'Austerity' To Blame? But Where's The Austerity? - Forbes

Repeatedly, I have written that "austerity" is not the source of problems in parts of Europe, since there hasn't been any real reduction in spending, no thoughtful labor reforms, and no general political reforms. Tax increases have certainly hurt in some nations, but overall the lack of serious change is the problem.

Also consider Japan, where stimulus in the form of spending and monetary easing hasn't worked — though it is the "solution" proposed by many progressives.

I'm not an absolutist, as the real solutions to economic stagnation are likely beyond simplistic and ideological adherence to any school of thought.

Everything the Keynesians argue for, is and has been done. Yet, there is stagnation. The following article from Forbes supports my views:

'Austerity' To Blame? But Where's The Austerity?
http://www.forbes.com/sites/paulroderickgregory/2013/05/26/austerity-to-blame-but-wheres-the-austerity/by Paul Roderick Gregory

Die-hard Keynesians bemoan that, with a few exceptions, the world's economies are drowning in the quicksand of austerity. They preach we need more government spending and stimulus, not less. Northern Europe should bail out its less-fortunate neighbors to the South so they can pay their teachers, public employees and continue generous transfers to the poor and unemployed. If not, Europe's South will remain mired in recession. In America, Keynesians entreat the skinflint Republicans to loosen the purse strings so we can escape sub par growth. They advise Japan to spend itself out of permanent stagnation and welcome recent steps in this direction.

But there simply has not been any real austerity. How can I state that? Because the statistics prove there has been neither a cut per-capita spending nor in "real" (inflation-adjusted) spending in most struggling economies. As Gregory writes in Forbes, statistics pose a challenge the Keynesians choose to ignore:

The Keynesian stimulus crowd blames austerity for the world's economic woes without bothering to examine facts. I advise them first to consult my colleague at the German Institute for Economic Research… Georg Erber (I See Austerity Everywhere But in the Statistics) who, unlike them, has actually taken the time to examine the European Union's statistics as compiled by its statistical agency, Eurostat.

The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending.

…

Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.

Yes, the PIIGS (and many other nations) have found it difficult, if not impossible, to reduce the spending already in place. I recently posted that Denmark is trying to follow Germany and a small handful of nations that have cut generous benefits. But, these are a minority of nations. Most countries — especially liberal democracies — are discovering that people won't vote to cut spending on benefits they love.

Surely during the 2008–09 financial crisis there were cuts? Nope, not really. Instead, spending kept on rising, in the PIIGs and in the United States. But, you wouldn't know that from media reports or popular columnists like Paul Krugman.

Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.

Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending increased by six percent from an already high plateau. Eurostat's projections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.

As Erber wryly notes: "Austerity is everywhere but in the statistics."

Surely Japan offers a different story. They've just started stimulus… about 20 years ago. It turns out, the "new" policies of Japan are more of the same old spending, and more spending, policies. And that spending isn't working. Although some progressives will argue Japan simply needs more time, the greater likelihood is that the spending will just be a black hole of debt.

Well, never mind. The Keynesians have new reason to cheer. Japan, under the new government of Shinzo Abe, has embarked on a program of monetary and fiscal stimulus, and, lo and behold, the stagnant Japanese economy actually recorded a whole quarter of decent growth. At last Japan has seen the light. (The latest Economist cover features a superman Abe flying to Japan's rescue). Stimulus cheerleader, New York Times columnist Paul Krugman (Japan the Model), answers his own question "how is Abenomics working?" with: "The safe answer is that it's too soon to tell. But the early signs are good…"

Krugman's memory must be incredibly short if he thinks that Japan has just discovered stimulus. Japan has been in a twenty-year-old funk, despite launching a dizzying variety of Keynesian stimulus programs, some of which bordered on the crazy (such as giving Japanese shopping vouchers so they could relearn how to spend). Over the past twenty years, Japan has tried to spend itself to growth and has nothing to show for it.

We need look only at the growth of Japan's public debt to prove the failure of Japan's Keynesian experiments. In 1990, Japan's public debt was 67 percent of GDP (much like the U.S. today). Today it is 212 percent. All that public spending and Japan still could not grow!

Politicians and the chattering class in the United States had better pay attention. I doubt they will, though, because Paul Krugman and progressive voices are selling feel-good policies. Not only do they wish to avoid any pain, commentators like Krugman promise we will all feel better with more spending and less (fictional) austerity.

Japan is an example of what Europe will look like in twenty years if it takes the Krugman advice — massive and dangerous debt with nothing to show for it. Japan is a perfect real-world experiment with long run, sustained Keynesianism. Europe and the United States, take notice and beware!

Which leads us to the austerity that is supposedly underway in the United States. (Remember that radical sequester that was supposed to ruin the economy?) Our figures tell exactly the same story as the PIIGS – a binge of public spending that has not been reversed. Between 2000 and 2008, both federal and state and local spending increased by almost two thirds. Despite budget cliff hangers, sequestration, and Republican intransigence (so claim the Democrats), the federal government today is spending 16 percent more than at the peak of its binge spending in 2008. State and local governments, which cannot borrow as freely as the Feds, are spending a modest 11 percent more.

Instead of "where's the beef?" we should ask "where's the austerity?" Perhaps economist Krugman can find it. But first I would advise him and others like him to consult some facts before they pontificate.

Gregory's column in Forbes is correct, there is no austerity. But, that doesn't stop progressive, big-government supporters. No, they simply change the argument to the rate of growth in spending. If there is a slower increase in federal spending, that must be a "cut" and "austerity" causing pain. Gregory responds to this nonsensical claim:

In the comments section, I got a priceless gem from a big government fan, who relates that government spending has risen at an annual rate of 7 percent since 1965. Hence, austerity is defined as growth of government spending at a rate less than "normal." The 7 percent rate is instructive because, according to the rule of 72, you get a doubling every ten years. If the federal government continues to grow at its "normal" (non austerity) rate, it will spend $32 trillion in 2043. Maybe then we'll finally have "enough" government spending to solve all of our problems.

Government printing presses work overtime, monetary easing continues as quantitative easing, and yet the economies of the world sputter along.

My view is that there are structural problems: aging populations, automation of jobs, and many other factors. No amount of Keynesian stimulus will change the facts behind these problems. Our populations, and workforces, are "flipping" in many nations. In the United States, automation and other factors are also changing the economic variables.

Austerity is not the problem. The problem is far, far more complex than Krugman and others will acknowledge. In fact, they are blaming something that isn't even contributing to the stagnation because they simply want to spend more money. That's bad policy, as we'll discover in future decades — if not sooner.

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