Wednesday, May 09, 2012

What European Austerity?

... and why should we be worrying about someone else's when we're so absorbed with our own and hoping that someone else will be doing all unpleasant austerity stuff? It's the economy, stupid. Like it or not, we're all in it together. Too important to take it straight from your favorite pundit or any single source. We've been remiss but plan to resume reading Jesse's Café Américain, starting right now with a scary piece on defaulting and unsustainability. Be brave and do the same when you finish the "Dish" just served. 


Veronique de Rugy throws down:
First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. Third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems. 
Wilkinson reframes the debate:
I suspect the entire debate hinges on a difference in assumptions about the relevant spending baseline. If your theory prescribes significantly ramping up spending during recession, low or flat spending growth can look perversely “austere,” even if absolute spending as a % of GDP is very high.
Tyler Cowen adds:
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.
Some of this is above my paygrade. But surely some of the increased spending comes from the cost of unemployment and other "automatic stabilizers." Drum argues that De Rugy's chart is wildly misleading:
There are, obviously, some problems here: the figures are in nominal euros/pounds, there's no adjustment for population growth, and anyway, the whole point of the anti-austerity Keynesians is that during a massive recession spending should be sharply higher, especially in the face of relatively tight central bank policy. Spending that's flat or slightly down is massively contractionary.
Ryan Avent nods:
The supposed absence of austerity in Ms de Rugy's figures is mostly a product of poor graph scaling and a reliance on nominal, absolute figures ...The spending cuts are there, in spades.
Brad Plumer echoes:
[A]usterity really is happening in Europe. The best way to see this is to look at the change in the “structural budget deficit” for each euro zone country — that’s the amount of deficit countries have once you factor out economic conditions. In other words, this is the part of the deficit that governments have direct control over. And, according to data from the IMF’s World Economic Outlook (see table B-7), most euro zone countries have been sharply cutting their structural deficits since 2009.
Plumer produces this chart as proof:
Martin Wolf has an excellent primer on the question of whether austerity actually increases debt in the long term. His bottom line:
The first and most obvious point is that the fiscal impact of the crisis is forecast to have overwhelmed the impact of tightening, over this period. Thus, between 2008 and 2012, the actual fiscal deficit is forecast to improve in only three countries: Italy (marginally); Malta and Greece. In no country, is the actual improvement forecast to be more than 2.5 per cent of GDP (namely, Greece).
Yglesias argues that "the debate over austerity in Europe has been mapped onto the American partisan debate in a weird way." Howard Gleckman takes the debate in another direction:
[T]here is only real lesson for us to learn from the recent European experience:  The U.S. needs to fix its long-term budget program as soon as it can, and on its own terms. Because you never, ever, want to find yourself at the mercy of the bond vigilantes. If you don’t believe me, just ask the Greeks.
My view, for what it's worth, is that Obama's infrastructure spending and tax cuts have worked well to avoid a depression - but without a clear long-term deal to cut the structural deficit, we remain in deep trouble. Worse: the US is likely to make European austerity look mild next year if there's deadlock and all the Bush tax cuts are ended, along with sequestration in entitlements and defense. I have no idea how deep the austerity would be under the Ryan plan as diligently executed by Romney. But to plunge into immediate austerity just as the recovery is gathering some steam strikes me as a very good reason to be skeptical of the GOP this fall.

We need smart long-term entitlement reform, revenue-enhancing tax reform and defense cuts. What voters have to figure out is which combination of partisan forces can bring this about. My fear is that the GOP is now so extreme we will eventually be delivered to the bond vigilantes. Even with a reserve currency - a luxury the Europeans do not have.

What European Austerity? and more good stuff at The Daily Dish by Andrew Sullivan

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