Paul Krugman is triumphant on the failure of Britain’s austerity:
Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.
Not so fast says Scott Sumner:
But I am seeing article after article claiming that the coming recession is due to fiscal tightening. I was curious to see just how tight British fiscal policy actually is, so I checked the “Economic and Financial indicators” section at the back of a recent issue of The Economist. They list indicators for 44 countries, including virtually all of the important economies in the world. Here are the three biggest budget deficits of 2011:
1. Egypt 10% of GDP
2. Greece: 9.5% of GDP
3. Britain: 8.8% of GDP
Egypt was thrown into turmoil by a revolution in early 2011. Greece is, well, we all know about Greece. And then there’s Great Britain, third biggest deficit in the world.
I suppose some Keynesians work backward, if there is a demand problem it must, ipso facto, be due to lack of fiscal stimulus. If the deficit is third largest in the world, it should have been second largest, or first largest.
A slightly more respectable argument is that the current deficit is slightly smaller than in 2010 (when it was 10.1% of GDP.) But that shouldn’t cause a recession. Think about the Keynesian model you studied in school. If you are three years into a recession, and you slightly reduce the deficit to still astronomical levels, is that supposed to cause another recession? That’s not the model I studied. Deficits were supposed to provide a temporary boost to get you out of a recession. At worst, you’d expect a slowdown in growth.
To cast a slightly broader net on the austerity which European countries are practicing the only two in which something that meets the intuitive definition of austerity are Sweden where the budget is balanced and Switzerland which is running a fiscal surplus of 1% of GDP. Sweden’s GDP growth rate is about 5.5%; its unemployment rate is 7.4%. Switzerland’s GDP growth rate is 2.6% (roughly the same as ours); its unemployment rate is 3.3%.
My point is not that austerity works. I have two points:
- Whatever Greece and Britain are doing, it’s not austerity.
- There’s no obvious, simple, straight line connection between fiscal policy and growth. In either direction.