Was there austerity? Is there still?

22 May

As the Euro debate trades one nostrum for another, shifting from ‘pro-austerity’ to ‘pro-growth,’ it is worth asking ourselves what ‘austerity’ was about. After all, as Tyler Cowen and others have argued, if austerity means an absolute decline in spending, then that hasn’t happened. As this graphic from Veronica de Rugy shows, there has been an overall slowing of the growth rate of spending, with slight absolute declines in Spain, Ireland and Greece from 2009 highs:

 

But the graphic does not show dramatic cuts in real dollars. So is all this talk of austerity a ruse or rhetorical flourish? Is ‘austerity’ simply defined according to one’s economic preferences? That is sort of Cowen’s view, at least insofar as Cowen believes there is no good definition of austerity, which is why the word austerity just ends up measuring the distance between the amount of spending one thinks is correct relative to the actual amount of spending.

While the Left might be inclined to jump at Cowen et al.’s approach to austerity, it is worth separating a few things. Data on overall state spending blurs together at least two distinct issues – changes in popular consumption (and expectations about that consumption) as compared with the role of the state in managing capitalism. Increases, or non-dramatic decreases, in state spending are perfectly compatible with across the board belt-tightening when it comes to popular consumption. War-time austerity, after all, is just that – sudden increases in overall state-spending, but simultaneous limitations on popular consumption. The graph below shows the rapid increase in US public spending during WWII despite belt-tightening at home:

Given the long-term trend over the twentieth century of the state’s increasing involvement in managing various aspects of capitalism, it would be very surprising if state spending dramatically declined. But it can still remain the case that the state is withdrawing from various welfare functions, or limiting its role in maintaining popular consumption – either through direct redistribution or through employment programs.

Consider, for instance, the fact that, over the same period that Cowen et al. think there have not been ‘savage cuts,’ we have seen the US, Spain and Greece cut public employment. The US government, for instance, has cut about 586,000 jobs since the recession began. As Doug Henwood pointed out a month ago (and the WSJ later agreed), state and local cuts to employment are responsible for about 1 to 1.5% of the unemployment. Put another way, were it not for cuts in public employment, the unemployment rate would be closer to 7%, not 8.5%. The Greek agreement includes cutting 15,000 jobs, despite a 22% unemployment rate. A similar story can be told for Spain. So it is worth separating discussions of austerity from overall state involvement in the economy. Spending can remain constant or even increase even as the state imposes new limits on its willingness to support popular consumption.

 

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2 Responses to “Was there austerity? Is there still?”

  1. Doug Henwood May 22, 2012 at 1:59 pm #

    What that kind of nominal spending analysis is that a lot of spending increases automatically in a recession – things like unemployment benefits go up automatically. The best measure of stimulus or austerity as policy is the movement in the cyclically adjusted balance, meaning the gap between what revenues and spending would be were the economy at full employment. According to IMF estimates (table B7, here http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/tblpartb.pdf), the eurozone as a whole saw a fiscal tightening of 1.2% of GDP between 2009 and 2011, and is projected to see another 1.4% this year. The tightening in the troubled countries – the so-called PIIGS – was in the range of 3-4% of GDP between 2009 and 2011, with more slated for 2012. This is extremely austere in the face of crisis, since the proper policy response should have been an expansion of the cyclically adjusted deficit, not a contraction.

  2. Lee Jones May 28, 2012 at 8:16 am #

    It surely isn’t surprising that overall public spending has increased precisely as states have assumed responsibility for the banking crisis. That doesn’t prove austerity isn’t happening. You would need to see a breakdown in spending. Overall spending may rise as welfare and capital investment expenditure falls but debt servicing costs increase.

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