Free Markets, Free People

austerity


Krugman–and now for a little statistical cherry picking

Paul Krugman poops out  a little blog post along with accompanying chart to ostensibly prove his point that austerity is the wrong way to go in Europe (and elsewhere).  He uses Estonia as his example because Estonia committed early to austerity measures.

 

060612krugman2-blog480

 

Says Krugman:

Since Estonia has suddenly become the poster child for austerity defenders — they’re on the euro and they’re booming! — I thought it might be useful to have a picture of what we’re talking about.

So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?

CATO guts him with a single chart that makes the point about cherry picking data:

estonia-role-model

 

Note where they are headed and note too that this is after rather heavy austerity measures were placed into effect.

It’s called a “recovery”, unlike what is happening here where money we don’t have has been poured down a Krugmanesque rat hole.  Estonia hit a bump in their road of growth, took austerity measures to right themselves and is on the path to full recovery (they still have more to do, but essentially, they’ve weathered the problem).

But you wouldn’t know that from Krugman’s chart would you?

CNBC tells the Estonia story:

Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. …How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank. …that’s not exactly the message that Europeans further south want to hear. …Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies.

How much austerity?  A lot:

… Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them. “It was very difficult, but we managed it,” explains Economy Minister Juhan Parts. “Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20 percent and the average civil servants’ by 10 percent,” Parts told Global Post. …As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.

But, you know, austerity doesn’t work (and so it is very important, to the point of giving half the story, that spending freaks like Krugman present Estonia as a failure).

Daniel Mitchell points out:

Estonia reacted to the overspending and the downturn in a very responsible fashion. Instead of using the weak economy as an excuse to further expand the burden of government spending in hopes that Keynesian economics would magically work (after failing for Hoover and Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, and Obama in 2009), the Estonians realized that they needed to cut spending.

Look at Estonia’s chart (not Krugman’s version).  Look at ours.  Tell me again why deficit spending is the answer and the only answer, Mr. Krugman?

~McQ

Twitter: @McQandO


Fiscal austerity? Certainly not in Europe

The narrative the left likes to push is that “austerity” is the wrong thing to do, that increased government spending will see us out of these tough times.  And they like to point to Europe’s continuing downward spiral because of “austerity” as proof.

Meh.  They should consult the numbers first before pumping out yet another false meme:

fiscal-austerity-newnew580_1-1

Hardly a picture of “drastic” spending cuts.  Hardly a picture of “austerity.”

As Joel Pollak at Breitbart points out:

Government spending has continued to rise across much of Europe, and even those countries that have made small cuts have not reduced government spending to pre-recession levels. Some Keynesians might believe that these policies are draconian relative to the massive spending that should have happened during a recession, but that shifting the austerity goalposts.

Veronique de Rugy at National Review Online points to the graph above, and also points out that "whenever cuts took place, they were always overwhelmed by large counterproductive tax increases." Higher taxes on the "rich" have led to uniform misery in Europe–and to political extremism among disenchanted voters.That is the real failure of European policy, and the lesson most relevant to Americans as we head to the polls to choose between an incumbent who wants to raise taxes and one who wants to reform them.

Or to distill this even further, the “blue social/political model” is dying and there isn’t much the left (or anyone) can do to save it.  Reality has again defined “unsustainable” for the left in terms they are finding difficult to deal with.

What’s the first stage of coping with grief?

Oh, yeah … denial.

~McQ

Twitter: @McQandO


Greece goes cold turkey

And no, that’s not a joke about Turkey.  What you’re seeing in Greece is what you see in any drug rehab program … the results of withdrawal.  In this case, the addiction isn’t to heroin or cocaine, but other people’s money.  And Greece passed the tipping point of dependency years ago, decades ago.

But the money has finally run out and the addict doesn’t have the necessary money for the next fix.

Result?  Violence, denial and the refusal to accept the treatment.

More than 40 buildings were set ablaze in an orgy of looting that left scores injured as protesters vented their anger at the caretaker government and parliament’s ordering of a further €3.3bn of savings by slashing wages and pensions and laying off public sector workers.

[…]

But the scenes of mayhem on the streets of Athens and all across the country leave big questions unresolved regarding Greece’s capacity to stick with the savage austerity. The country is in its fifth year of recession and has little prospect of halting a steep decline in living standards.

[…]

Meanwhile street battles between police firing rounds of teargas and demonstrators hurling firebombs and marble slabs left Syntagma square, the plaza in front of the parliament building, resembling a war zone.

Rubbish bins burned and plumes of smoke and asphyxiating clouds of toxic chemicals filled the air.

The explosions were so loud, they could be heard inside parliament and the teargas drifting across square reached the debating chamber. The buildings that were set on fire included cinemas, banks and a number of shops, and Greek television reported that dozens of citizens and at least 40 police officers had been injured.

Why?  Because the caretaker parliament has, of necessity, tried to do what is necessary to return the country of Greece to fiscal sanity.  And that entails drastically reducing or eliminating decades of entitlements that the government granted but which was obvious the country couldn’t afford.   Among them:

Parliament backed drastic cuts in wages, pensions and jobs on Sunday as the price of a 130-billion-euro ($172 billion) bailout by the European Union and International Monetary Fund …

That included a roll back of Greece’s minimum wage.   This doesn’t settle anything though.  Although the vote was important, EU leaders are still not convinced that implementation will ever happen:

The EU welcomed the vote, but told Greece it had more to do to secure the funds and avoid a disorderly default next month that would have "devastating consequences."

Euro zone finance ministers meet on Wednesday, and the fragile ruling coalition of Prime Minister Lucas Papademos has until then to say how 325 million euros of the 3.3 billion euros in budget savings will be achieved.

A government spokesman said political leaders also had until Wednesday to give a written commitment that they will implement the terms of the deal, reflecting fatigue in Brussels over what EU leaders say have been a string of broken promises.

So this has turned into a series of attempts and votes and “guarantees” and failures leading to this latest attempt to keep Greece afloat – something the rest of Europe, according to reports, deems as critical.

There’s also a vote in April, a month after the demand that the deal agreed upon is scheduled to be implemented.  Many observers believe the vote will be driven to the extreme left or right by these events.  That, of course, would set up political polarization which will be difficult, if not impossible, to overcome.  A preview of that problem was seen after this vote:

The leaders of two of the three major political parties in Prime Minister Lucas Papademos’s interim coalition government — the Socialists and the center-right New Democracy party — agreed on the new round of austerity after days of tense debate, maneuvering and threats. The leader of the third, the right-wing Popular Orthodox Rally, refused to endorse the measures and later withdrew from the coalition.

In the debate on Sunday night before the vote, Mr. Papademos appealed to lawmakers to do their “patriotic duty” and pass the measures, saying they would be saving Greece from bankruptcy in March, when a bond issue comes due that Greece cannot repay without foreign help.

In a sign of how the crisis has frayed the political order in Greece, the three leading political parties all moved swiftly to expel lawmakers who had broken ranks with leaders in the voting.

Although we’re likely to deny any applicability of the crisis there to our circumstances, our country is headed in the same direction, albeit later and more slowly.  But the end-state will be the same.  The difference is just a matter of degree, not design.  Greece is simply the first of many countries who’ve tried to redistribute income to support a socialist inspired lifestyle from a diminishing pool of workers. 

It is our future, if we don’t change our ways … drastically.

~McQ

Twitter: @McQandO


Krugman and the false prophets of economics

The one-trick pony that is Paul Krugman, constantly pushes massive government spending as the panacea for all recessionary ills.  It is supposed to be the way one “manages the economy” from a central government position – as collectivist a thought as one can imagine.

In fact, one of Krugman’s criticisms – despite the fact that his estimate of the amount needed to stimulate the economy was $200 billion less than what was passed in the stimulus package – is that the government hasn’t borrowed and spent enough.  And he certainly is no fan of austerity, claiming that the “pain caucus” has been in charge (what almost a year trying to address decades of borrowing and spending?), with no significant results and oh, by the way, look at the UK.

“In Europe,” he wrote last week, “the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer … [But] Europe’s troubled debtor nations are … suffering further economic decline thanks to those austerity programs.”

Yes, friends, “sound money and balanced budgets” are, apparently, things to be avoided.

But curiously Krugman never says, “oh, by the way, look at Switzerland” because if he did, he’d have to explain their positive outcome based on austerity:

The Swiss have run a prudent fiscal policy throughout the economic crisis. They have had a structural surplus in each of the past five years. Their net debt is actually lower today than it was in 2005. And guess what? In 2009 their economy suffered the smallest contraction in Europe, with unemployment today below 4 percent. As for sound money, the Swiss franc is up 95 percent against the dollar since 2000.

The key point is the Swiss never let their economy get in the shape that is now plaguing the rest of Europe and the US.  It has never spent and taken on debt like the UK, much less Portugal and Greece.  It has been a program of economic austerity for years.   Consequently, the debt level is miniscule compared to other Western economies and recovery was quick with minimal intrusion (if any) from government.   We, on the other hand, were borrowing in good times and borrowing heavily to spend on things our government has no business involving itself in much less borrowing money to do so.  And it points out that even if you buy into the Krugman theory that we ought to be borrowing and spending in “bad times” ala Keynes, the other borrowing that has taken place limits those options considerably:

The real lessons for the United States are clear. Those who run up debt in good times can borrow only so much more when a recession strikes. And heavily indebted governments postpone fiscal stabilization at their peril. If you wait to reform until the bond market calls time, you are—to use a technical term from economics—screwed.

And we’re headed toward that “technical term” more quickly than we can imagine, and yet the Krugman’s of the world still counsel more spending of borrowed money leading to more accumulation of debt. 

At a certain point, the amount of debt begins to shave percentage points off the GDP as the debt is serviced.  That, at least in my opinion, is where we are now and one of the reasons we’re seeing such a slow recovery.  GDP growth, last quarter for instance, is not at all robust:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2011…

Economically we have to understand, at the highest levels, that despite the siren songs of Keynesians like Krugman, that the bill has come due – in fact it is past due-  and must be addressed and paid.  We  can’t afford to ignore it anymore, nor pretend that spending borrowed money will do more good than harm.  We and the can are at the end of the road.  It can’t be kicked anymore without dire consequences.  Unfortunately, while it seems we’ve at least recognized that fact – for the most part – what we can’t seem to make ourselves do is that which is necessary – cut spending deeply.  We continue to hear from the false economic prophets that we can fix all this if we’ll just borrow and spend.  

~McQ

Twitter: @McQandO


David Brooks: austerity, “death panels” and spending exemptions

David Brooks helps demonstrate the problem we face in doing anything meaningful about the fiscal mess our government has gotten itself in.  To give him his due, he is trying, at some level, to address the problems facing the country. But he manages to end up putting himself in precisely the position which seems  prevalent today among those not really serious about doing what is necessary to put the fiscal house in order (but like to pretend they are)  – that is “we want budget cuts but don’t touch my favorite programs”.

Let me give you an example from his column today entitled “The New Normal”.

He begins by acknowledging that there is going to be (needs to be?) a whole lot of deficit cutting over the next few years.  And, his first principle of austerity, as he calls it, is that lawmakers must, as he inartfully but correctly puts it, “make everybody hurt”.  He’s right – no exemptions.  Every program, department, echelon, you name it, associated with government (yeah, that means you public sector unions) are going to have to sacrifice something.  Fine to that point.  When you’re looking at 1.3 trillion in a single year deficit, everyone does have to “hurt” if you hold any hope of eliminating it.

However, in this column  he launches into his second principle of austerity and loses me immediately.

A second austerity principle is this: Trim from the old to invest in the young. We should adjust pension promises and reduce the amount of money spent on health care during the last months of life so we can preserve programs for those who are growing and learning the most.

This “principle”  is based in a very nasty premise that “we” are in control of all the money “spent on health care” during the last months and should use that power to help balance the budget (and the fact is, with Medicare, that premise is true).  In other words, “we” will decide to pull the plug on the treatment for oldsters in favor of treatment/”investment” in youngsters.  Not the old folks themselves, mind you.  They’ll have no say in it. He’s talking about the collective “we”.  But don’t you dare say “death panels” you hear me?  And note, he immediately violates his first principle of making “everyone hurt” by claiming that if we throw the oldsters under the bus, we can “preserve programs” for the young.  Where’s the cut in spending when we’re “preserving”?

Oh, it’s not “spending” … we’ll call it “investing”, shall we?

Brooks then expands his “for the children” campaign with this bit of nonsense where he takes a shot at House GOP members:

In Washington, the Republicans who designed the cuts for this fiscal year seemed to have done no serious policy evaluation. They excused the elderly and directed cuts at anything else they could easily reach. Under their budget, financing for early-childhood programs would fall off a cliff. Tens of thousands of kids, maybe hundreds of thousands, would have their slots eliminated midyear.

You’d think Brooks, someone the NYT pays to be informed about how government works, would understand that the legislation he questions isn’t a budget, but a continuing resolution (CR) to fund government in the current fiscal year.   That’s not where you make “serious policy evaluations”.  You do that in budget legislation, something which the Democrats in the House failed to pass last year.   The government has been running on a series of CRs all year.  That doesn’t remove the crying need for cuts in spending, but the only spending under their control in a CR is discretionary spending.  And that’s where they’re cutting.

Brooks prefers to ignore those facts in favor of the emotional argument that they’re going after children in favor of old folks.

What is instructive about the Brooks argument is this is precisely the type arguments that you’re going to see from now on.  Arguments like the one Brooks puts forward here are going to begin with statements like “we must make cuts” and then spend the entire rest of the time arguing against making them.   And 90% of those arguments are going to be based in emotion, not facts or sound reasoning.

Mr. “Make Everyone Hurt” then advances his third austerity principle:

Which leads to the third austerity principle: Never cut without an evaluation process. Before legislators and governors chop a section of the budget, they should make a list of all the relevant programs. They should grade each option and then start paying for them from the top down.

I don’t necessarily disagree with the point, but it is again inconsistent with his first principle, isn’t it?  If everyone has to “hurt”, then something must come from every spending point – to include children’s programs and education.  What Brooks wants is some sort of arbitrary “evaluation” which will – wait for it – justify or rationalize exempting certain programs, policies, departments from spending cuts.

Any guess as to which programs he wants exempted?  Certainly not those effecting older Americans.

Brooks isn’t really serious about cutting spending.   Like many politicians and pundits, he mouths the words and makes the point about all of us sacrificing something, but he really doesn’t mean it. When pressed, he falls right into the “cut everything else but don’t cut my favorite program” group in which you find much of the populace today.  That’s not “shared sacrifice”.

Its hard to take someone seriously who doesn’t seriously address the fact that we have massive debt, massive deficits staring us in the face, a huge new entitlement program on the books and and conclude there’s an urgent need to cut spending in all areas, period.   Brooks should have stopped with his first principle, if he actually wanted to be taken serious.  That is the “new normal”.

~McQ


German austerity v. US profligacy – guess which one is working out best?

While the US remains mired in recession (despite the claim its over) and the usual suspects are claiming we need to spend even more money we don’t have, Germany has managed a minor miracle. Eschewing a large stimulus package and instead opting for austerity and pro-business legislation, it has seen almost the opposite of US results:

"Although October’s decline in unemployment turned out weaker than expected, the underlying trend in the German labor market clearly remains one of rapid improvement on the back of strong economic growth," said Aline Schuiling from ABN Amro.

Data on Europe’s biggest economy over the past week has been bullish, signaling its unexpectedly strong recovery could hold up in the face of signs of fragility in the global economy.

Consumer morale remains at its highest level since May 2008 going into November on expectations for a further rebound, a survey by GfK market research group showed on Tuesday.

Business sentiment hit its highest level in 3-1/2 years in October and firms’ expectations also improved, a survey showed last week, and the corporate outlook continued to improve on Thursday.

As I’ve pointed out in many other posts, this isn’t rocket science. People respond to incentives. People respond positively to positive incentives. That’s what is happening in Germany which has economically battled back first from the absorption of East Germany and now a deep recession to a position of prosperity and growing economic stability.

Meanwhile here we’re about to go into QE2 all while popinjays like Paul Krugman encourage us to go more deeply in debt as a country because everyone knows that government spends money much more wisely and well than do individuals.

~McQ