Yes, Europe really is in the throes of austerity

June 5, 2013

Senate Budget Committee chair Patty Murray (D-Wash.) is skeptical of the case for austerity. (AP Photo/J. Scott Applewhite)

Two years ago, Sen. Patty Murray (D-Wash.) was on the supercommittee, trying to hash out a multi-trillion-dollar deficit reduction package. Three months ago, she was proposing (and, later, passing) $1.85 trillion in additional spending cuts and revenue-raiser.

So it was a little striking to see her using the Senate Budget Committee, which she chairs, to hold a hearing on the negative effects of austerity. This isn't a flip on policy; her budget does, after all, include some stimulus spending. But instead of the usual routine of emphasizing the importance of medium-run deficit reduction, while paying lip service to the need to prevent premature cuts, Murray used the hearing to focus almost exclusively on the latter concern.

The CBO's latest projections and the Reinhart-Rogoff debacle, she argued, "make it clearer than ever that now we need to focus above all else on our fragile economic recovery, and that the case for austerity in a time of economic weakness is simply wrong."

To bolster the point, she had on hand former Treasury secretary and Harvard economics professor Larry Summers, as well as MIT economist and former IMF chief economist Simon Johnson. "International comparisons tend to confirm the view that excessively rapid fiscal consolidation has adverse impacts on economic performance," Summers wrote in prepared testimony. Johnson concurred, writing, "Immediate spending cuts would, by themselves, likely slow the economy."

Countering them was Salim Furth, an economist at the Heritage Foundation. Furth argued that (a) tax increases harm the economy (b) spending cuts help economic growth and (c) permanent spending reform permanently increases growth. So far, so conservative. But the most interesting part of his testimony was Furth's claim that most of Europe isn't experiencing austerity at all.

"Just ten OECD countries have tightened their cyclically adjusted deficits since 2006–2007," Furth writes. "Despite major crises, even Ireland, Iceland, and Spain have
increased their cyclically adjusted deficits." He included this chart in his testimony to illustrate the point:

Here's the thing, though. The numbers Furth is using here have both a numerator and a denominator. The denominator - the countries' GDP - is biasing results in this case. Ireland is actually a perfect example. According to the OECD, between 2008 and 2012, its budget deficit went from €13.2 billion to €12.2 billion, not adjusting for inflation. Its GDP went from €178.9 billion to €163.6 billion. So its deficit-to-GDP ratio went up slightly, from 7.35 percent to 7.48 percent. But that's only because the economy shrank massively during that time period. Even though it was experiencing austerity, the numbers Furth is using don't show that. 

Update: As Furth points out in a reply to this post, the cyclically adjusted numbers use potential GDP as a denominator, as Summers' chart below does. The issue is that Furth lumps together the 2007-2010 stimulus with the 2010-13 austerity measures. It remains the case that Europe is engaged in massive austerity but the issue is one of dating, not of denominators. I apologize for the error.

Other numbers do show it. Earlier this year, Brad pointed to a study by the European Trade Union Institute measuring the size of austerity packages across Europe. For example, Furth's data showed, against widespread perception, that the UK and France weren't experiencing real austerity. The ETUI data, as highlighted in this chart Brad made, shows that we weren't losing our collectives minds: there really was austerity.

In other countries where Furth denies austerity is happening, ETUI differs. Ireland, they find, experienced a 3.8 percent austerity package last year, and Portugal had a 4.9 percent package in 2011. How do they find this? They sent out surveys to experts in each of those countries, who relied in turn on data put out in the actual budgets proposed by their countries' leaders. "The findings…represent a fairly simple adding-up of the expected size of announced packages and/or individual measures," the report says.

Or for another way of looking at which countries are and are not tightening fiscal policy, one could use an approach Summers used at the same hearing. He divided deficits by potential GDP, or how large these economies would be if they were operating at full capacity. That allows him to adjust for countries' relative sizes and levels of economic development without having the data muddled by recessions, as happened with Furth's data. (Update: as explained above, what's relevant is that Summers looks at 2010-13, not that he uses potential GDP as the denominator. Apologies for the error.) Sure enough, he finds not only that austerity is pretty popular across Europe, but that it's associated with slower growth:

Furth also quoted a Goldman Sachs report as claiming, "none of the existing sets of fiscal plans in the major economies qualifies as 'expenditure‐based' and 'significant.'" To support that contention, he presented this chart, claiming that what austerity did occur was largely tax increases rather than spending cuts:

This also repeats the claim that many countries that most people would argue experienced austerity — such as Spain, Portugal, the U.K., Ireland and Iceland — actually did not. "Only Greece, Italy, and Hungary faced crises severe enough that they raised taxes and cut government consumption – classic austerity, in the upper left corner of Chart 2," Furth writes.

The only problem, as Sen. Sheldon Whitehouse (D-R.I.) pointed out, is that, while that chart credits the OECD, that organization's data says the exact opposite. It finds that not only did 15 European countries adopt austerity plans (not three), but they were overwhelmingly tilted toward expenditure cuts, rather than tax increases. Here's the data as reported by Whitehouse:

But don't take the senator's word for it. The OECD's own charts show the same thing. European austerity, the OECD concludes, is "weighted on average two-thirds toward expenditure reductions and one-third towards increased revenues":

"I am concerned that your testimony to this committee has been meretricious," Whitehouse told Furth. "I am contesting whether you have given us fair and accurate information." It's a fair concern, given what the OECD has actually said on the subject.

Update: Here's the video of Whitehouse:

Update II: The original version of this post spelled Mr. Furth's first name, "Salim," as "Selim." We regret the error.

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