Is Europe moving away from austerity? Will it matter?
Here’s a NYT headline:
Europe May Finally End Its Painful Embrace of Austerity
And here’s the claim:
As Europe has grappled with the trauma of a devastating financial and economic crisis, policy makers have consistently relied on one approach to managing the damage — budget austerity.
Shrink government spending by trimming pensions and cutting social programs, the logic runs, and the markets will gain confidence in the tough-minded people in charge. Confident markets make for happy markets. Money will pour in, and good times will roll.
Even as prosperity has remained painfully elusive across much of Europe, leaders have time and again renewed their faith in the virtues of this harsh medicine.
Until now.
Some policy makers are flashing tentative signs that they may be prepared to slacken their grip on public coffers to spur growth and improve the lot of ordinary people suffering joblessness and diminished wealth. In the clearest sign of this shift, the heavily indebted Italy is increasingly inclined to challenge Germany — the guardian of austerity — to loosen European purse strings.
Of course everything is relative, and European fiscal policy has not been particularly austere. But even so, can we assume that a slackening of “austerity” will boost growth? Veronique de Rugy of the National Review reports:
The Congressional Budget Office recently released its Monthly Budget Review for September 2016. It includes a revised estimate of the deficit for 2016. It isn’t much different than the one projected in August. The document makes it hard to ignore that in 2016 the deficit grew by $149 billion, from $439 billion in 2015 to $588 billion at the end of FY2016. This explains why we haven’t heard president Obama brag about how the deficit is shrinking in a while.
Normally the deficit falls during expansions. How did the economy respond to this loosening of “austerity”? RGDP growth slowed to less than 1.3% during the past four quarters, as the Fed tightened policy. As a result of our foolish fiscal policy, fiscal authorities will now have less room for “stimulus” during the next recession, as the deficit will be starting from a higher base. Of course this will come as no surprise to readers of this blog. The austerity of 2013 (when the deficit plunged from about $1,050 billion to about $550 billion between calendar year 2012 and 2013), coincided with an increase in GDP growth. But like Chicago Cubs fans, Keynesians never give up hope.
Now let’s look at the UK:
Before the June 23 vote for “Brexit,” the man in charge of the budget, the chancellor of the Exchequer, George Osborne, was publicly pursuing the aim of delivering a budget surplus by 2020. The target required cuts.
But as the political class absorbed the ballot result, interpreting it as a demand for redress from communities reeling from high unemployment and wage stagnation, Mr. Osborne acknowledged that his goal could no longer be achieved.
His successor, Philip Hammond, has raised the ante.
In a speech at an annual gathering of the governing Conservative Party on Monday, the new chancellor declared that the government would borrow more to finance new infrastructure projects — presumably creating construction and manufacturing jobs.
While reading this, I spied a link in the right column, to another NYT story, this one from May 25th:
‘Brexit’ Could Spell More Austerity for Britain, Study Warns
That’s pretty scary, but could the prediction be trusted? The NYT says yes:
LONDON — Prime Minister David Cameron’s campaign to keep Britain in the European Union was bolstered on Wednesday by a report from one of the country’s most authoritative economic research bodies, which concluded that a withdrawal from the bloc would lead to up to two more years of public spending cuts or tax increases.
A frequent critic of government economic plans, the research body, theInstitute for Fiscal Studies, this time delivered some welcome news for Mr. Cameron.
Of course it could be trusted (the NYT signals), it came from “one of the country’s most authoritative economic research bodies”, which is also “A frequent critic of government economic plans”. So we aren’t talking about one of those nutty right-wing outfits, like the Adam Smith Institute or the IEA.
NYT readers never need fear leaving their cosy intellectual cocoon, where fiscal stimulus produces growth miracles, and a continent where governments spend 50% of GDP is struggling because of “austerity.” Yes, the Trumpistas are even worse (and also oppose austerity), but then I don’t expect much from the “stupid party”. I do expect more from the Times.
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17. October 2016 at 08:49
Sorry, from within Europe, I don’t see it. Some anti-austerity slogans from an Italian prime-minister in political campaign mode don’t make for a change in policy.
Just last week, I heard Jean-Claude Junker, president of the European Commission in an interview laugh at the suggestion that somehow Greece was a victim of austerity (“they spent money they didn’t have for decades and eventually collapsed, they are proof that we need to keep public debt in check”). He gave this interview after his home party decided to start agitating against the current government of Luxembourg for their irresponsible public deficits, letting debt grow to over 20% of GDP.
The NYT says that the EC declined to fine Portugal and Spain for its deficits as somehow representing a turn against austerity, but I actually interpret the fact that the process went so far that the possibility of a fine was on the table as the EC tightening its grip on member state’s budgets. The EC has never actually fined anybody. The fact that it was so seriously discussed already represents a breach of a taboo. Reading the Portuguese press nowadays (the 2017 budget proposal was just released and is under discussion), I see the EC rules and the possibility that the EC will not accept certain budget items as a real discussion. This was not the case a few years ago, but it’s the new normal.
17. October 2016 at 11:31
“Yes, the Trumpistas are even worse (and also oppose austerity)”
-Donald Trump is in favor of infrastructure spending, entitlement spending, and military spending, as well as the 2009 stimulus and 2008 bailout. He was also in favor of the sequester in 2013 (in fact, even larger non-military discretionary spending cuts), and, like you, and unlike the Keynesians, correctly predicted what would happen as a result of it:
http://www.foxnews.com/on-air/on-the-record/2013/02/24/trump-looming-sequester-its-being-overexaggerated
17. October 2016 at 11:32
The whole article is built on a false premise, “austerity” is mostly tax hikes — actual spending rose in almost all countries, as did taxes. The spending “cuts” were to generally only to the rate of growth of spending.
17. October 2016 at 11:48
@E.Harding
Trump: I really thought that Mitt Romney would do well. He’s a wonderful man. But he didn’t resonate. Somehow, people didn’t catch on. He didn’t catch on. It just didn’t work. And that was an election that should have been won. It should have been won really easily.
Funny how the last two sentences are even more true today. Maybe not “really easily” but it would have been a fair 50:50 chance with a candidate like Romney, who was by the way still so much closer in 2012 than Trump ever was in 2016, no matter what you say.
Unlike others I don’t blame the defeat on Trump. Blaming Trump is like blaming a very stupid dog for being a very stupid dog. It makes not much sense. Trump was being Trump, he played his role and achieved more than even he would have imagined.
17. October 2016 at 12:12
Thanks Luis, I’m skeptical too.
E. Harding, As I said he opposes austerity right now. Indeed his plan would balloon the deficit to unprecedented levels for a peacetime boom.
TallDave, That’s also my view.
Christian, Yes, this election should be 10 times easier for the GOP, and Trump may lose worse than Mitt Romney!
17. October 2016 at 15:42
Hi Scott, unrelated but I noticed the Amazon product description for the Midas Paradox says
“The understanding held by many about the financial crisis of 2008 is mistaken as well due to the attributed similarities between this instance and the happenings of the early-mid 19th century”
Should that say 20th century?
17. October 2016 at 16:02
Sumner makes fun of fiscal policy, but truth is, fiscal policy demonstrably works even if the multiplier is one. Y = C + G + I + Nx. Only if there’s crowding out if the multiplier is less than one does increased G spending fail to increasing Y. And get this (from a book): “In the period 1980– 95, ‘the average gross public debt in industrial countries swelled from about 40 per cent to about 70 per cent of GDP’. They went on to state that ‘most countries, including France, Germany, Italy, Japan, the Netherlands, Sweden and the United States, experienced roughly a doubling of their debt [as a percentage of GDP] over this period’” Yet these were ‘boom years’. In short, much as I hate government spending, it does ‘work’ over decades long periods to boost growth. It’s the hangover that’s bad.
What are Sumner’s views on taxes? He never says. Does Sumner believe that cutting taxes will increase growth long term (not short term, which we know what Keynes says, namely they do)? Is he a Laffer/Kemp style supply side maniac? Does Sumner believe in debt-to-gdp ratios? Do they have any meaning as levels rather than rates of change? I’d like to know.
17. October 2016 at 17:50
Trump is leading or tied in 5 of 6 key battlegrounds. Must be why he moved up to 16% on election betting odds!
Alaska
37 Trump
34 Clinton
Utah
30 Trump
29 McMullin
28 Clinton
Arizona
39 Clinton
37 Trump
Texas
47 Trump
43 Clinton
Georgia
48 Trump
42 Clinton
Ohio
45 Trump
45 Clinton
17. October 2016 at 17:51
Also Carl Icahn and Jeffrey Gundlach think fiscal stimulus is the #1 reason to vote for Trump. Both on TV today talking about Trump as the best fiscal stimulus candidate.
Amazing how Wall St never ceases to push macro fallacy, even people with amazing micro track records!
18. October 2016 at 05:07
@Steve,
Carl Icahn also thinks Herbalife is great. Anyone taken in by such an obvious con has pretty questionable judgement.
18. October 2016 at 07:39
Martin, Yes, should be 20th century. Thanks for pointing that out.
Steve, Utah will be fun to watch. Bush won it by over 40 points.
3. November 2016 at 04:57
“like Chicago Cubs fans, Keynesians never give up hope.”
I have seen the light! Keynesian Cubs for the win!