Is Austerity to Blame for Europe's Economic Woes? Q&A with Veronique de Rugy

From Nobel laureate Paul Krugman to the free-market-friendly Economist to former Treasury Secretary Lawrence Summers, all sorts of experts are charging that financial austerity measures are killing the great economies of Europe. "Austerity Is So Wrong!" reads the headline of a Krugman piece at The Daily Beast that argues against cutting government spending during weak economic times.

But the critics of austerity have got it all wrong, says Mercatus Center economist and Reason columnist Veronique de Rugy. For starters, many European countries haven't cut spending at all and, among the ones that have, most have made relatively minor trims while also hiking taxes. That's known as "the balanced approach," notes de Rugy, and it almost never works to reduce debt-to-GDP ratios or get economies moving again. Yet critics of cutting government spending in a weak economy ignore academic research showing that significant spending cuts, structural reforms to entitlements, and loosening labor regulations are proven ways to reduce debt loads and get countries moving again.

De Rugy talked with Reason's Nick Gillespie about austerity and its discontents—and what the United States could learn from Germany's economic reforms made earlier this century.

About 7 minutes long. Produced by Jim Epstein; camera by Epstein and Meredith Bragg.

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  • Lord Humungus||

    so it's not austerity-austerity? Color me shocked that free-spending "mixed",er socialist governments can't stop the money train.

  • Fist of Etiquette||

    Lack of austerity is a kind of austerity. Being austere with your austerity.

  • Tim||

    Austrian austerity is the most austere.

  • Tim||

    Although I hear Australian austerity is really something.

  • Spiny Norman||

    Ostensibly.

  • Raistlin||

    But Aboriginal Australian austerity is always awesome.

  • Pro Libertate||

    It's so amazing that people can get away with suggesting that spending more than you take in is a viable, long-term strategy for governments, while being a complete disaster for anything else.

  • sarcasmic||

    If "anything else" could obtain money at gunpoint or debase the currency, then they could get away with spending more than they take in, right?

  • ChrisO||

    For awhile. Reality ultimately happens, no matter what.

  • Pro Libertate||

    That only works because people listen to the bullshit. Frankly, it's somewhat surprising that there aren't actually revolts over what governments are doing.

  • sarcasmic||

    Generally as long as people are well fed they don't revolt.

  • Zeb||

    Yeah, things have to get really bad before a popular revolt will happen. Revolts are dangerous and usually don't turn out very well. Most people will keep their heads down and do what they need to do to survive and take care of their families. Most people have more to lose in a revolution than to gain.

  • ||

    So far, governments have been good at convincing people that the fat cats are the problem. They won't be able to keep it up forever, though. We'll see riots and revolutions when they can't cut their dole checks any more.

  • sarcasmic||

    It seems to be a cycle.
    People start off without burdensome red tape, and are able to create wealth.
    As restrictive legislation and regulations grow, the ability to generate wealth decreases.
    Governments make up for this with redistribution.
    At some point government enacted barriers make wealth generation impossible, and redistribution is the only option.
    Eventually all that wealth that was created is destroyed, and everything collapses.
    Repeat.

  • hk||

    Yes this seems to be the case.

    Although I always advocate peace and nonviolence against Government. We need to be rational and calm, and not break the law.

  • hk||

    Europeans are getting violent, but we need to stay calm over here.

  • rtb61||

    Record global corporate profits would indicate that your thinking flies in the face of reality.
    Pooling of resources within an ever diminishing group in the economy disrupts the flow of capital, which of course capitalism requires.
    Those within whom all the capital is concentrated continue to desire more and use their economic advantage to further tilt it in their favour they corrupt politics to enable this.
    This leads to growth of the police state to enforce the will of the minority upon the majority.
    The police state then seizes power from those that empowered it, all under the pretence of supporting the majority, the police state only ever supports itself and as demonstrated time and time again ruthlessly executes to ex-top 1%.
    The top 1% in trying to gain total power end up victims to what they create.

  • hk||

    Wow you are full of shit.

    Hey fucking genius, 70% of people get more from government than they pay in, and we are mostly in debt because of Entitlements.

    Sorry ti hurts your feelings but Populism is much stronger than the "1%".

    Once you adjust for progressive income tax brackets and welfare, you'll see your full of shit.

  • hk||

    *you're

    Keynesian economics is about raising taxes on the rich and wasting money on entitlements, look it up novice.

  • ichopbeef||

    O HAI 1986

  • Mo' $parky||

    At this point, there are more people who think the government is doing enough than there are people who think the government is out of control.

  • Mo' $parky||

    *government is NOT doing enough

  • wareagle||

    It's so amazing that people can get away with suggesting that spending more than you take in is a viable, long-term strategy for governments, while being a complete disaster for anything else.

    because they have a Nobel Prize and a newspaper column...fuck you, that's why.

    Besides, your explanation is way too simple for the thinkers of deep thoughts who follow the likes of Krugs.

  • Tim||

    I'm thinking Europeans are to blame for Europe's problems. But I'm old fashioned.

  • sarcasmic||

    It's Bush's fault.

  • ichopbeef||

    He invented korparatunz.

  • Tim||

    OT
    The "Dark Shadows" thread seems to have fallen into the shadow known as

    <meta name="description" property="og:description" content="

  • sarcasmic||

    Same with the thoughtcrime thread.

  • Tim||

    An expanding blackhole of bad code that will consume us all? Or did the Wretched Reason Intern get dorito dust in the server again?

  • fried wylie||

    dorito dust in the server again

    diabesity for the squirrels, oh noes!

  • WTF||

    Same with the Kelly Thomas article.

  • R C Dean||

    I like how they are re-branding tax increases as austerity in order to make this argument.

    It is, of course, impossible to imagine that the Usual Suspects would write articles pointing out that increasing taxes seems to be dragging European economies under.

  • Pro Libertate||

    Spend too much. Tax too much. Regulate too much. Then profit!

  • T o n y||

    Austerity has always meant spending cuts and tax increase. Spending cuts and tax cuts as a means to solving a debt crisis was once correctly described as voodoo.

  • Mr. FIFY||

    Bullshit. According to your Team Handbook, spending and taxes can NEVER be cut.

  • hk||

    Agreed, Keynesians don't believe in either.

  • T o n y||

    You both don't know what you're talking about. Quelle suprise.

  • hk||

    Didn't we have a balanced budget in the 1990'? What are these fucking idiots in the MSM complaining about again?

  • hk||

    1990's

  • R C Dean||

    Didn't we have a balanced budget in the 1990's?

    The last year during which the total national debt (including debt held in the "trust fund") did not increase was 2000. The debt increased every year of the 1990s.

    Publicly held debt (not counting the "trust fund") declined during the late 1990s, reflecting, most likely, the use of Soc Sec funds for deficit spending.

    There has not been a single year when both gross debt and publicly held debt declined.

  • hk||

    Right but public debt was MUCH more under control and "balanced", during the 1990's.

    This is an important point to make because Bill Clinton is clearly much more republican than Paul Ryan.

    You have to use Democrats against the Mainstream media to make points sometimes.

  • Lane Meyer||

    Tax increases + small spending cuts is synonymous with austerity. Liberal is synonymous with Progressive. Socialism and Marxism are not synonymous with Progressivism... it's all semantics with these people. Change definitions and create new meaningings to obfuscate unpopular agendas. As long as you have a complient media and a semi-retarded populace this method works quite well. Hell, most members of Team Blue are offended by the accusation of pervasive Marxism within their team... it's different because we call it Progressivism now, duh!

  • Rasilio||

    I want my two dollars

  • Loki||

    "...the free-market-friendly Economist"

    How is The Economist still considered "free market friendly"? I though they were cheer leadin Keynesian stimulus just as much Krugnuts.

  • ||

    Better than the NYT I suppose.

  • Torontonian||

    Krugman and the rest of the Keynesian cast are at least technically correct that austerity should result in near term reduction in GDP.

    This is simple math... GDP = Consumption + Investment + Government Spending + Net Exports.

    If austerity involves reducing government spending it directly reduces GDP dollar for dollar. If it involves tax increases, it reduces GDP indirectly by reducing consumption and investment.

    However, this is only true in the short-run. In the long run, with high certainty, the lower debt burden will be positive for growth.

    Unfortunately, Keynesians don't think long-run.

  • Scruffy Nerfherder||

    Which is why GDP is a bullshit measurement of the economy.

  • hk||

    Agreed completely.

    GDP is complete and utter Bullshit, it violates the principals of classical economics.

  • hk||

    *principles

  • Mike M.||

    Like I said the other day, to the Krugmanian cocksuckers "austerity" is when everybody doesn't get absolutely everything they want in life.

  • Sevo||

    ""austerity" is when everybody doesn't get absolutely everything they want in life", for free!
    Thought that was worth adding

  • sarcasmic||

    "Government is the great fiction through which everybody endeavors to live at the expense of everybody else."
    http://bastiat.org/en/government.html

  • Drake||

    I'm going to try losing weight by eating a lot more.

  • Pi Guy||

    And I'll be F#*&ing; for Virginity!!!

  • NotSure||

    Small correction, the Economist is no longer market friendly, its become pro American to the point of sycophancy, and is pro politicians that are supposedly pro market but never really are in practice.

  • DarrenM||

    pro American to the point of sycophancy

    Doesn't that kind of depend on who's in office?

  • Sevo||

    Using the term "austerity" in this case is too clever by half.
    You may have to live in austere circumstances for a while if you've maxed out your credit and your creditors demand payment, but those circumstances are a result of "reality".

  • hk||

    This is the best example, the credit card analogy.

    In the short run it is indeed disastrous, but it is good for us in the long run. The Central planners have been making horrible investments for decades.

  • Torontonian||

    Headline: Europe Votes to Replace Voluntary Austerity with Involuntary Austerity.

  • John C. Randolph||

    Can we please stop pretending that there's a Nobel prize for economics? I know that Hayek accepted the Swedish Bankster's Bogus Prize for Economics and gave it a level of prestige it never deserved, but the fact that it's been given to Krugman should demonstrate that the Banksters who vote on it are court-astrology fans, not serious students of economics.

    -jcr

  • robc||

    How is it any less "valid" than the prize for peace, which is given by the actual nobel committee?

  • Les||

    Some help please. I'm always trying to play "Leftist's Advocate" in my head when these subjects come up, so I wish I could ask questions to Veronique directly. But I can't, so you animals will have to do.

    Leftist's Advocate: Doesn't Germany have a large government that guarantees vacations and paternity/maternity leave for all employees? Doesn't Germany have a good universal healthcare system? Isn't that proof that big government programs and regulations like this aren't a bad thing?

    Please go easy on Leftist's Advocate. He's really not a bad guy. And thank you in advance for your help in preventing his voice from popping up in my head every time Germany is mentioned.

  • sarcasmic||

    Taxes is Germany are outrageous compared to the US, and they don't pay for their own defense (we do).

    So it's not a fair comparison.

  • Les||

    That's a good point about the military.

    Leftist's Advocate: But if taxes are so high in Germany, why is their economy doing so well? Don't high taxes stunt economic growth?

  • hk||

    Yes they do, but they are simply not as Keynesian as their neighbors.

  • ||

    But if taxes are so high in Germany, why is their economy doing so well?

    I don't know how high taxes are in Germany as opposed to the US (you'll have to ask sarcasmic about that), but "doing so well" is relative to Greece/Italy/Spain/Portugal/Ireland: Germany's per capita PPP GDP is some 20% lower than for the US (and even nominal GDP is lower by about 10%).

    The other thing is that for the Germans, there are relatively cheap labor quite close to them: for example, Audi has a factory in Hungary & Mercedes-Benz just made one there, yet they export a lot of both cars all over the world, so outsourcing is used to produce lots of _exported_ goods instead of goods consumed _internally_. That must help some.

  • Rrabbit||

    German income tax rates are indeed outrageously higher than US income taxes. However, Germany has no state taxes, and almost no taxes at the city level. To compare tax levels from the US to German tax level, you'd need to compare not only Federal tax rates, but also add in state income tax, state sales tax, and property tax. And compare deductibles. And Germany doesn't add two trillion in national debt in one year.

  • hk||

    Nice.

    God do I hate these whiny US Socialists over here, whining about the Capital gains tax. Don't forget the Corporate income tax rate.

  • Rrabbit||

    Compared to the US, Germany has a relatively small Federal government.
    Yes, German government employees get six weeks of vacation a year, paternity/maternity leaves, and also bigger pensions than German non-government employees. They are, though, paid less than on comparable positions outside the government sector.

    Total German government expenses as percentage of GDP(*) are pretty much the same as in the US. For that, the Germans get universal health care, and functional public transport, but a much smaller military than the US.

    (*) This is a somewhat skewed comparison. If US GDP would be computed according to German rules, it would be 20-25% lower than actual US numbers.

  • Les||

    Thanks, all. I appreciate the info and perspective.

  • Len Bias||

    "to the free-market-friendly Economist"

    Seriously? They always SAY they are free-market friendly, but they have yet to meet a tax hike, spending increase or regulation they didn't like.

  • ||

    This Is Not a Joke: Government Issues Study of a Study About Studies

    http://news.yahoo.com/not-joke.....itics.html

  • Terrance||

    About7minuteslong.http://www.edhardypoort.com/ Produced by Jim Epstein; camera by Epstein and Meredith Bragg.

  • rtb61||

    It is logical, Capitalist economies require money flow to function. Anytime you allow it to pool in one location, just like a stream, it becomes stagnant.
    Austerity's only seeming target was to aggressively thin the numbers of middle class in order to shift further economic power to the upper class. Only real result of course is political extremism as a result of a disaffected and rebellious lower class.
    Economic class warfare which will result in the inevitable result, actual warfare whether internal rebellion or externalised conflicts targeted at those accused of causing the problems.

  • hk||

    Except the PIIGS economies are extremely Left-wing, populist, and socialist, and they are getting ravaged by unemployment.

    Whereas right-wingish CASSH countries have extremely low unemployment and they are also not insolvent.


    So shut the hell up. Read Veronique's other articles she has dozens of studies on austerity. Increasing taxes doesn't work, and government spending is the real level of taxation. Classical economics completely refutes Keynesianism.

  • Social Security||

    How long has this austerity been in effect?

  • Office Space Global||

    Austerity will only work if actually implemented. For all the hype about austerity, increased debt levels due to increased public spending is still the norm in the EU. All that has changed is the rate of increase is slightly lower. There have not been any real cuts in public spending. Until there are, the problem remains, and gets progressively worse.

  • Dr. Thaddeus Tingleberry||

    I daresay that the only significant difference between those who study economics and opine soberly on 'facts' and the questionable container of hummus in my ice box is that the hummus has a better grasp of 3rd grade mathematics.

    I'm shorting 'the economy,' and will subsequently smoke myself into an opium coma.

    Parenthetically, those of you lambasting Doctor Krugman for being 'an idiot,' or otherwise misguided overlook at your considerable peril the distinct possibility that he knows, better than you, that he is slinging magic beans. I submit to you that the good doctor is evil, not stupid, or at least, mostly evil... Which is not quite the same as all evil, because he's also at least somewhat stupid as well.

    http://www.zerohedge.com/news/.....y-medicare

    http://www.zerohedge.com/news/.....ist-idiocy

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