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Austerity doesn’t work?

The word ‘austerity’ has been kicking around in political life, these last few years. It conjures images of Greek old people forced to eat cat food as their country’s economy collapses and to burn furniture for heat, because right-wing budget-balancing Nazis have forced cruel cuts to social spending.

I exaggerate, but not much; see this Greek depiction of Germany’s Merkel. Leaving aside the fact the Nazis were socialists who believed in Keynesian deficit-spending on public works and social benefits (much like our Democrat friends believe), the word ‘austerity’ – specifically, the image of cruel spending cuts – is largely a myth, that left-wingers deploy to narrow the range of acceptable thought.

“Look at Europe!”, cry advocates of Big Government and deficit spending, “They’ve tried austerity and it doesn’t work!” And what they mean is: don’t you dare think about government spending cuts.

If you corner them, they may acknowledge that tax hikes also count as ‘austerity’ policies. But they are usually fine with tax hikes; they love tax hikes. So when they hurl ‘austerity’ as a pejorative, they mean, DON’T CUT SPENDING.

But let’s step back a minute. Have European countries actually cut their spending? And if they are suffering, might other factors – another policy, perhaps – explain the suffering? These questions are worth examining.

This is only a blog post; we won’t look exhaustively. But let’s at least check if the major European countries have cut spending, in these last few years. (Figures will be rounded billions of annual expenditure in local currency, such as pounds or euro. In several cases, I extrapolated 4Q2012 from the previous quarters of 2012. I apologize for any inaccuracies.)

UK government spending: 582 (2008), 629 (2009), 670 (2010), 689 (2011), 695 (2012). Each year increases; no cut.

Germany government spending: 441 (2008), 453 (2009), 461 (2010), 466 (2011), 470 (2012). Each year increases; no cut.

France government spending: 150 (2008), 154 (2009), 158 (2010), 154 (2011), 156 (2012). They cut spending slightly in 2011, increased it in 2012.

Italy government spending: 301 (2008), 304 (2009), 301 (2010), 299 (2011), 297 (2012). Finally, a government that has cut its budget a little bit (2% from peak).

Spain government spending: 400 (2008), 415 (2009), 421 (2010), 418 (2011), 405 (2012). OK, Spain has cut 4% from peak.

I couldn’t easily get figures for Greece, but several articles suggest its total government spending has hardly dropped yet: see this Forbes article, or this Cato article.

These countries have something in common, in addition to struggling economies and little (or no) total government spending cuts. They have all hiked taxes.

While they made theoretical cuts to future spending, they have increased taxes ‘in the here and now’. Also noteworthy: their tax hikes have all yielded less revenue than expected.

Could tax hikes, the only part of ‘austerity’ policy that they have really tried up to now, be what doesn’t work? Is Europe proving for us all that tax hikes don’t work?

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16 Comments

  1. Maybe austerity doesn’t work, but profligacy is unsustainable.

    Comment by V the K — January 16, 2013 @ 2:55 pm - January 16, 2013

  2. Let me revise: Austerity may be painful, but profligacy is unsustainable.

    Comment by V the K — January 16, 2013 @ 2:59 pm - January 16, 2013

  3. A bit of color on the tax hikes yielding less revenue than expected. In Spain, for example:

    [Last year's] tax increases — on income, savings, property, companies, sales, tobacco and fuel — added 7 billion euros of revenue through November, according to the tax agency. The government estimate was for 20 billion euros.

    Oops.

    Comment by ILoveCapitalism — January 16, 2013 @ 3:14 pm - January 16, 2013

  4. Within the USA, The governors of Louisiana and Nebraska have proposed ending their state income taxes; like Florida, Tennessee, Texas and Wyoming.

    Meanwhile, Massachusetts, Maryland, California, New York, and Illinois have enacted massive increases.

    Wonder which set of states will see better economic growth. (Actually, I don’t).

    Comment by V the K — January 16, 2013 @ 3:45 pm - January 16, 2013

  5. I think Austerity is the only choice given that at some point there isn’t going to be enough money to continue at current levels.

    I do think how cuts are made is important, but better to cut now than end up in too deep a crisis for cuts to do any good later.

    Comment by Just Me — January 16, 2013 @ 6:22 pm - January 16, 2013

  6. Agree.

    On re-reading this post, the point could be less clear than I thought. If someone has never read me before, they might wonder where I’m going. I think large spending cuts are a necessity, and I just wish Europe would try them. Contrary to left-wing propaganda, Europe hasn’t tried them yet. (They might this year, 2013.) But they have tried tax hikes. Tax hikes + no net spending cut is the wrong path; the reason their economies are so sluggish. And our economy too, since Obama is determined to drag us along the same path.

    Comment by ILoveCapitalism — January 17, 2013 @ 3:55 am - January 17, 2013

  7. Austerity by itself won’t work. Just cutting spending won’t change the tax or regulatory burden on society and businesses. The net effect would be to reduce borrowing by the Government but that alone won’t significantly change the dynamics in the economy.

    Austerity will only work if Government starts to transfer control of the economy back to businesses and individuals. That means reducing the regulatory burden and costs so that businesses can invest and individuals can feel more secure about their future. When that happens the economy will start to grow again.

    Austerity in this context should really be defined as Government living within its means and not trying to do those things that are better left to businesses and individuals.

    Comment by David — January 17, 2013 @ 8:12 am - January 17, 2013

  8. Austerity hasn´t worked in Europe because leftist governments caved in to the people or better yet to the unions. Sarkozy in France raised the retirement age to 62, and the unions voted him out and socialist Hollande in, who immediately dropped it back to 60 and to pay for it raised the top tax rate to 75%. French unions give the impression the french are lazy, who would rather retire at 60 with a pension rather than work to more years for more money in their pockets. C´est le vie!

    Freebies work. Romney´s 47% comment was right on. Look at Venezuela, between the military and government employees they constitute 50% of the population and with the give aways to the poor, Chavez didn´t need to resort to fraud to win elections. Barak Obama read his book.

    Comment by Roberto — January 17, 2013 @ 1:11 pm - January 17, 2013

  9. “Have European countries actually cut their spending?”

    [Two Thoughts]
    1. “The real question addressed by this post is how bad spending cuts have been …. It is fine to argue “due to automatic stabilizers, spending should have increased more than it did.”

    That is not how people phrase it, rather they are complaining rather vociferously about “spending cuts,” many of which are either imaginary or extremely small.” [Fair point]

    2. E.g., UK “Each year increases; no cut”: [but]
    2009-10: 47.7% of GDP
    2010-11: 46.7% of GDP
    2011-12: 45.2% of GDP

    Comment by Passing By — January 17, 2013 @ 2:30 pm - January 17, 2013

  10. And the ignorance of Cas/Passing By continues to amuse, with its screaming insistence that a reduction in the rate of increase constitutes a cut in spending, and its attempt to argue that government making up a lower percentage of GDP means automatically that government is spending less.

    These are the mental gymnastics that the psychotic Keynesian left keeps trying to deploy, all of which center on one point and one point alone: lazy worthless Passing By/Cas wants to sit on its couch all day and be paid the same as those who work and create value, and government is the means by which it intends to do that.

    It just has to create the rationalization to do it.

    Comment by North Dallas Thirty — January 17, 2013 @ 4:47 pm - January 17, 2013

  11. Agree that in the 2008-2012 period, the UK, France and Germany slowed their growth in spending. And they even slowed it below their nominal GDP growth rate (which, in turn, is some combination of inflation + real growth, depending on the country), hence the declining share.

    But NDT is right that slowing your growth in spending is still a net spending increase (not a cut). And it certainly isn’t the type of draconian cut that the Left has been protesting; not unless you care to admit that inflation is a larger factor than you have previously admitted.

    Comment by ILoveCapitalism — January 17, 2013 @ 5:16 pm - January 17, 2013

  12. “These are the mental gymnastics that the psychotic [Libertarian right] keeps trying to deploy, all of which center on one point and one point alone: lazy worthless [North Dallas Thirty/Thelma] wants to sit on its couch all day …”

    Comment by Passing By — January 17, 2013 @ 6:18 pm - January 17, 2013

  13. “But NDT is right that slowing your growth in spending is still not a net spending cut.” [Not the point I raised]

    “It is fine to argue “due to automatic stabilizers, spending should have increased more than it did.” That is not how people phrase it, rather they are complaining rather vociferously about “spending cuts,” many of which are either imaginary or extremely small.” [Fair point] “

    Comment by Passing By — January 17, 2013 @ 6:21 pm - January 17, 2013

  14. Try stating your point directly, PB. (Your own words.)

    Comment by ILoveCapitalism — January 17, 2013 @ 7:09 pm - January 17, 2013

  15. lazy worthless [North Dallas Thirty/Thelma] wants to sit on its couch all day …”

    Comment by Passing By — January 17, 2013 @ 6:18 pm – January 17, 2013

    Except, given that ILC and Dan both know me, what that makes obvious is that you’re just a desperate liar.

    There goes your credibility. LOL.

    Comment by North Dallas Thirty — January 17, 2013 @ 9:02 pm - January 17, 2013

  16. “ILC and Dan both know me” [It doesn't make you a desperate bad person, North Dallas Thirty, just because you like sitting on your couch ...]

    Comment by Passing By — January 18, 2013 @ 1:23 am - January 18, 2013

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