The No-sterity debate
Last week, several econobloggers debated the definition and extent of austerity in Europe. The debate started with an article in the National Review by Veronique de Rugy. She showed the following chart of government expenditures in several European countries:
The chart provoked the question where the ”savage spending cuts” are, the opponents of austerity are arguing against. With the exception of Spain and Greece, no country has reduced spending in absolute terms at all, Italy’s spending has stayed roughly constant since 2009. Spain is still spending more than before the recession, Greece is spending the same amount it did in 2007.
Her main argument is that austerity critics should accept that the European countries are repairing their finances more through tax raises than spending cuts.
Tyler Cowen cited here article and supported her claims shortly after. He argues, austerity critics are comparing government spending to some imagined ideal level of spending increases. Not increasing spending thus counts as “austerity”.
Both Veronique de Rugy and Tyler Cowen are heavily criticised by Tweets and Blog articles. Some accuse Veronique de Rugy of “argument by axis scaling” – a criticism she’s surprised about in her response. I think by including Greece and France in the same chart, she understates the cuts Greece has made which are small in nominal terms because Greece is small. These are the relative spending changes 2009 - 2011 based on Eurostat data:
Clearly, Greece is in a league of its own and Greece cuts do qualify as “savage”. Europe-wide Veronique is right however, some countries have moderately reduced spending, others kept spending stable, France and Germany increased spending.
The strongest critic was Ryan Avent, economics correspondent for the Economist. He was surprised that there actually are people who debate the existence of austerity. Whose existence he considers obvious. He adds the following chart in his first response:
The chart shows the ratio of government spending to GDP. It shows sinking ratios for all countries, i.e., all countries have less government spending as percentage of GDP in 2011 than 2009. They all have improved their budgets in some way. Strangely, his chart supports Veronique’s points more than it contradicts them. His chart says, France could have increased spending more than it did, given that it had GDP growth in 2009 - 2011. At the same time, his chart underestimates the severity of spending cuts in Greece by putting them in relation to the tanking GDP. Here is the change in spending shown next to the change in GDP for the same set of countries:
The chart again divides the countries into four groups: Greece in its own group where the very real spending cuts do little to improve the country’s financial situation because the GDP is falling along with it. Ireland, Spain are reducing spending despite non-existent growth. Portugal and Italy see little to no growth and keep spending constant. France and Germany grew again but their spending increases lag their GDP growth. Essentially, austerity critics argue the latter two countries with no imminent crises could do more. Given that their spending to GDP ratio and their debt to GDP ratio took a huge hit during the recession I doubt this. Maybe they are repairing their finances too soon, exacerbating the situation for everyone else. Yesterday’s WSJ article showed the limits of Germany’s potential for stimulus.
Tyler Cowen made these points in his reply to Ryan Avent and others. When GDP grows and spending does not grow by the same amount, this should not be considered a contractionary event. Ryan was not convinced.
A little later, Tyler offered some definitions of austerity from the literature, showing the confusion if austerity consists of spending cuts, tax raises, both, or if increases in spending less than GDP increases should be considered austerity. He offers the following conclusion:
In any case, austerity is a misleading and often misunderstood word. It is better if we describe policies more concretely, and in fact that is not hard to do. Furthermore, insisting on a clearer accounting should not be equated with “austerity denial.”
This debate is blogging at its best and it certainly enlightened me. It is surprising and unfortunate however, that such a debate over the meaning of a word central to the current political debate (and possibly the future of the Euro) takes place in English on English or American blogs. Europeans still can’t blog.
PS: As Buttonwood points out, some things are improving in the Eurozone. Trade is balancing with Germany importing more and exporting less. Labor costs are balancing.