Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Austerity really means raising taxes

Jerry Stratton, May 15, 2013

The neat thing about Paul Krugman’s Humpty-Dumpty austerity (“a word means just what I choose it to mean—neither more nor less”) is that he can choose countries whose austerity is raising taxes, and then claim that since austerity means cutting spending, those countries’ failures mean we should raise taxes rather than cut spending.

The true solution, says Krugman, is to raise spending. That’s how to get out of a bad economy. Michael Tanner describes the conundrum at RealClearPolitics:

Which brings us to the question of European “austerity.” Krugman continues to insist that European countries’ austerity has been devastating, and that spending cuts must therefore be resisted. The “case for keeping [the U.K] on the path of harsh austerity isn’t just empirically implausible, it appears to be a complete conceptual muddle,” he wrote this week, and “austerity policies have greatly deepened economic slumps almost everywhere they have been tried.”

But there have actually been few spending cuts in Europe, so it makes little sense to blame them for poor performance. A new study by Constantin Gurdgiev of Trinity College in Dublin compared government spending as a percentage of GDP in 2012 with the average level of pre-recession spending (2003–2007). Only three EU countries had actually seen a reduction: Germany, Malta, and Sweden. Not surprisingly, two of those three, Germany and Sweden, are among those countries that have best weathered the economic crisis. Those countries that have suffered most, Greece, Italy, Spain, and Portugal, have all seen spending increases.

And what about Great Britain, which has been Krugman’s No. 1 exhibit for the dangers of austerity? Compared with pre-recession levels, British government spending is up by 2.5 percent of GDP, a 29 percent increase in nominal spending.

Krugman belittles those who cite countries such as the Baltic nations or Switzerland, whose governments really have cut spending and seen robust economic recoveries. But how does he account for Iceland, considering he himself once called it “a post-crisis miracle?”

Iceland actually slashed spending from 57.6 percent of GDP in 2008 to 46.5 percent in 2012, a nearly 20 percent reduction. Yet, while Iceland was one of the countries hardest hit by the international banking crisis of 2008 and the recession that followed, the economy started growing rapidly again in 2010.

What most of Europe has seen in abundance is tax increases—exactly the sort of thing Krugman has advocated in the United States. In fact, overall, European countries have raised taxes by $9 for every $1 in spending cuts.

One might conclude that it was these tax hikes, rather than nonexistent spending cuts, that are responsible for Europe’s economic slowdown. Something to keep in mind the next time Paul Krugman—or President Obama, for that matter—calls for yet another tax hike on the rich.

Krugman is absolutely right that “austerity” is bad—when it’s defined as raising taxes. The problem is the Krugman Shuffle where the definition changes after picking the countries to use as examples.

In response to Beware the Austerity of the Politician: Austerity, to politicians, doesn’t mean what you think it means.

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