In Search of the Dreaded Austerity

To paraphrase Inigo Montoya of Princess Bride: You keep using that word, "austerity." I do not think it means what you think it means. 

Defining austerity. My 1976 Webster's Unabridged Dictionary includes this definition of austerity: "lack of luxuries: enforced or extreme economy."

If we can believe Wikipedia,

"In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt."

Austerity is cutting deficits by reducing deficit spending, not raising taxes. If you want to include tax increases in your definition of "austerity," be my guest. But then do not try to hang that word around the necks of conservatives and Republicans. They are not advocating tax increases. Paul Krugman does that.

I'm going with this definition: austerity means government spending less. That simple concept seems difficult only for economists.

Given that definition, we could ask a couple of questions. Where is the austerity? Does government spending help or hurt?

The Great Recession. As everyone knows, we suffered an economic crisis recently. It has been called the Great Recession. What everyone might not know is that it was not confined to the US. It affected even countries that did not have George W. Bush as president. And that crisis set in at the tail end of 2007 or the beginning of 2008 for most advanced economies. (The NBER dated the beginning of the recession in the US as December 2007. A somewhat fishy call, in my estimation.)

So I will compare our most recent complete year, 2011, to that last pre-Great Recession year, 2007. That last year, 2011, is also the most recent year of available data from the International Monetary Fund. It lists 34 countries as "advanced economies." Of those, all but three suffered a decline in real Gross Domestic Product from 2008 to 2009. The lucky three: Australia, Israel and South Korea. That is, every country of Europe, as well as the US and most advanced economies of the world, suffered a recession at the same time.

The US suffered a decline in real GDP of 3.5% from 2008 to 2009. The average decline for those 34 countries was 3.9%. So the US was neither alone nor the worst off in the Great Recession.

Where is the austerity? How many of those 34 countries cut government spending over those last four years (2011 compared to 2007)? The answer is two: Israel and Korea. (All references to "Korea" herein mean South Korea. North Korea did not quite make the "advanced economies" cut.)

So 32 of 34 countries, and all European ones as well as the US, have increased government spending -- even as percentages of GDP -- over 2007. The average increase for those 32 countries: 4.2% of GDP (or more than the equivalent of the entire US national defense budget in 2007, the year of the Iraq surge).

There has been no austerity. All governments of Europe and almost all governments of "advanced economies" spent a larger portion of their GDPs in 2011 than they did pre-crisis. If I didn't know better, I'd say that "crisis" was simply used by governments as an excuse to spend more.

Does government spending help or hurt? So we can ask: how did government spending policies affect a country's ability to withstand the recent financial crisis and recover from it?

Below are three charts. The vertical axis of each chart is real GDP growth from 2007 to 2011. Each chart compares how countries fared over those four Great Recession years compared to some measure of government spending.

The first chart compares real GDP growth during the Great Recession to government spending just prior to the crisis, 2007. The second chart compares it to growth in government spending prior to the crisis, from 2001 to 2007. And the third chart compares it to growth in government spending during the Great Recession, 2007 to 2011.

 

 

Data source: IMF World Database. 

 

 

Data source: IMF World Database.

 

 

Data source: IMF World Database.

The lines in these charts are the linear regression trends. In all three cases, more government spending and spending growth meant lower economic growth in the Great Recession. In all three cases, the trend was statistically significant.

(If you are looking at the first chart and wondering why Israel did so well during the Great Recession, look at the second chart. From 2001 to 2007, Israel cut government spending by 7.4% of GDP. That would be the equivalent of the US completely eliminating all national defense spending and Social Security, combined, over those same years.)

Myths busted. Government spending was bad for real GDP growth during the Great Depression, no matter how you figure it.

  • The more your government spent prior to the crisis, the worse your economy did during the recession and recovery.
  • The more your government cut spending prior to the crisis, the better your economy did during the recession and recovery.
  • The more your government grew spending during the crisis, the worse your economy did during the recession and recovery.

There was no good time to increase government spending -- not before the crisis, during the crisis, or during the "recovery. 

The existence of austerity is a myth. The idea big government helps weather a financial crisis is a myth. The idea that increasing government spending helps economic growth is a myth. Real world data keeps falsifying the Keynesian hypothesis.

Keynesians, abandon your epicycles.

Another myth is that the US is somehow different from Europe. Look at those three charts again. The US is in the thick of the European cluster in every chart. We spend as much as Europe does. We even grew spending when much of Europe was cutting, as if we needed to catch up to our welfare-state betters in terms of government size.

We are a European country. That is our problem. We should be imitating the Asian tigers, not the European welfare states.

In 2011, all government in the US spent 41.4% of GDP. The advanced economies listed below spent less.

  • Australia, 36.6%.
  • Hong Kong, 20.4%.
  • Japan, 40.7%
  • Korea, 21.7%.
  • New Zealand, 35.4%.
  • Singapore, 17.6%.
  • Slovak Republic, 38.4%.
  • Switzerland, 34.7%.
  • Taiwan, 22.4%.

We seem to be looking over the wrong ocean for examples to follow. 

Randall Hoven's bio and other writings can be found via Twitter.

{A note on sources and methods. With two exceptions, all data used above came from the IMF's World Economic Outlook Database, April 2012 Edition, available at http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx. The data series used were "Gross Domestic Product, constant prices, national currency" and "general government total expenditure, percent of GDP".

The two exceptions were used to compare percentages of GDP to specific US federal programs. One was the observation that 4.2% of GDP is more than the entire national defense budget of 2007, which was 4.0% of GDP. The other was the observation that 7.4% of GDP was more than both national defense and Social Security spending, combined, in 2001, or 7.2% of GDP. Those statistics can be found in Table 8.4 of the White House Office of Management and Budget, available at http://www.whitehouse.gov/omb/budget/Historicals/.

All linear regression and statistical significance tests were done with built-in Microsoft Excel functions. Statistical significance tests were at the 95% confidence level. Anyone with internet access and a spreadsheet could re-produce all of the above charts and statistical tests. No advanced economies were left out -- there was no "cherry picking."} 

Correction: Indigo corrected to Inigo

To paraphrase Inigo Montoya of Princess Bride: You keep using that word, "austerity." I do not think it means what you think it means. 

Defining austerity. My 1976 Webster's Unabridged Dictionary includes this definition of austerity: "lack of luxuries: enforced or extreme economy."

If we can believe Wikipedia,

"In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt."

Austerity is cutting deficits by reducing deficit spending, not raising taxes. If you want to include tax increases in your definition of "austerity," be my guest. But then do not try to hang that word around the necks of conservatives and Republicans. They are not advocating tax increases. Paul Krugman does that.

I'm going with this definition: austerity means government spending less. That simple concept seems difficult only for economists.

Given that definition, we could ask a couple of questions. Where is the austerity? Does government spending help or hurt?

The Great Recession. As everyone knows, we suffered an economic crisis recently. It has been called the Great Recession. What everyone might not know is that it was not confined to the US. It affected even countries that did not have George W. Bush as president. And that crisis set in at the tail end of 2007 or the beginning of 2008 for most advanced economies. (The NBER dated the beginning of the recession in the US as December 2007. A somewhat fishy call, in my estimation.)

So I will compare our most recent complete year, 2011, to that last pre-Great Recession year, 2007. That last year, 2011, is also the most recent year of available data from the International Monetary Fund. It lists 34 countries as "advanced economies." Of those, all but three suffered a decline in real Gross Domestic Product from 2008 to 2009. The lucky three: Australia, Israel and South Korea. That is, every country of Europe, as well as the US and most advanced economies of the world, suffered a recession at the same time.

The US suffered a decline in real GDP of 3.5% from 2008 to 2009. The average decline for those 34 countries was 3.9%. So the US was neither alone nor the worst off in the Great Recession.

Where is the austerity? How many of those 34 countries cut government spending over those last four years (2011 compared to 2007)? The answer is two: Israel and Korea. (All references to "Korea" herein mean South Korea. North Korea did not quite make the "advanced economies" cut.)

So 32 of 34 countries, and all European ones as well as the US, have increased government spending -- even as percentages of GDP -- over 2007. The average increase for those 32 countries: 4.2% of GDP (or more than the equivalent of the entire US national defense budget in 2007, the year of the Iraq surge).

There has been no austerity. All governments of Europe and almost all governments of "advanced economies" spent a larger portion of their GDPs in 2011 than they did pre-crisis. If I didn't know better, I'd say that "crisis" was simply used by governments as an excuse to spend more.

Does government spending help or hurt? So we can ask: how did government spending policies affect a country's ability to withstand the recent financial crisis and recover from it?

Below are three charts. The vertical axis of each chart is real GDP growth from 2007 to 2011. Each chart compares how countries fared over those four Great Recession years compared to some measure of government spending.

The first chart compares real GDP growth during the Great Recession to government spending just prior to the crisis, 2007. The second chart compares it to growth in government spending prior to the crisis, from 2001 to 2007. And the third chart compares it to growth in government spending during the Great Recession, 2007 to 2011.

 

 

Data source: IMF World Database. 

 

 

Data source: IMF World Database.

 

 

Data source: IMF World Database.

The lines in these charts are the linear regression trends. In all three cases, more government spending and spending growth meant lower economic growth in the Great Recession. In all three cases, the trend was statistically significant.

(If you are looking at the first chart and wondering why Israel did so well during the Great Recession, look at the second chart. From 2001 to 2007, Israel cut government spending by 7.4% of GDP. That would be the equivalent of the US completely eliminating all national defense spending and Social Security, combined, over those same years.)

Myths busted. Government spending was bad for real GDP growth during the Great Depression, no matter how you figure it.

  • The more your government spent prior to the crisis, the worse your economy did during the recession and recovery.
  • The more your government cut spending prior to the crisis, the better your economy did during the recession and recovery.
  • The more your government grew spending during the crisis, the worse your economy did during the recession and recovery.

There was no good time to increase government spending -- not before the crisis, during the crisis, or during the "recovery. 

The existence of austerity is a myth. The idea big government helps weather a financial crisis is a myth. The idea that increasing government spending helps economic growth is a myth. Real world data keeps falsifying the Keynesian hypothesis.

Keynesians, abandon your epicycles.

Another myth is that the US is somehow different from Europe. Look at those three charts again. The US is in the thick of the European cluster in every chart. We spend as much as Europe does. We even grew spending when much of Europe was cutting, as if we needed to catch up to our welfare-state betters in terms of government size.

We are a European country. That is our problem. We should be imitating the Asian tigers, not the European welfare states.

In 2011, all government in the US spent 41.4% of GDP. The advanced economies listed below spent less.

  • Australia, 36.6%.
  • Hong Kong, 20.4%.
  • Japan, 40.7%
  • Korea, 21.7%.
  • New Zealand, 35.4%.
  • Singapore, 17.6%.
  • Slovak Republic, 38.4%.
  • Switzerland, 34.7%.
  • Taiwan, 22.4%.

We seem to be looking over the wrong ocean for examples to follow. 

Randall Hoven's bio and other writings can be found via Twitter.

{A note on sources and methods. With two exceptions, all data used above came from the IMF's World Economic Outlook Database, April 2012 Edition, available at http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx. The data series used were "Gross Domestic Product, constant prices, national currency" and "general government total expenditure, percent of GDP".

The two exceptions were used to compare percentages of GDP to specific US federal programs. One was the observation that 4.2% of GDP is more than the entire national defense budget of 2007, which was 4.0% of GDP. The other was the observation that 7.4% of GDP was more than both national defense and Social Security spending, combined, in 2001, or 7.2% of GDP. Those statistics can be found in Table 8.4 of the White House Office of Management and Budget, available at http://www.whitehouse.gov/omb/budget/Historicals/.

All linear regression and statistical significance tests were done with built-in Microsoft Excel functions. Statistical significance tests were at the 95% confidence level. Anyone with internet access and a spreadsheet could re-produce all of the above charts and statistical tests. No advanced economies were left out -- there was no "cherry picking."} 

Correction: Indigo corrected to Inigo

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