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More fact-free claims about austerity

Posted By Russ Roberts On December 24, 2012 @ 12:11 am In Stimulus | Comments Disabled

In this previous post [1], I wrote about how the New Yorker’s John Cassidy [2] claimed that we have finally figured out that austerity is a failure because of the current state of the British economy. The claim of the article was that the British beginning in June of 2010 had “slashed the budgets of various departments by up to 30%.” That was the only fact in the article. Nothing about total spending. Cassidy went on to claim that the British economy was in essence a laboratory where it had been conclusively established that austerity didn’t work because the British economy has been struggling during these austere times.

In that earlier post, I shared data from the UK’s Office of National Statistics (ONS) and Eurostat. In the ONS data, both real and nominal government spending increased. In the Eurostat data, nominal spending increased too, but real spending did fall–by less than 1% in 2010 and 4.1% in 2011. Not really much of a slashing even if the Eurostat data is the right source and not the ONS.

Now Adam Davidson in the New York Times Sunday Magazine [3] has a similar story:

In the spring of 2010, British voters went in another direction. They elected Prime Minister David Cameron, who had promised to reset the economy by severely cutting government spending, which would lead to significant public-sector layoffs. The economy’s only chance to return to long-term growth, Cameron argued, would be a painful, but brief, period of austerity. By shrinking the size of an inefficient government, Cameron explained, the budget would be balanced by 2015 and the private sector could lead the economy to full recovery.

Today these two approaches offer a crucial case study and perhaps a breakthrough in an age-old economic argument of austerity versus stimulus. In the past few years, the United States has experienced a steep downturn followed by a steady (though horrendously slow) upturn. The U.S. unemployment rate, which shot up to 10 percent at the end of 2009 from 4.4 percent in mid-2007, has now dropped steadily to 7.7 percent. It might be a frustrating pace, but it’s enough to persuade most economists that a recovery is under way.

The British economy, however, is profoundly stuck. Between fall 2007 and summer 2009, its unemployment rate jumped to 7.9 percent, from 5.2 percent. Yet in the three and a half years since — even despite the stimulus provided by this summer’s Olympic Games — the number has hovered around 7.9. The overall level of economic activity, real G.D.P., is still below where it was five years ago, too. Historically, it’s almost unimaginable for a major economy to be poorer than it was half a decade ago. (By comparison, the United States has a real G.D.P. that is around a half-trillion dollars more than it was in 2007.) Yet austerity’s advocates continue to argue, as Cameron has, that Britain’s economic stagnation shows that the government is still crowding out private-sector investment. This, they say, is proof that austerity is even more essential than was first realized. Once the debts have been paid off and the euro zone solves its political problems, the thinking goes, the British economy will bounce back quickly.

Strangely, just as in Cassidy’s piece, there are no data in Davidson’s piece about what happened to spending after Cameron took office. Yes, he may indeed have pledged to slash government spending. But he certainly wasn’t able to do so in 2010 and even in 2011, the cut was at most, a little over 4%.

Here are the key questions:

What really happened to government spending in the UK? Is the ONS or Eurostat data the right measure?

Correlation isn’t causation–other things were going on in the British economy in 2010 and 2011. You can’t just presume that the struggles in the economy were caused by changes in government spending alone.

Why don’t journalists writing about austerity give us some data on what really happened instead of focusing on the promises of politicians?

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URLs in this post:

[1] this previous post: http://cafehayek.com/2012/12/what-everyone-knows-about-austerity.html

[2] New Yorker’s John Cassidy: http://www.newyorker.com/online/blogs/comment/2012/12/austerity-economics-doesnt-work.html

[3] Adam Davidson in the New York Times Sunday Magazine: http://www.nytimes.com/2012/12/23/magazine/god-save-the-british-economy.html?ref=economy&_r=0

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