Two posts yesterday. First was “Austerity Europe:”
Some readers have been asking me for the data source for Paul De Grauwe’s measure of austerity. I’m working on it. Meanwhile, however — and partly for my own reference — I discovered that I can do a similar exercise over a somewhat longer time horizon, which I’m posting in large part as a note to myself.
Now, measuring austerity is tricky. You can’t just use budget surpluses or deficits, because these are affected by the state of the economy. You can — and I often have — use “cyclically adjusted” budget balances, which are supposed to take account of this effect. This is better; however, these numbers depend on estimates of potential output, which themselves seem to be affected by business cycle developments.
So the best measure, arguably, would look directly at policy changes. And it turns out that the IMF Fiscal Monitor provides us with those estimates, as a share of potential GDP, for selected countries from 2009 to 2012 (Table 15). What I’ve done is to plot those estimates (horizontal axis) against changes in real GDP from 2008 to 2012 (vertical axis). Here it is:
The implied multiplier is 1.2; the R-squared is 0.84.
In normal life, a result like this would be considered overwhelming confirmation of the proposition that austerity has large negative impacts. Yes, you can concoct elaborate stories about how it could be wrong; but it’s really reaching. It seems safe to say that what we have here is a case in which rival theories made different predictions, the predictions of one theory proved completely wrong while those of the other were totally vindicated — but in which adherents of the failed theory, for political and ideological reasons, refuse to accept the facts.
Facts, schmacts… Next up was “Little Statesmen and Philosophers:”
So, people want me to comment on the Moody’s downgrade of Britain. No real news there. As a guide to the future, ratings agency judgments are literally worse than useless; remember, US bond yields actually fell after the 2011 S&P downgrade. Still, it’s kind of a poke in the eye for Cameron/Osborne, who are subjecting their country to pointless austerity because confidence!
But they won’t change course; basically, they can’t, for careerist reasons. And that’s the story of a lot of what’s going on now.
Ralph Waldo Emerson understood this. The original version of his famous quote — I had forgotten this — reads:
A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.
I don’t know about the divines bit, but the little statesmen thing is completely accurate. Suppose George Osborne were to admit that austerity isn’t working. What, then, would be left of his claim to be qualified to do, well, anything? He has to stick it out until something turns up,no matter how many lives it destroys.
Pretty much the same thing is going on among pundits now stuck in what Jonathan Chait memorably calls the “fever swamp of the center”. Suppose that some pundit who has spent his whole career calling for bipartisanship, a compromise between the extremes of left and right, were to admit the plain fact that Obama is very much a centrist, who is in particular proposing deficit reduction through exactly the kind of mix of tax hikes and spending cuts “centrist” pundits demand — and that the GOP, by contrast, is an extremist organization whose extremism is almost solely responsible for the bitterness of the partisan divide. A pundit making that admission would in effect be saying that everything he has said and done for the past several years was not just useless but harmful, actively misleading readers about the state of the debate. He just can’t do it.
The point is that a large part of the reason we’re locked into such a mess is careerism. And yes, that’s quite vile, if you think about it: politicians and pundits alike letting the world burn — probably unconsciously, but still — because their personal position would be hurt if they admitted to past mistakes.