Tag: austerity

The EU’s Anti-Austerity Hypocrites

The European Union (EU) is still in the midst of an economic slump. Many members of the political class in Brussels claim that fiscal austerity is to blame. But, this diagnosis is wrong. The EU’s problem is one of monetary, not fiscal, austerity. Money matters. Just look at the accompanying chart. Private credit in the Eurozone has been shrinking since March 2012.

Never mind. The EU fiscal austerity bandwagon keeps rolling on with Matteo Renzi, Italian Prime Minister and current President of the EU, holding the reins. Indeed, Renzi recently went so far as to form an anti-austerity coalition with France and Spain. According to the coalition, its members simply cannot impose further spending cuts. They assert that their budgets have been cut to the bone. This claim is ludicrous. 

<--break->There is nothing to cut in Italy? Get real. Senior civil servants are being paid over 12 times the national average salary. As for France and Spain, their civil servants are “well paid,” too. It’s time for the public to stop listening to the EU’s anti-austerity hypocrites and start looking at the numbers.

Hungary’s Slide Towards Authoritarianism

Yesterday’s general election in Hungary has given Viktor Orbán’s party, Fidesz, a very comfortable majority in the Hungarian Parliament, while strengthening the openly racist Jobbik party, which earned over 21 percent of the popular vote. Neither of this is good news for Hungarians or for Central Europe as a whole.

In the 1990s, Hungary was among the most successful of transitional economies of Central and Eastern Europe. With a significant exposure to markets in the final years of the Cold War and a political establishment committed to reforms, it was often singled out as an example of how a successful, sustained transition towards market and democracy should look like.

In 2014, the situation could not be more different. Hungary’s economic policies have become increasingly populist and haphazard, as the government has confiscated the assets of private pension funds, undermined the independence of the central bank, and botched the consolidation of the country’s public finances (p. 77). Worse yet, Hungary has seen a growth of nationalist and anti-Semitic sentiments which have not been adequately countered by the country’s political elites. In a recent column, I wrote about Mr. Orbán’s personal responsibility for the disconcerting political and economic developments in Hungary:

Mr. Orbán’s catering to petty nationalism often borders on selective amnesia about certain parts of Hungarian history. Recently the Federation of Hungarian Jewish Communities, the Mazsihisz, announced it would not take part in the Orbán government’s Holocaust commemorations. According to the Mazsihisz, the framing of the ceremonies whitewashes the role that the Hungarian government played and focuses exclusively on the crimes perpetrated by the Germans—despite the fact that Hungary adopted its first anti-Jewish laws as early as 1938.

Mr. Orbán’s tone-deafness when it comes to historical symbols goes hand in hand with a concerted effort to undermine the foundations of liberal democracy and rule of law in Hungary. Since Mr. Orbán came to office four years ago, Fidesz has consolidated its political power and used it to pass controversial legislation tightening media oversight, as well as constitutional changes that curb judicial power and restrict political advertising, among other measures.

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 when resources are allocated by political forces, cronyism and pork cause inefficiency and waste.

That’s why statist nations languish and market-oriented countries flourish.

Paul Krugman has a different perspective on these issues, which is hardly a revelation. But I am surprised that he often times doesn’t get the numbers quite right when he delves into specific case studies.

He claimed that spending cuts caused an Estonian economic downturn in 2008, but the government’s budget actually skyrocketed by 18 percent that year.

He complained about a “government pullback” in the United Kingdom even though the data show that government spending was climbing faster than inflation.

He even claimed that Hollande’s election in France was a revolt against austerity, notwithstanding the fact that the burden of government spending rose during the Sarkozy years.

My colleague Alan Reynolds pointed out that Krugman mischaracterized the supposed austerity in the PIIGS nations such as Portugal, Ireland, Italy, Greece, and Spain.

We have another example to add to the list.

He now wants us to believe that Germany has been a good Keynesian nation.

Larry Summers Redefines Balanced Budgets as Stimulus and Big Deficits as Austerity

Former Treasury Secretary Larry Summers, in June 4 testimony before the Senate Budget Committee, offers a scatter diagram which allegedly shows “that countries that pursued harsher austerity policies in recent years also had lower real GDP growth.”  He acknowledges, but does not adequately explain, that the causality may well be backwards: Bond markets would not allow countries in severe economic distress (Portugal, Ireland, Greece and Spain) to continue financing deficits at the peak levels of 2010.

Summers defines “austerity” as the three-year change (regardless of the level) from 2010 to 2013 in cyclically-adjusted “primary” deficits (excluding interest expense) as a percent of potential GDP.  His scatter diagram then compares those changes to average real GDP growth from 2010 to 2013, using unexplained estimates for 2013.

Measuring fiscal stimulus by the change in budget deficits means several countries with little or no budget deficit in both 2010 and 2013 appear as employing the most “fiscal stimulus” in Summers’ graph. Sweden’s deficit is estimated at 0.1 percent of GDP for 2013, according to The Economist, and was literally zero in 2010.  Keeping the budget balanced puts Sweden on the admirable left side of Summers’ diagram – the side ostensibly choosing growth rather than austerity.  Germany is another country Summers counts as avoiding austerity, even though Germany’s brief cyclically-adjusted deficit of 3.5 percent of GDP in 2010 was cut to zero in 2012-2013.

When it comes to real GDP Growth, Hong Kong, Singapore, the Slovak Republic and South Korea appear near the top of Summers’ graph.  It is revealing that Hong Kong is also far to the left on the pro-growth side of the austerity axis.  This may appear paradoxical since Hong Kong ran budget surpluses in 7 of the past 8 years, and will do so again in 2013. No amount of cyclical adjusting could turn chronic surpluses into deficits.  Simply because Hong Kong has not switched from a big deficit to a smaller one, that alone suffices to place it among the least “austere” economies on list.  Similarly, South Korea’s budget surplus is estimated at 1.3-1.4 percent of GDP in both 2010 and 2013, according to the OECD, but keeping the budget in surplus between those years counts as stimulative policy in Summers’ reckoning.

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 libertarian approach, which means “austerity” is imposed on the government, rather than on taxpayers?

In the past, Krugman has also tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.

Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts:

…in celebration of that great [May 1] socialist holiday, “In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening”. Except, no one really asked them what did the mean by ‘belt-tightening’. …let’s check out expenditure side of Europe’s ‘savage austerity’ story… The picture hardly shows much of any ‘savage cuts’ anywhere in sight.

As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what’s happened to the size of the public sector over a multi-year period.

Austerity in Europe

Here are some of his conclusions from reviewing the data:

Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.

No peripheral country - where protests are the loudest - or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.

Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.

…All in, there is no ‘savage austerity’ in spending levels or as % of GDP.

I’ll add a few additional observations.

Margaret Thatcher and the Battle of the 364 Keynesians

With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment—a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”

According to the Oxford English Dictionary, a factoid is “an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.” The standard Keynesian fiscal policy prescription for the maintenance of non-inflationary full employment is a fiscal factoid. The chattering classes can repeat this factoid on cue: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or expand its surplus).

Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman repeats it ad nauseam. Now, the new secretary of the treasury, Jack Lew (who claims no economic expertise), is in Europe peddling the fiscal factoid.

Unfortunately, the grim reaper finally caught up with Margaret Thatcher—but not before she laid waste to 364 wrong-headed British Keynesians.

In 1981, Prime Minister Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee-jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures to that letter than the economy boomed. Confidence in the British economy was restored, and Mrs. Thatcher was able to introduce a long series of deep, free-market reforms.

As for the 364 economists (who included seventy-six present or past professors, a majority of the Chief Economic Advisors to the Government in the post-WWII period, and the president, as well as nine present or past vice-presidents, and the secretary general of the Royal Economic Society), they were not only wrong, but also came to look ridiculous.

In the United States, the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, American Keynesians can continue to peddle snake oil with reckless abandon and continue to influence policy in Washington, D.C., and elsewhere.

Slumping Money Supply (Not Austerity) Plunges Hungary Into Recession

Hungary is in a recession, again. According to the chattering classes, as well as many analysts and financial reporters, fiscal austerity is the cause of Hungary’s slump.

Nonsense. Hungary’s recession results from its slumping money supply.

When monetary and fiscal policies move in opposite directions, the economy will follow the direction taken by monetary (not fiscal) policy – money dominates. For doubters, just consider Japan and the United States in the 1990s. The Japanese government engaged in a massive fiscal stimulus program, while the Bank of Japan embraced a super-tight monetary policy. In consequence, Japan suffered under deflationary pressures and experienced a lost decade of economic growth.

In the U.S., the 1990s were marked by a strong boom. The Fed was accommodative and President Clinton was super-austere – the most tight-fisted president in the post-World War II era. President Clinton chopped 3.9 percentage points off federal government expenditures as a percent of GDP. No other modern U.S. President has even come close to Clinton’s record.

The money supply picture for Hungary seemed to be looking up until late 2011 (see the accompanying chart). Indeed, Hungary’s money supply had nearly returned to its trend-rate level, when it peaked in November 2011. Then, in the course of just over a month, things took a turn for the worse.

First, Moody’s downgraded Hungary’s debt to junk status, and soon thereafter, S&P and Fitch followed suit. Then, the EU and IMF walked out on debt restructuring talks, citing concerns over proposed constitutional changes, which threatened the Hungarian central bank’s independence. Just days later, their fears were confirmed, as the Hungarian Parliament passed the controversial law, merging the central bank with the Financial Supervisory Authority. And, to top it off, Hungary unexpectedly cancelled part of its December debt auction.

When the dust settled, confidence in Hungary’s financial system had been shattered. Despite a 15.9% increase in the supply of state money, the total money supply had plummeted by 4.2% (from November 2011 to January 2012). As the accompanying table shows, this decline in the total money supply was driven by a 9% drop in the all-important bank-money component of the total.

Hungary’s money supply has yet to recover from this perfect monetary storm. And, as if that wasn’t enough, Hungary recently adopted a damaging financial transactions levy.

Money and monetary policy trump fiscal policy. Until Hungary gets its money and banking houses in order, its economy will continue to wallow in recession.