28 Sep 2010

Reuters Readers Ruv Me

Shameless Self-Promotion 1 Comment

At least according to the first two commenters. Here’s an excerpt of my op ed on fiscal austerity–and I had to rely on your guys’ help with digging up the European statistics:

The ECB documented several episodes when a government implemented aggressive policies to reduce its budget deficit, and the result was a stronger economy. Specifically, they reviewed the experiences of Belgium, Ireland, Spain, the Netherlands, and Finland in successfully reducing their budget deficits. Three of the countries—Ireland, the Netherlands, and Finland—saw immediate improvements in economic growth, but all benefited from tightening government finances.

Consider the case of Finland. From 1993-1997, its government budget deficit averaged -5.2 percent of GDP. But starting in 1998, the string of deficits turned into a string of surpluses, which averaged +3.8 percent of GDP from 1998-2002.

Finland embarked on this austerity program in the midst of high unemployment, which was 12.7 percent in 1997 (the last year of a budget deficit). In the first year of surplus, the unemployment rate had fallen to 11.4 percent, and it continued to fall in the subsequent years. It’s true, Finland’s unemployment had been falling steadily since its peak, at 16.6 percent, in 1994, but the crucial point is that the austerity program didn’t reverse the trend.

Turning from the labor market to total economic output, we find that in 1997, GDP growth was 2.0 percent, while in 1998 — the first year of a budget surplus — GDP growth rose to 3.4 percent. Also, average GDP growth was slightly higher in the first three years of budget surpluses, than in the preceding three years of budget deficits.

Now a Keynesian cynic might argue that Finland’s economy, for whatever reason, naturally recovered in 1998, and that this lightened the load on government social programs while bringing in more revenues. So perhaps the switch from massive budget deficits to sizable surpluses was a consequence, not a cause, of the improving economy.

It’s true that we can’t run a controlled experiment in macroeconomics. But in 1998, when the Finnish government went from a string of deficits to a string of surpluses, government expenditures fell sharply as a share of GDP — from 56.5 percent down to 52.9 percent in a single year. Yet the fall wasn’t merely relative: the Finnish government actually cut the absolute size of its budget by some 50 million euros. This cut was not large — less than 1 percent of the budget — but still impressive at a time when the unemployment rate had averaged almost 13 percent the prior year.

BTW for a purist, let me admit my wording was less than desirable in the above. What I was trying to say is that they achieved their deficit reductions by holding absolute spending in check, so that the economy’s growth lowered expenditures/GDP.

That is practically unheard-of in conventional fiscal punditry. It’s just assumed that spending in absolute dollars will rise, and that tax hikes (on “the rich”) are needed to boost revenue/GDP.

One Response to “Reuters Readers Ruv Me”

  1. Dilip says: