Hysterity! Global Panic about "Austere" 9 Percent Spending Hike

America’s economic boom is the latest evidence for anti-austerity arguments.

Measured according to the strict two-quarters-of-GDP macroeconomic standard, the United Kingdom is now back in a recession. According to this same standard, the United States is not in a technical recession. 

At Business Insider, Joe Weisenthal cites the UK recession to continue a theme advanced by BI founder Henry Blodget yesterday.

"Basically we have a life test of a country that wants to do what conservatives in the US want to do: reduce national debt," Weisenthal writes. "Doing so is a growth disaster."

Sounds like the contrast between the judicious Keynesianism of President Barack Obama and the small-government extremism of Prime Minister David Cameron is pretty stark, right?

According to the OECD, British deficit spending as a percentage of GDP is 0.6 percent lower than our own, and projected to be a full percentage point lower in 2013. (The ghost of First Baron Keynes can rest easy in the knowledge that the deficit/GDP percentage in both nations is still more than twice what it was in 2007; that’s an almost-Keynesian public response if you slightly edit Keynes’ advice that you’re actually supposed to run surpluses during a boom.) 

So what does the Sceptre’d Isle’s budget look like under the tyranny of extreme austerity? Here’s the lowdown from Her Majesty’s Treasury [pdf]. 

Leave aside the violence you need to commit against our two great nations’ shared language to define "austerity" as a "five straight years of increases in outlays." There’s a bigger problem, noted yesterday by powerhouse commenter R C Dean, with citing GDP to determine the economic  effects of deficit spending.

"Any time you balance a budget or start paying down debt, you will, by definition, cause GDP to go down. That's a failure in Keynesian terms," R C wrote. "So what [Blodget is] saying is that the only way to succeed under Keynes is to continually run deficits and borrow more and more and more. Forever. Because we know that you can borrow infinite amounts of money and nobody will ever stop loaning it to you or expecting repayment in real terms, right?"

This is the openly hidden truth of the continental austerity argument. The EU push for budget-balancing (which, just to be clear, has been all talk and no action) didn’t come about in a vacuum but because the European countries are out of money and nobody wants to lend to them anymore. The Uniteds Kingdom and States may have slightly more leeway because their central banks are so willing to buy government debt, but last-year’s downgrade of the U.S. credit rating suggests that excessive debt really does have consequences. 

The important question is not whether destruction of the nation’s currency and finances solves the recession, but whether it helps people get through the recession, as proponents claim, by keeping them employed. 

We already know the answer for the United States. American unemployment peaked at 10.2 percent in 2009, during the first part of American Recovery and Reinvestment Act (ARRA) stimulus payouts. The rate went back up to almost 10 percent in the fall of 2010, during the high-water mark of ARRA stimulus. It has since declined and is now 8.2 percent – still higher than the rate the Obama brain trust in the beginning of 2009 argued it would have been without the stimulus. Just to repeat that, because it doesn’t seem to get much attention from totally objective media: In every quarter since the beginning of the 2009, unemployment has been at least half a percentage point higher than it would have been if there had been no stimulus at all

How does that stack up against the faux-sterity of Dear Old Blighty? The Bureau of Labor Statistics helpfully compares U-3 unemployment with unemployment in a handful of other developed countries, including the UK. Over the same period, UK unemployment has not come close to 9 percent. After rising to 8.4 percent earlier this year, it’s going back down and is now at 8.3 percent – within the margin of error of the current US unemployment rate. 

Pro-stimulists could argue that ARRA funds didn’t stimulate job growth because they were mostly used to plug holes in state budgets – notably in payouts of extended unemployment benefits (which would have had the effect of raising the rate of U-3 unemployment). But that still wouldn’t provide any support for the idea that Bush/Obama deficit spending supported the economy, or that Cameron and Clegg’s token efforts at deficit reduction slowed the UK economy down. If you’re going to argue that deficit spending stimulated the economy, a decent respect to the opinions of mankind requires that you explain how. 

In U.S. News and World Report (and really, how bad can a recession be when U.S. Snooze is still in business?), Rick Newman says the long-term benefits of budget discipline could outweigh the current political risks to Cameron, Nicolas Sarkozy and other politicians: 

Some skeptics feel that sharp spending cuts and other austerity measures are deepening the European downturn and making it more likely that economies like Greece's will shrink so much that leaving the euro zone becomes irresistible. Going it alone would probably be chaotic and risky, but it would allow such nations a chance to devalue their own currencies--boosting exports--and to rely on inflation to shrink debt and artificially pump up paychecks, keeping voter revolt in check.

But austerity might work. David Zervos of investing firm Jefferies argues that rolling back fixed wages, subsidized jobs and other sinecures in southern Europe will make those economies more vibrant, if they're able to stick with it. "This European austerity is a move to free market capitalism," he wrote to clients recently. The United States went through something similar in the 1980s, he says, after Ronald Reagan fired striking air-traffic controllers and ushered in a new era of "laissez-faire labor," which coincided with a 25-year economic boom.

But for austerity alarmists, as for Keynes himself, there is no long term. I've been watching the development of the austerity panic for a while, and I can tell you: These guys don't let facts get in the way of a good mania. It will be interesting to track the trajectories of unemployment rates on both sides of the Atlantic over the next year. But to do a comparison of profligacy and austerity, you need to have some actual austerity. 

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  • ||

    Just like the gnashing of teeth over the Paul Ryan budget. The fact that TEAM RED doesn't propose actual spending cuts when this shit is going to happen anyways only shows how little they give a shit about limited government themselves.

  • sloopyinca||

    Were you under the impression that they actually did give a shit? If so, you're more retarded than the child of two retarded parents who in turn had retarded first cousins for parents...or Prince Harry.

  • Sevo||

    ".or Prince Harry."
    Noooooooooooooooooooooooooooooo

  • ||

    The most retarded person since retard went retardtown.

  • Brutus||

    The problem is the formula for GDP. Factor out the "G" and it's obvious our economy's in the crapper. And when "G" is borrowing 40 cents of every dollar to keep the bubble inflated, things will not have a happy ending.

  • Dylan||

    I'll take it in a slightly different direction. The problem is the "P" in GDP. Measuring the total production of a nation is very difficult, so GDP takes a shortcut, it measures the total spending of a nation (including government spending, the G Brutus alluded to) and assumes that the total spending is equal to the total production. The "P" which stands for product is a lie. It should really be an "S" as in gross domestic spending.

    When you realize this, statements like "We need to spend more to increase GDP" become tautologies "We need to spend more to increase spending".

  • Dylan||

    A while ago I tried to make my own stat to replace GDP. I wanted it to represent the productivity of the nation. Ideally it would be

    (GDP - Net Borrowing)/Population and adjusted for inflation.

    I couldn't find data on net borrowing (public and private) so I just did

    (GDP - Federal Deficit)/population adjusted for inflation.

    Another problem was that I had to rely on government numbers for inflation. Anyway, what I got was essentially linear growth (with booms and busts) and an overall increase in our productivity by roughly a factor of three since 1945.

  • Dylan||

    A while ago I tried to make my own stat to replace GDP. I wanted it to represent the productivity of the nation. Ideally it would be

    (GDP - Net Borrowing)/Population and adjusted for inflation.

    I couldn't find data on net borrowing (public and private) so I just did

    (GDP - Federal Deficit)/population adjusted for inflation.

    Another problem was that I had to rely on government numbers for inflation. Anyway, what I got was essentially linear growth (with booms and busts) and an overall increase in our productivity by roughly a factor of three since 1945.

  • Dylan||

    Full Disclosure

    Along with being a double poster I am a complete amateur in economics.

  • Sevo||

    Uh, I'd keep it up.
    You have a good idea of what to look for, and you could well come up with a 'corrective' for the GDP.
    Not suggesting that an econ department at X university is gonna give you a signing bonus, but a 'Dylan' could be every bit as valid as a 'Godwin' in debunking BS.

  • ||

    an econ department at X university is gonna give you a signing bonus

    Does not reflect "reality", will not approve as "reality"

  • Gray Ghost||

    Another problem was that I had to rely on government numbers for inflation.

    I wonder what happens if you change the Gov't numbers on inflation to something from, e.g., ShadowStats? Seems like an easy calc to do, and a fun way to while away part of today.

  • R C Dean||

    Dylan, you should check out Karl Denninger's site Market Ticker. He's done some research and analysis on that very issue.

    His point/conclusion, if I recall, is that most of our GDP growth for awhile has been due to leverage (public and private). In other words, we've been counting borrowing as income (kind of like taking a cash advance on your credit card an calling it a raise), and when you back out the borrowing, our income has been pretty flat.

  • Coeus||

    OT: Winner of most misleading headline since the beginning of the Zimmerman debacle:

    Ron Paul Gives Cybersecurity Bill CISPA A Boost

  • ||

    Holy shit, that really scared me for a moment. Want to bet that if the amendments are added he'll still oppose the bill?

  • Coeus||

    No bet. There's too many decades of precedence to argue against that.

  • scareduck||

    Not to be pedantic, but evidence for this? Has there been a failed bond auction supporting this assertion?

  • scareduck||

    Also, a meta comment for the admins, if they're hanging out: <blockquote> tags are giving me a warning about using a 50-character word, which is bogus.

  • Coeus||

    These guys don't let facts get in the way of a good mania. It will be interesting to track the trajectories of unemployment rates on both sides of the Atlantic over the next year. But to do an actual comparison of profligacy and austerity, you need to have some actual austerity.

    It's worse than that, not only are we in austerity now, apparently we've been practicing it for the last 30 years, and that's what led to the financial crisis. How fucking stupid do you have to be to buy that shit? And 30-40 percent of the population is just eating it up.

  • Rob.||

    RC, The Powerhouse. Boom!

  • Coeus||

    Yeah, he definitely won the adjective prize with that one.

  • Pro Libertate||

    He got cited and quoted in the main body of the post. For legal scholars, that's like candy.

  • General Butt Naked||

    Quick! Find the grammar mistakes so we can drag him back down to our level.

    What's worse, having been quoted by Cavanaugh and returning to the comments section or never knowing the glory at all?

  • Killazontherun||

    My heart fluttered one time when TC acknowledged my existence. I can only imagine what it must feel like to be quoted in the main body of a post. Dreamy, isn't it?

  • SIV||

    I comment-trolled both Matt and Tim with great success.One was linked by Instapundit (Cav) and the one that got Welch was a perfect sentence of performance art. More fun ruined or made much more difficult by registration

  • ||

    I got quoted about The Jacket once. It was magical.

  • ||

    It’s ironic, you know

  • Killazontherun||

    Measured according to the strict two-quarters-of-GDP macroeconomic standard, the United Kingdom is now back in a recession. According to this same standard, the United States is not in a technical recession

    Oh, the UK is done for whether they balance their budget or keep the spigot on, economic betterment is going to allude them. Have you tried having a conversation with a Brit in the last decade? Energy absolutely alludes them. Of the several I'm acquainted they all drift off in mid sentence and stare gloomily in to the distance. Snapping your fingers to get them to acknowledge what is in front of them only frightens them into a deeper somnambulant state. They're gone, man. You're not going to get an increase in productivity from that people under any terms. Completely useless as a data point for an argument in regard to economics.

  • Sam Grove||

    I think the term you want is "elude" rather than "allude".

  • Killazontherun||

    I an paide bye the letter arounde here. Thank you for, uhm, breaking, no not quite right, destroying, not even close, doing something to my cover.

  • Killazontherun||

    BTW, the sentence was going to go an entirely different direction, and 'allude' was used correctly, but got stuck in my head with the change in subject.

  • Sevo||

    "But for austerity alarmists,..."
    Uh, the problem here is an appeal to emotion.
    "Austerity" is a term used by those who really don't want to admit that spending more than you earn is a bad plan.
    The term "Reality" is proper in this context, and reality has the wonderful effect of correcting what fantasy promised and can't deliver.

  • ||

    Soooo.... reality alarmists then?

  • ||

    As Biggie Smalls once said, "More money, more money"

  • John Thacker||

    The UK "austerity" also included introducing a new 50% top tax rate.

  • Paul.||

    which, in the big picture is kind of... reasonable. Reduce outlays and increase taxes to close the gap.

    Painful for a short time, but think how happy you are when you got those credit cards paid off.

  • Paul.||

    Except of course in my case, I could reduce outlays, but when I went to my boss and demanded a 50% increase in revenues, he told me to get stuffed. So I just reduced outlays.

    Governments aren't like households!11!

    No, no they're not.

  • 0x90||

    Just pass a household amendment that says you have the power to lay, and collect taxes on, the wife.

  • ||

    In a qualified defense of the Keynesian position, the unemployment levels with respect to that now infamous model are a testament to the grotesquely unscientific and dishonest use of that model and its assumptions, not arguments theoretically pertaining to stimulus itself. If anyone has an interest in those kinds of details, Greg Mankiw has been excellent on the issue, namely, the question-begging nature of such model forecasts.

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