Austerity to Blame? But Where’s the Austerity? an article I first read in Forbes by Paul Roderick Gregory is a fabulous essay written that challenges the concept that governments of this world are really cutting their spending.
In economics, austerity describes policies used by governments to reduce budget deficits during adverse economic conditions according to the definition provided in Wikipedia.
Paul Gregory is a research fellow at the Hoover Institution. He holds an endowed professorship in the Department of Economics at the University of Houston, Texas. Mr. Gregory is a research professor at the German Institute for Economic Research in Berlin, and is chair of the International Advisory Board of the Kiev School of Economics.
Here is Mr Gregory’s article:
Keynesian Economic thinkers complain that the world’s economies are drowning in austerity. They argue we need more government spending and stimulus, not spending cuts. 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.
Take the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have supposedly been devastated by cutbacks in public spending. 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.
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 you can show me in the chart below where the spending has been cut, because I just don’t see it.
If those who control the spending of our tax dollars are going to make an effective change in the long term stability of our nation(s) they are going to need a new definition of austerity. Perhaps WE need a New Definition of Leader, because the current “leaders” of the nations of this world are doing a very poor job of leading, not just here in the United States but around the globe. When we compare ourselves to other nations and say we are doing comparatively well, reminds me of the phrase “pigs don’t know pigs stink” (not to be confused with the PIIGS Mr. Gregory speaks of in his article).
Life Leadership to the rescue !