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


Uncle Sam's more fit because he spends more money.

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]. 

We lose money on every transaction, but we make it all up on one year's capital annually managed expenditure.

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?"

I like posting pictures of pretty ladies in fancy-schmancy dresses. I admit it!

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.