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The Missing Data in Krugman’s German Austerity Narrative

There’s an ongoing debate about Keynesian economics, stimulus spending, and various versions of fiscal austerity, and regular readers know I do everything possible to explain that you can promote added prosperity by reducing the burden of government spending. Simply stated, we get more jobs, output, and growth when resources are allocated by competitive markets. But […]

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Detroit, Europe and Krugman-defined optional austerity

Decreases in annual increases of big government budgets do not “austerity” measures make and are not the reason that the, rightly-named-by-Nobel-Prize-winning-economist Paul Krugman, economic Depression continues in most of Europe and the United States. President Richard Nixon actually didn’t say that “We are all Keynesians now” after taking the United States off the gold standard in 1971 and otherwise ensuring that Hubert Humphrey-Democrats got the | Read More »

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Another Example of Editorial-Page Fiction at the New York Times

Are there any fact checkers at the New York Times? Since they’ve allowed some glaring mistakes by Paul Krugman (see here and here), I guess the answer is no. But some mistakes are worse than others. Consider a recent column by David Stuckler of Oxford and Sanjay Basu of Stanford. Entitled “How Austerity Kills,” it […]

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Keynesian Economics: Still Failing After All These Years

I wrote this a couple of weeks ago, but didn’t post it here until I noticed that Michael Tanner of The Cato Institute agreed. Keynesianism is still not working. The central idea of the dominant economic philosophy in Washington, DC, is that when the private economy fails to produce enough demand, the government can and should step in to take up the economic slack. It | Read More »

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Does Austerity Work?

Does raising taxes and cutting government spending reduce a government’s deficits and thus debt? Confine consideration to more tax revenue and less spent and the theoretical answer is yes; it being a simple matter of mathematics. Include the impacts of raising taxes and cutting spending and the answer become far less straightforward. More paid in tax means less disposable income, which means less consumption and thus less produced (i.e., GNP). A government spending less also means less consumption in the economy, and therefore even less to be produced to meet demand. In short, austerity is recessionary. Whether the ratios of deficit and debt to GDP increase depends on how much the numerators drop relative to the decrease in GDP. We can look at the E.U. for some empirical evidence.
 
For the states that have adopted the euro currency, government spending exceeded tax revenue by 3.7% in 2012, down from 4.2% in 2011. Add in the remaining E.U. states and those figures are 4 and 4.4 percent. In fact, 2012 was the fourth straight year of deficit reductions in the European Union. So far, everything looks to be in line with the theory: adding revenue and reducing what is spent reduces a deficit. Lower deficits in turn mean that the government debt does not increase as much from year to year than would be the case were the deficits larger.
 
Unfortunately, as the excess spending was reducing in percentage terms over the revenues collected, the debt burden, which is simply the government debt relative to GDP, was increasing. In the states that use the euro, government debt as a percentage of total economic output, or GDP, increased to 90.6% in 2012 from 87.3% in 2011. Include the remaining states and public debt rose to 85.3% from 82.5 percent. Interestingly, the difference between the “euro-zone” and the entire Union was around 5% in both years. Relative to the E.U. as a whole, the euro-zone debt burden had not improved or worsened. Both the euro-zone and all of the E.U. states together saw a roughly 3% debt-burden increase. Why is that?
 
For the states undergoing austerity, decreases in GDP exceeded the decreases in the deficits. Although exogenous factors such as a dip in global trade could have played a role, it is also possible that the recessionary impacts of the austerity exceeded the decrease in the deficits. Austerity reduces demand in the economy and increases unemployment, which in turn puts pressure of governments to increase social spending—either by raising taxes or increasing the deficit, and thus debt. It can be a rather vicious cycle, with the most vulnerable people put most at risk. Even if GDP contracts without any increase in the deficits, we would expect to see the total debt-burden in the euro-zone worsen relative to the combined debt-burden of all the E.U. states, unless a number of non-euro-zone states were also undergoing austerity.
 

                                           If austerity kills dignity, then pressure on governments to relax spending cuts can be expected.   source: rt.com

In any case, at least some experts have concluded that austerity in practice is less stellar than its advocates have admitted. Ben May, an economist at Capital Economics, argues that “the fact that most economies’ deficits have fallen by less than expected and that the consolidation has coincided with deeper than anticipated recessions confirms that the costs have been large.” He noted that the state of Germany, which posted a budget surplus in 2012, accounted for 60% of the improvement. Yet how is it then that the debt-burden of the euro-zone did not change in percentage terms relative to all of the states put together?

Source:

David Jolly, “E.U. Austerity Shrinks Deficits, If Not Debt,” International Herald Tribune, April 23, 2013, p. 15.

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Where Are the European Spending Cuts?

Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity. More specifically, he presented a decent case against the European-IMF version of “austerity,” which has produced big tax increases. But what happens if nations adopt the [...]

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