A Closer Look At "Austerity" In Britain

The forces that oppose absolutely any reduction of government spending anywhere and at any time use the current situation in the U.K. as their Exhibit A.  But when you look at the situation more closely, it's a classic example of the "austerity" scam.  By the "austerity" scam, I mean the confused use of a term combining spending cuts with tax increases as a device to claim that spending cuts do not work, when in fact the destructive force is the tax increases.

In the 2010 election, the Tories promised an attack on problems labeled as "debt" and "deficit."  From the 2010 Conservative manifesto:

A Conservative government will act now on debt to get the economy moving. We will deal with the deficit more quickly than Labour, so that mortgage rates stay lower for longer with the Conservatives.

To achieve those goals they proposed a number of reductions (or at least slowed increases) in spending (one year public sector pay freeze, raising the retirement age, reducing welfare dependency, etc.) and very little about taxes.  Three years later, economic growth remains sluggish, to say the least:  1.1% for 2011, 0.1% for 2012, and a big 0.3% for the first quarter of 2013.

Of course this has the advocates of maintaining all government spending (posing as enemies of "austerity") ecstatic.  For example, from Britain's left-wing Guardian newspaper, an article from January 2013 titled "Austerity plan is failing, IMF tells Osborne."  (George Osborne is the Chancellor of the Exchequer.).  Excerpt:

The IMF has never been wildly enthusiastic about Osborne's tough austerity plan for the British economy and has been saying for at least a year that the Treasury should ease off if recovery falters. But up until now it has tended to avoid telling Osborne that his policy is failing.  No longer, it appears. "We said that if things look bad at the beginning of 2013 – which they do – then there should be a reassessment of fiscal policy", Blanchard said.

Or, from the New Yorker magazine, an article entitled "It's Official:  Austerity Economics Doesn't Work."

Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits. Osborne, relying on arguments about restoring the confidence of investors and businessmen that his forebears at the U.K. Treasury used during the early nineteen-thirties against Keynes, insisted (and continues to insist) otherwise, but he has been proven wrong.

That "any decent economics textbook" would undoubtedly be the Paul Samuelson opus, from the guy who made the most spectacularly wrong economic prediction of all time., namely that the demobilization from World War II and associated cuts in government spending would lead to economic disaster.

Well, do either these or the many other articles claiming vindication for opposition to "austerity" actually tell you what were the policies adopted by Britain during this 2010 - 2013 period?  No.  But Nicole Gelinas of the Manhattan Institute is just out with a long and detailed article in the current City Journal that goes into specifics as to what policies Britain has followed.  So what were the actual policies?  Very simple:  after promising large spending cuts and few or no tax increases, what they actually did was immediately increase taxes; as to spending cuts, they may have slowed future increases, but overall spending has gone up and not down.

Start with the VAT:  "Just after Christmas 2010, the VAT rose from 17.5 percent to 20 percent."

And how about the income tax:  "In early 2010, Osborne waved through Brown’s earlier plan to boost income taxes by 25 percent for people earning more than £150,000 annually, for a top rate of 50 percent."   How did that big income tax increase do at raising revenue?

As Osborne acknowledged two years later, “the behavioural response has been larger than expected.” Supposed to raise £2.5 billion annually, the hike raised £1 billion or less—and once enough time passes, the government has concluded, “it’s quite possible” that the result “could be negative.”

So, they did increase taxes, but did they also cut spending?

In his final budget document, in 2009, [former Labor] Prime Minister Brown had proposed to spend £646 billion for the fiscal year ending in 2011, up from £601 billion the previous year. In his first budget, Osborne lowered Brown’s £646 billion to £637 billion, and the government ended up spending even less than that: £629 billion. The deepest austerity that Britain had seen in a generation, then, was a 4.7 percent spending increase relative to the previous year. Yes, spending must keep pace with inflation if it’s going to buy the same quantity of goods and services. But the coalition’s 4.7 percent increase exceeded Britain’s 2011 inflation rate, which peaked at 4.5 percent.

So in fact the big 2011 "austerity" budget actually represented a spending increase.  And Gelinas reports that the plan for the coming year calls for spending 672 billion pounds, yet another increase, and 43.1% of GDP.  Recall that Thatcher's great accomplishment was cutting government spending from 48% to 38% of GDP.

So when you read that "austerity" economics doesn't work, apply a very healthy dose of skepticism.  Find an example of a country that actually cut government spending meaningfully as a percent of GDP without major tax increases, and check the result.  Hint:  Latvia, Estonia. 

Europe In The Grip Of Fallacy Economics

Today's Wall Street Journal contains multiple articles on the continuing sluggishness and/or decline of some of Europe's major economies, and the "remedies" proposed by their incompetent government-aggrandizing politicians.  The unquestioning acceptance of the usual fallacies is literally beyond belief -- and not just among the politicians, but also by the WSJ writers.  Help!

Since the articles are behind pay walls, I will include quotes of the key parts.

The front page headline is about Spain:  "Still Sputtering, Spain Turns Away From Cuts."  Seems that the latest figures from Spain show that the unemployment rate has gone up to an astounding 27.2%  What's the proposed solution?  Better go easy on the "austerity"!  There's that deceptive word again, invoking the usual confused melange of tax increases and spending cuts to keep anyone from trying to shrink the government.  

On Friday, the government is expected to announce new, less-stringent deficit targets, which means it won't have to take significant new austerity measures.

How did Spain get in this mess?  You won't find any information on that in these articles or in the quotes from various government officials.  But perhaps try the Heritage Foundation page on Spain here.  Deficits averaging near 10% of gdp since 2009.  Top income tax rate of 56%, higher than even California and New York City.  Uncompetitive corporate income tax rate of 30%.  Wild spending on ridiculous renewable energy boondoggles.  Government spending as a percent of gdp not as out of line as many others in Europe at 44%, but still way too high.   Do they really expect anyone to keep investing in their bonds if they keep running deficits of 10% of gdp indefinitely?  So they force the banks to buy the debt, and the banks are then insolvent, cutting off business lending in the private economy.   Since taxes are already uncompetitively high, Spain has only one way out of its mess, which is big shrinkage of the government.  They invoke the deceptive "austerity" bugaboo to ward that off.  You'd think at least the Wall Street Journal would be alert enough to call them out.

In another article on page A-16 ("Europe's Unemployment Problems Worsen") we branch out into other European economies like France and Portugal.  "In France, the number of registered job seekers who are fully unemployed rose to more than 3.2 million, topping a previous record set in 1997."  What does the economic genius Francois Hollande have to say about that?

In, France, President Francois Hollande has championed the charge for greater emphasis on growth, arguing that more austerity at this point is a risk, not a remedy to Europe's crisis. . . .  With no economic growth expected this year, Mr. Hollande is pinning his hopes on state-sponsored incentives for employers to make good on his pledge to start bringing unemployment down by the end of the year. 

This would be the France where government spending already is an astounding 56% of gdp, the corporate income tax rate is 34.4%, and they're trying to implement a top personal income tax rate of 75%.  The private sector has become a small and shrinking part of the economy, shoved off into some little corner.  Of course the economy is dying, and of course Hollande is recommending "growth" through yet more government spending.  If government spending at 56% of gdp brings sluggishness and decline, does anyone really believe that 60% will bring growth?  How about 80%?  Anybody with a brain knows that this is the route to North Korea.  But there is barely a single politician in Europe with a brain.  (That would be Vaclav Klaus.  Try to name another one!)  

Perhaps you think the Germans are a little smarter?

But Jorg Asmussen, German Chancellor Angela Merkel's appointee to the European Central Bank's executive board, spoke out in defense of austerity, calling it the only way for countries to secure long-term stability.

The Germans then are equally incapable of distinguishing spending cuts (government shrinkage) from tax increases (government growth) as elements of economic policy.  Pathetic.

As to Portugal and Spain:

Portugal this week presented an ambitious stimulus program aimed at growth, and the Spanish government is expected to outline a similar shift on Friday.

Japan has had well over 20 years of "stimulus" and stagnation.  The U.S. blew through almost a trillion dollars on "stimulus," raised government spending by about 4% of gdp and has had a stagnation ever since.  France has government spending at 56% of gdp and stagnation.  What's the solution?  More government spending!

We can confidently predict that the sequence of debt crises in Europe and the economic stagnation are not going to end any time soon.

The Welfare State Aggressively Advertises To Expand Itself

The phrase often used to describe the welfare state is the "safety net," a term with connotations of small numbers of people otherwise in grave danger of harm.  Then we find out that the number of people on food stamps (aka SNAP) has close to doubled over the last four years and now is around 48 million, costing close to $80 billion per year.  How did it get so big so fast, and is the term "safety net" really a fair description of its current status?

Over at the Washington Post a guy named Eli Saslow appears to be undertaking a project to report on the implications of the food stamp explosion in the real world.  On March 16 he had a big report on food stamps in Woonsocket, Rhode Island; and on April  23 another big report from Florida.

Saslow clearly comes at this with a view that all food stamps are good and more food stamps are better.  Still, there's a lot to be learned from reading his articles.

First, I found them by a Google search of "food stamps Washington Post."  I guess that determines what ads you get.  At the top of my version of the Rhode Island article we have:

Government Assisted Phone

Get a Free Phone & Monthly Plan.  See if You Qualify for One Today!

www.assurancewireless.com

And then down at the bottom of page 1:

Apply For SSI/Disability

Get SSI & Social Security Benefits Free Consults & Help With Your App

Apply.SSDisabilityApplication.com

Click that last link and you go not to a government site, but rather to the site of a firm called Myler Disability, "Social Security Disability Advocates."

Also, many more such ads scattered through these multi-page articles.

But let's look at the articles themselves.  In Florida we follow around a woman named Dillie Nerios, employed by "a local food bank that is funded in part by the state" of Florida.  Her job: to recruit "at least" 150 seniors each month onto the food stamp rolls.  Is it working?  "Nowhere had the SNAP program grown as it has in Florida, where enrollment had risen from 1.45 million people in 2008 to 3.35 million last year."

To help enroll more seniors, the government has published an outreach guide that blends compassion with sales techniques, generating some protests in Congress. The guide teaches recruiters how to “overcome the word ‘no,’ ” suggesting answers for likely hesitations.

Nerios spends a lot of time with a couple named Lonnie, 60, and wife Celeste, who seem to have lost most of their savings in a failed business venture a couple of years ago.  They are eligible for food stamps, but clearly reluctant to take them.  Dillie tries everything to get them signed up.  Saslow meanwhile tries everything to get your sympathy for the effort, including describing the small mobile home where L&C live, and Lonnie's lack of success in getting jobs in the last few years.  Then, even as he's trying to pull on your heartstrings, Saslow basically gives away the game:

They decorated the walls of the mobile home with memories of a different life: photos of Lonnie in his old New Jersey police officer uniform, or in Germany for a manufacturing job that paid $25 an hour, or on vacation in their old pop-up camper.

An "old New Jersey police officer uniform"?  You mean this poor, poor guy has one of those New Jersey police pensions?  For anybody who follows any news at all, New Jersey police pensions have to be one of the biggest scandals out there.  In this article we never learn how big Lonnie's pension is, or whether he is one of the notorious New Jersey "double dippers."  But hey Eli, an article trying to drum up sympathy for the poor condition of a retired New Jersey policeman who must be entitled to a pension, and doesn't even mention the pension or how big it is?  This is really preposterous!  By the way, Lonnie and Celeste also have five grown working kids.  Any chance that one of them could pitch in before the parents become wards of the taxpayers?

You are probably asking, how can Lonnie and Celeste even be eligible for food stamps if he has one of those New Jersey police pensions?  The answer is that most pensions are not counted for food stamp eligibility.  Again, we can't know the details if Eli won't ask the most basic questions here.  Oh, and by the way, equity value of home (unlimited in amount) is also not counted in food stamp eligibility, and same for value of a first car (this one varies some state by state).  Don't let being a millionaire slow you down!

The articles are also completely permeated with the economic fallacy that passing around free money is a good thing for the economy.   As in, for example, "food-stamp enrollment has become a means of economic growth, bringing almost $6 billion each year into the state.  The money helps to sustain communities, grocery stores and food producers."  So I guess the government should just pay everyone to sit around and do nothing -- that will make us all rich! 

I appreciate the Washington Post at least shining something of a light on what is going on out there.  But really, in its worldview and total acceptance of the most ridiculous economic fallacies, this series is an embarrassment.

UPDATE:  Thinking about this post since I wrote it yesterday, my question is, is it possible that Lonnie came away from his tour as a NJ policeman with no pension?  I don't think so.  Saslow is trying to pull on our heartstrings.  If Lonnie had no pension, there is no way that he would have omitted that fact.  And there is much in the article to indicate that Lonnie must have some source of income, since he clearly spends money (fixing up his mobile home, for example) and Saslow emphasizes repeatedly that all jobs have fallen through.  No, Lonnie has a pension -- and NJ police pensions are known to be some of the most lucrative -- and Saslow is intentionally omitting that fact to deceive the readers.  Not good.

Competition For The Worst Economics Writer In America

You probably think it is so obvious that Paul Krugman is the worst economics writer in America that the proposition is not even worth discussing.  But over at National Review Online, Kevin Williamson thinks he has a competitor for the prize:  Martin Crutsinger, Chief Economics Writer for the Associated Press.

To his credit, Williamson nails the fundamental problem with the economics reporting by Crutsinger (and for that matter, the rest of the AP staff):

You will be hard-pressed to find an Associated Press report acknowledging the fact that government spending is accounted for at cost when calculating GDP.

It's not like Crutsinger ever makes a principled argument for why Fake Keynesianism is a good view of the economy.  It's just that he has so totally internalized the fallacy that it is everywhere in his reporting without his even seeing it.  So you get things like this whopper from his report of February 28:

"the only impediment [to economic growth of around 2%] . . . may be the across-the-board government spending cuts that kick in Friday."

Back to Williamson:

The final product is an AP-distributed political worldview that government spending is always good for the economy, good for employment, good for construction, etc., with little or no contemplation of the possibility that government spending may be one of our more significant economic problems.

OK, that's bad.  But could it really be worse than Krugman, who just takes everything about economics and turns it around a full 180 degrees?  Consider his recent column from March 28, entitled "Cheating the Children."  And how exactly are we cheating the children?  You might guess, by taking on huge amounts of debt that they will never be able to repay?  Wrong:

Yet there is, as I said, a lot of truth to the charge that we’re cheating our children. How? By neglecting public investment and failing to provide jobs.

So in Krugman's view, we are cheating the children by not having enough government spending and not taking on enough debt.  Got that?

Sorry, Kevin, but Krugman has Crutsinger beat by a mile.

All Of The Government's Important Economic Data Are Fraudulent -- Part I

Perhaps the most painful aspect about reading (or watching) debates about economic policy is that everyone cites government economic data that are completely unsuited and useless for the purpose cited.  I'm not talking here about obscure data; I'm talking about the main and most widely cited and used data, about which the ignorance of just about everyone is appalling.

In fact I assert that the principal government economic data are uniformly fraudulent.  And not in little ways; rather, in fundamental ways that go to the heart of how the data are designed to be used and how they are used.   Now, I am not accusing the United States government of systematically falsifying or putting out inaccurate data, the way, for example, Argentina puts out inflation data that everyone knows are completely made up.  But what our government does is just as bad or worse.  Our government issues data in categories that are defined in ways to that are designed to and do deceive the people.  And the deception is always of the same sort, namely, making bigger government appear more desirable in order to achieve the support of the people for that end.

This proposition is decidedly true with respect to the three categories of economic data that are the most important in terms of their use in the argument over economic policy.  Those categories are:  (1) GDP, (2) the rate of poverty, and (3) the cost of obligations to retirees for pensions and health care.

Today I will start with GDP, the principal measure of the overall size of the economy, and of whether the economy is growing or shrinking and by how much.  There is a fundamental problem with the compilation of GDP data, which is that government spending on goods, services and salaries is added into GDP dollar for dollar.  This fact makes the GDP data completely useless in a debate over whether government spending should be increased or cut.  Of course, that is the principal use to which GDP data are generally put.

The portion of the GDP that comes from the private economy is based on the assumption that voluntariness and markets mean that transactions of equal dollar value should be given equal weight.  That assumption does not apply to government spending.  How should the value of government spending be measured?   The assumption used is that a dollar of government spending gets added to GDP as if it were completely equal to a dollar of private spending.  When the government was a small percentage of the economy, and the government thought that thrift was a virtue, this assumption may have been as good as any other. 

But as soon as you count every dollar of government spending at full value, you can immediately see that pure wasted spending counts to "increase" GDP just as much as the very most necessary expenditure.  Suppose you pay someone to dig holes and fill them in (an example actually extensively discussed in Keynes' General Theory).  At the end of a year he has produced exactly nothing -- but the GDP numbers add in an amount equal to whatever the government paid him.  If the government pays every one of 300 million Americans $50,000 each to dig holes and fill them in all year, they have produced absolutely nothing by the end of the year, and the government records a GDP of $15 trillion.  If the government doubles everyone's salary to $100,000, then it just doubled the GDP to $30 trillion, even though they are all starving (because they were too busy digging holes to produce any food).

These are extreme examples, but we live in a time when the acceptance of the GDP numbers as measuring real changes in the economy is so great that the government can completely just pass out hundreds of billions of dollars of totally wasted spending to its friends, cronies and supporters, and count that as a dollar for dollar increase in GDP.   Yes, I am talking about the so-called "stimulus."  And they get virtually no push-back from the media, including most of the conservative media.  And the "stimulus" is just a small part of it.  How about "green" energy spending, specifically designed and intended to impoverish the people by preventing them from using cheaper energy and driving up the cost of electricity and driving.  Yes, that kind of destructive spending also is measured as increasing GDP dollar for dollar.

And of course, it works the same way when there is any proposal to cut spending.  Under GDP accounting, cuts in government spending, no matter how wasteful that spending, are recorded as reducing GDP dollar for dollar.  Thus here we have President Obama a few days ago opposing the upcoming spending cuts:

"Our top priority must be to do everything we can to grow the economy and create good, middle-class jobs," Obama said during remarks at the White House, standing alongside a group of emergency responders. "That's why it's so troubling that just 10 days from now, Congress might allow a series of automatic, severe budget cuts to take place that will do the exact opposite."

Thus, you can't ever cut any government spending, because that will shrink the economy.  Under this logic, we just head inexorably for a world where the economy is 100% government.  North Korea!

Over the next couple of days I'll consider poverty and pension accounting.