There Is No Broad Austerity In Europe

The wailing and gnashing of teeth over austerity being the end of the world does not hold up to an examination of the facts. Austerity, as trumpeted by inept journalists who couldn’t tell the difference between Minsky (the economist) and Minsk (capital city, Belarus), means a reduction in government spending.

Courtesy of tooth enamel protectors ZeroHedge, we are pointed to a beautiful chart that highlights the truth of austerity in Europe. Only two countries – Iceland and Hungary have reduced public spending. Ireland has kept spending largely flat because of massive bailout costs and rising social welfare expenditures.

faux 1_0

This is why the kneejerk criticism of Reinhart & Rogoff was so irrelevant to the grand scheme of things. There is no way of figuring out whether high debt causes slow growth or slow growth causes high debt. But the reverse causality seems more reasonable. When you make hiring and firing very difficult and starting a business almost impossible, of course you get slow growth and record unemployment figures.

The big concern over government debt is also another inept journalist meme. This chart from Morgan Stanley shows clearly how the United Kingdom is essentially insolvent and depend on interest rates sticking close to zero in perpetuity. It also shows that in New Zealand, household debt is a massive chunk of our debt problem but government debt is growing rapidly.

World debt to GDP_0

If there was actually broad austerity in Europe, we would see even higher levels of unemployment and even lower levels of GDP growth. Don’t forget – the cost of bailouts and cheap finance made available to insolvent banks is still government spending. Someone, at some point in the future, has to earn a profit and pay taxes on it in order to repay the debt or provide the cashflow to justify the bond market “rolling over” the debt.

One of the reasons why public debt has grown rapidly during Great Depression 2.0 is that automatic stabilisers in the form of welfare spending has increased substantially. Tax expenditures in the form of Working for Families tax credits and the Independent Earner Tax Credit have increased as well, reducing net tax revenue. This means that on top of slow growth, you have massive changes in cash flow even before the impact of the Christchurch earthquakes is taken into account.

The question simply has to be asked – given that there is no broad austerity in Europe – and unemployment is at record highs – what does that imply about the multiplier, if it indeed exists? It implies that the multiplier is far, far lower than the 1.5 trumpeted by Obama’s economic advisors during the rollout of the stimulus. It might even be less than 0 because of a “crowding out” effect.

All of this stuff matters, but no one cares. Some people reading this will experience a kneejerk emotional response that makes them want to post links to articles about public servants losing their jobs while missing the point that cutting wages and salaries does not offset the effect of automatic stabilisers.