Skip to comments.Show Me the ‘Savage’ Spending Cuts in Europe, Please (Austerity? what austerity?)
Posted on 05/07/2012 2:26:10 PM PDT by SeekAndFind
Austerity is destroying Europe, we are told. In fact, this “anti-austerity” slogan was a big reason for the victory of newly elected socialist François Hollande to the presidency of France. Interviewed in The Economist a few weeks ago, Hollande’s campaign director said “We are not disciples of savage spending cuts.”
But then, I look at the data and I am asking: What “savage” spending cuts?
Look at this chart. It is based on Eurostat data which you can find here. Following years of large spending increases, Spain, the United Kingdom, France, and Greece — countries widely cited for adopting austerity measures — haven’t significantly reduced spending since 2008. As you can see on this chart:
The most important point to keep in mind is that whenever cuts took place, they were always overwhelmed by large counterproductive tax increases. Unfortunately, that point is often overlooked. This approach to austerity — some spending cuts with large tax increases — is what President Obama has called the “balanced approach.”
However, as I have mentioned previously, while this balanced approach may sound good and appeals to our sense of fairness and moderation, but it can be a recipe for disaster. That’s because it fails to stabilize the debt, and it is more likely to cause economic contractions.
We know what successful fiscal adjustment look like and it’s not what was implemented in Europe. Here is a reminder:
Now, a new book by the IMF called Chipping Away at Our Debt, edited by Paulo Mauro, looks at 66 instances of fiscal adjustments in Canada, France, the United States, Japan, Germany, and Italy. The key findings are in many ways consistent with the works highlighted above. For instance:
- Successful fiscal adjustments were grounded in structural reforms. Such reforms include welfare reforms as well as comprehensive expenditure review in the context of repositioning the role of the state (think Canada and Germany).
- Plans that avoided structural reforms failed to meet their targets.
- Successful plans were often grounded in real budget cuts.
- Expenditure cuts didn’t materialize to the extent initially envisioned.
- Revenue-based plans without well-specified tax-policy measures — a majority of the revenue-based cases — failed.
Other really interesting findings were:
- Ambitious plans tend to produce more adjustments than modest ones.
- Ambitious plans aren’t associated with more frequent changes in government (in other words, ambitious fiscal adjustment plans aren’t penalized by voters).
- In the case of successful adjustments, revenue often surpassed expectations Deviations of economic growth from initial expectations is key factor underlying a fiscal adjustment’s ability to meet its target.
- Public support is key to achieving successful fiscal adjustment.
Here is my hope: First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems. Some spending cuts have been implemented in a few countries. Also, if this data were adjusted for inflation (which I would prefer but the data isn’t available) it would possibly show a decrease and certainly a flatter line for all countries. However, the overwhelming take away from the European experience is that a majority of governments haven’t really implemented spending cuts, large or small, and some have even continued to grow.
Update: Will Wilkinson makes a good point about my chart and wishes:
I suspect the entire debate hinges on a difference in assumptions about the relevant spending baseline. If your theory prescribes significantly ramping up spending during recession, low or flat spending growth can look perversely “austere,” even if absolute spending as a % of GDP is very high
I agree with Will. However, note that when anti-austerity critics talk about it, they imply dramatic reductions in spending.
Obviously, I am sure that there is plenty more going on here. But it is misleading to say that “large” spending cuts are the sole source of EU troubles.
I think the moment you use the word “austerity,” you have lost the debate. “Austerity” sounds icky and unfun with no upside whatsoveer. “Balanced Budget” sound pretty good.
Socialism always fails, always.
Denying Greek women pensions at age 52 = savagery
Allowing Italian employers to ever fire an employee, for any reason = savagery
Allowing a french employee to work more that 35 hours a week and not get at least 8 weeks paid vacation = savagery
You’re right about the connotations of “austerity”. However, don’t overlook how “balanced budget” is interpreted. To the left, it means “more taxation, so we don’t have to cut programs”.
Sarkovsy was the Euro version of a RINO. He talked austerity or was described as austere; but in reality he was spending as fast as anyone.
So when the voters are faced with the choice: a socialist vs. a faux socialist, guess what they chose?
Which is why we are so anti Romney-McCain here.
Greece is so laughable. 70b to 108b is a 52% increase! The Greek population probably declined during the period.
I just made a new tagline that sounds even better and more direct and doesn’t worry about any tricky “icky” sounds!!!
Considering the debt loads of many European countries, even if austerity causes a recession in the short term, isn't that still better than destroying the economy by going bankrupt? If the government spending is unsustainable (and it clearly is) then it is not investment in the economy. The government spending that does help the economy, causes companies to make investments that become unprofitable when the government money stops flowing?
The United States should pay attention. Do we really want to do that through the Student loan market, housing (again), green energy etc.
You want to create a economic bubble? Add government money to a market.
You want to pop said bubble? Shut off the flow of government money.
“It should be known that at the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”
‘Abd-ar-Rah.mân Abû Zayd ibn Khaldûn (1332-1406), The Muqaddimah, An Introduction to History, Franz Rosenthal translation, abridged and edited by N.J. Dawood, Bollingen Series, Princeton University Press, 1967, p.230, quoted by Ronald Reagan.
Exactly, their definition of austerity is very different from ours.