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The slashed spending of European governments

Posted By Russ Roberts On May 10, 2012 @ 12:01 am In Debt and Deficits,Stimulus,Uncategorized | Comments Disabled

In this recent post [1], I asked Paul Krugman for evidence to support the claim that he made in a recent column:

What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

My point is that if you’re going to claim that the virtue of “slashing government spending” has been “overwhelmingly refuted by the experience of the last two years” you ought to at least provide some evidence that there have been spending cuts in the last two years.

A number of readers responded by sending me various data sources. Tyler ended up writing something similar, received a lot of angry reactions, and responded here [2] with arguments for why you should look at nominal spending rather than real spending or government spending as a percentage of GDP. That’s all interesting, but I was interested in the simpler question–have European nations made actual cuts in nominal or real spending? Are they large? When you talk about “slashing” government spending, you should be talking about fairly large changes. I understand that “large” or “slashing” are imprecise. But that was Krugman’s claim–we’ve learned that “slashing government spending” makes depressed economies more depressed. Forget about correlation vs. causation. Is he right about the facts?

The burden of proof, in other words, is on him. If you’re going to make that claim, you should provide some evidence. The following data are from Eurostat (HT: to Guillaume Nicoulaud and others who sent me to Eurostat–Guillaume also sent me a spread sheet.) These appear to be the appropriate numbers though if you know otherwise, please let me know. The expenditures are for all levels of government within a country. They are in billions of nominal Euros.

(If you want to play with the numbers yourself, go here [3], which will give you borrowing and lending. Change the pull down menu that says borrowing and lending to government expenditures. To get the actual amounts rather than percentage of GDP, hit the “Select Data” tab at the top and you’ll see the choices.)

Should we look at nominal or real? Tyler makes the case for nominal. But the differences may be small. There was deflation in France [4] in 2009 for example, and mild inflation (under 2% in 2010) so my guess is that correcting for inflation would not have a large effect. Inflation was 7.9% between 2009 and 2011 in the UK [5]. In Italy, it’s about 3% annually. Spain [6] had deflation for part of 2009 then mild inflation after–in the 3% range.

For the European Union (27 countries) as a whole, spending is up 3.4%. For the Euro zone (17 countries), spending is up 1.8%.

Here are a few individual countries. The spending is for 2009, 2010, and 2011 so we can compare the last two years that Krugman sums up.

France  1071 1096 1118

UK  805 858 851

Greece 125 114 108

Spain 485 480 468

Portugal 84 89 84

Ireland 78 104 76

Italy 788 784 789

How would you summarize these numbers? France hasn’t slashed spending. Nor has the UK. Spending fell by less than 1% 2011 but is still above 2009. So please don’t tell me that “austerity” or “slashing spending” is the cause of the UK slipping into recession. No for Portugal. Ireland–yes relative to 2010, no relative to 2009. Italy, no. Greece, absolutely. Spain, sort of, at least relative to 2010. If Krugman were here, I presume he would say that when he wrote of “Europe’s ills” he meant Greece. Greece has slashed spending and Greece isn’t doing well. OK. Of course Greece doesn’t have an alternative to slashing spending if they want to stay in the Euro zone and given the recent election results, it looks they won’t be in the Euro zone for long. Is their economy struggling because they’ve slashed spending or for other reasons? I wouldn’t say Greece is depressed “overwhelmingly refutes” the idea that when you’ve been spending beyond your means and it’s expensive, maybe prohibitively expensive to keep borrowing, then maybe spending less isn’t a strategy, it’s a necessity. And the troubles that ensue don’t come from spending less, they come from spending money unwisely in the past.

Here is Veronique De Rugy’s picture [7](along with related commentary) for a few of the European countries showing data over a long period of time:

 

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URLs in this post:

[1] this recent post: http://cafehayek.com/2012/05/show-me-the-numbers.html

[2] here: http://marginalrevolution.com/marginalrevolution/2012/05/how-savage-has-european-austerity-been.html

[3] here: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_main&lang=en

[4] in France: http://www.insee.fr/en/themes/info-rapide.asp?id=29

[5] in the UK: http://www.rateinflation.com/consumer-price-index/uk-cpi.php

[6] Spain: http://www.global-rates.com/economic-indicators/inflation/consumer-prices/cpi/spain.aspx

[7] Here is Veronique De Rugy’s picture : http://mercatus.org/publication/fiscal-austerity-europe-doesnt-mean-large-spending-cuts

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