I want you to consider the following two northern European economies:
Country A had a deficit of 8.8% of GDP in 2011. According to The Economist, only Egypt and Greece had larger deficits in 2011. It has an unemployment rate of 8.2%, well above the natural rate.
********** centre-right coalition government is being too tight-fisted with public finances that are likely to remain strong for years to come, a think tank charged with evaluating policy said on Monday.
The ********* Fiscal Policy Council, a state agency that evaluates government policy, said it saw little risk the country would breach spending ceiling rules in the coming years and instead urged the government to slacken spending constraints.
If you had to guess, which one would be practicing “austerity” and which one is engaged in “stimulus?” I’m not going to tell you yet, but I’ll provide some quotations from Paul Krugman, and I want you to see if you can match them up with the respective countries:
I learn from Ezra Klein’s interview with Tom Coburn that Sweden, of all places, has become the new right-wing icon. I thought Europe’s woes were all about collapsing welfare states? But anyway, the story now is that Sweden has slashed spending and cut taxes, and is doing great; supply-side economics vindicated!
. . .
But Ezra didn’t challenge Coburn on the claim about spending cuts; why don’t we look at what Sweden has actually done, as opposed to the official right-wing line? Look, in particular, at actual government consumption “” purchases of stuff. Here’s Sweden versus the United States, from Eurostat:
Somebody has been practicing harsh spending-side austerity “” and it’s not Sweden.
OK, so Sweden’s not the mystery nation practicing austerity. How about this one:
Jonathan Portes is angry, and rightly so. He points out that the Cameron government is systematically starving public investment:
There might conceivably be a justification for this policy if Britain were facing an intense cash squeeze. But it isn’t “” it’s able to borrow very cheaply, with near-zero real interest rates even on very long-term borrowing.
And given that public investment is, you know, productive, this is almost surely a case of self-defeating austerity:
Yes, tight-fisted Britain must be country B, and socialistic Sweden must be country A. Wrong. Britain had the massive deficit and Sweden is running a surplus. I might add that the data Krugman presented has absolutely no bearing on the claims made by Senator Coburn. He claimed spending cuts were made, and of course in countries like Sweden a big part of spending is transfers, not consumption. Kind of unfair to ridicule someone, and then provide irrelevant evidence to back up your claim.
Now I’m sure a million Krugmanites will rush over here and tell me I have the data all wrong. And they’d be right, every source I checked had different numbers. I have no idea whether Sweden’s spending went up or down in recent years. (Although I do know their debt to GDP ratio is falling, while those ratios are soaring much higher in the US and UK.) But what difference does it make? In the world of Keynesian economics spending can soar much higher, and they’d still insist that austerity is occurring. If the Keynesians are to be believed we have savage cuts in government spending in America, despite data showing spending levels much higher than before the recession. You can cut the numbers anyway you want, and get whatever result you want. One of their favorite techniques is to explain away the high government spending by pointing to the depressed state of our economies, even though most private forecasters see this as the new normal, RGDP will never recover to the old trend line in either the US or UK.
But if you are not a committed ideologue on either side, just look at the data provided up top. Does Country A really look like savage austerity? Does country B look like a country engaged in fiscal stimulus?
In the post on Sweden Krugman also had this to say:
Ezra points out, rightly, that Sweden has actually benefited a lot from very aggressive monetary policy “” one of the original Princeton zero-lower-bound Group of Four, Lars Svensson, is now deputy governor of the Riksbank. (The others were Mike Woodford, yours truly, and a fellow by the name of Ben Bernanke).
Readers of TheMoneyIllusion were the first to find out about the Swedish monetary stimulus back in 2009. But that begs raises another question. Isn’t Britain also outside the euro? If monetary stimulus makes fiscal stimulus unnecessary (and it does), then why would Britain want to do fiscal stimulus? Why not just do monetary stimulus, and avoid the big deficits? After all, just the other day didn’t Krugman say that there’s no argument at all for fiscal stimulus when monetary stimulus is available? Yes he did. And now he’s (correctly) attributing Sweden’s relative success to monetary stimulus (it sure wasn’t deficit spending!)
Some might argue that the BOE is stubborn like the Fed, they’ll refuse to raise their inflation target, or switch to NGDP targeting, and that these are the only routes to success when near the zero bound. But wait, in Britain I thought the target was set by the government, not the BOE? Why not instruct the BOE to set a higher inflation or NGDP target?
Just to be clear, I’m not saying there aren’t good arguments for the BOE keeping a 2% inflation target. I don’t agree with those who support this target, but it’s an intellectually respectable argument. But only a complete lunatic would argue that the Cameron government should refuse to boost the inflation target above 2%, but then engage in fiscal stimulus which can only work by boosting inflation! That’s like shifting your car into neutral, than flooring the accelerator. They’d have to be complete masochists; “Let’s spend lots of money, run up a huge debt, and then watch the BOE sabotage our policy.”
PS. Krugman acts like he just discovered the growing right-wing love affair with the Nordics. And yet over a year ago the Heritage Foundation rated Denmark more economically free than the US. If Krugman were smart he’d march right down to the Heritage Foundation and demand they join him in calling for Congress to scrap the US economic system and replace it with the Danish system. I’m sure Krugman would go for that idea, but how about the Heritage Foundation?