the time to examine the European Union’s statistics as compiled by its statistical agency, Eurostat.

The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending. Austerity has made things worse rather than better – clear proof that Keynesian stimulus is the answer. Keynesians claim the lack of stimulus (of course paid for by someone else) has spawned costly recessions which threaten to spread.  In other words, watch out Germany and Scandinavia: If you don’t pony up, you’ll be next.

Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.

Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.

Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau.  Eurostat’s projections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.

As  Erber wryly notes: “Austerity is everywhere but in the statistics.”

The PIIGS remind me of the patient whose doctor orders him to lose weight by eating less. The patient responds by doubling his calorie intake. He later cuts back  by ten percent and wonders why he is not losing weight. The PIIGS went on a spending binge from which they do not want to retreat. They then blame their problems on austerity and the lack of charity of others.

There is another message in these figures: the insolvent PIIGS cannot finance their deficits on their own in credit markets. They can keep on spending only with loans from international organizations and the European Central Bank. That PIIGS have continued to spend unabated means that their “miserly” neighbors have continued to bail them out, largely out of public sight.

So much for the scourge of austerity in Southern Europe. The facts show it simply does not exist.

Well, never mind. The Keynesians have new reason to cheer. Japan, under the new government of Shinzo Abe,  has embarked on a program of monetary and fiscal stimulus, and, lo and behold, the stagnant Japanese economy actually recorded a whole quarter of decent growth. At last Japan has seen the light. (The latest Economist cover features a superman Abe flying to Japan’s rescue). Stimulus cheerleader, New York Times columnist Paul Krugman (Japan the Model), answers his own question  “how is Abenomics working?” with: “The safe answer is that it’s too soon to tell. But the early signs are good…”

Krugman’s memory must be incredibly short if he thinks that Japan has just discovered stimulus. Japan has been in a twenty-year-old funk, despite launching a dizzying variety of Keynesian stimulus programs, some of which bordered on the crazy (such as giving Japanese shopping vouchers so they could relearn how to spend). Over the past twenty years, Japan has tried to spend itself to growth and has nothing to show for it.

We need look only at the growth of Japan’s public debt to prove the failure of Japan’s Keynesian experiments.  In 1990, Japan’s public debt was 67 percent of GDP (much like the U.S. today). Today it is 212 percent. All that public spending and Japan still could not grow!

At an interest rate of 5 percent, the Japanese would have to devote ten percent of GDP just to paying interest!  And Krugman wants to add to that debt. And believe me, Japan did not accumulate that debt due to austerity. It does not work that way.

Japan is an example of what Europe will look like in twenty years if it takes the Krugman advice — massive and dangerous debt with nothing to show for it.  Japan is a perfect real-world experiment with long run, sustained Keynesianism. Europe and the United States, take notice and beware!

Which leads us to the austerity that is supposedly underway in the United States.  (Remember that radical sequester that was supposed to ruin the economy?) Our figures tell exactly the same story as the PIIGS  – a binge of public spending that has not been reversed. Between 2000 and 2008, both federal and state and local spending increased by almost two thirds. Despite budget cliff hangers, sequestration, and Republican intransience (so claim the Democrats), the federal government today is spending 16 percent more than at the peak of its binge spending in 2008.  State and local governments, which cannot borrow as freely as the Feds, are spending a modest 11 percent more.

Instead of “where’s the beef?” we should ask “where’s the austerity?” Perhaps economist Krugman can find it. But first I would advise him and others like him to consult some facts before they pontificate.

PS 

In the comments section, I got a priceless gem from a big government fan, who relates that government spending has risen at an annual rate of 7 percent since 1965. Hence, austerity is defined as growth of government spending at a rate less than “normal.”  The 7 percent rate is instructive because, according to the rule of 72, you get a doubling every ten years. If the federal government continues to grow at its “normal” (non austerity)  rate, it will spend $32 trillion in 2043. Maybe then we’ll finally have “enough” government spending to solve all of our problems.