The recent debate surrounding the
studies by Carmen Reinhart and Kenneth Rogoff of public deficits and
economic growth shows how alert academic critique can make a strong
research finding fizzle down to a somewhat interesting footnote. By
now we know that it does not matter a whole lot whether a country's
public debt level exceeds 95% of its GDP. (I must add my own footnote here, see below at the *) Yet I am amazed at the
level of influence initially ascribed to the 2009 Reinhart-Rogoff
study, advocating austerity, until it was challenged. The US is a country where politicians – and conservative
politicians in particular - are not exactly enamored of
intellectuals. Somehow the claims of a scholarly article are said to
have inspired the whole Republican stance in the congressional budget
fights over the past half-decade. I find this overblown, and as
Krugman suggests (April 29), there may be more to the story than just one academic article.
But I am still puzzled by his conclusion that one side has won the
debate.
Austerity, in Krugman's view, is simply wrong; stimulus is right. Still, I wonder what these
terms mean, or more precisely, what they have meant in the public
debates over the past four-five years. What is austerity? Strictly
speaking it should be cutting or avoiding unfinanced spending;
reducing public deficits. Yet this is not necessarily what all the
rage in the streets of Europe has been about.
In Greece, austerity has meant people
could no longer retire at 52, but had to wait until their early 60s
like most other Europeans. It has meant stopping the payment of
(public) pensions to thousands of people long dead. It has meant
stopping the payment to persons unknown of salaries for government
jobs held by nobody. It has meant reducing the salaries and pensions
of public servants who have been living well above the medium
standard of EU citizens elsewhere. It has meant Greeks suddenly had
to begin paying taxes (- horrors! -) like ordinary people do
everywhere else in the industrialized world.
In all Mediterranean EU countries, I
have been hoping that austerity also should lead to fewer limos for
elected officials, and no more life-long salaries for departed
politicians, but I am not sure we're there yet. In Spain austerity
means everybody now has to pay a certain (minor) share of the cost of
their medication and of the cost of their medial treatment – like
most people in northern EU countries have been doing for years.
Austerity in Spain also has deprived people of free nosejobs and
other cosmetic surgery, which has left me shocked.
Now, admittedly, the most sensitive
part of austerity in Spain is that which is linked to unemployment.
Austerity has reduced the number of government jobs in Spain. It has
also opened the door for private companies to fire people they no
longer need. So unemployment has increased.
While the first of these measures
(cutting government jobs) is a must for a country dangerously in
debt, it is not clear to me that Spain is really in that situation.
The question is more what kinds of jobs are being cut. My impression
from public offices in Spain like the mail service, public health
centers and the public documentation services is that their
slow-moving, impolite and haughty employees have no idea how
privileged they are when compared to their colleagues in northern EU
countries. Public money should - and can – simply be better spent.
As for private sector jobs, no company
can survive a downturn without being able to lay off unneeded
employees. These kinds of lay-offs for longer-term employees are now
gradually becoming legalized in Spain, so there is no wonder
unemployment increases. It will stay that way until the hoped-for
upturn comes along.
In short, the debate about austerity in
Europe, at least, has been confused by a lack of clarity as to what
is meant by austerity. To me austerity should mean being strict about
the kind of public spending one allows (and on that I continue to
insist), but not requiring necessarily that there be no deficit in
the budget. Deficits in the EU, at least, have to be limited, as
required in the eurozone, otherwise euro countries will have to
continue being bailed out by their neighbors. For this reason I see
managing the public deficit as a macroeconomic task that cannot just
be ignored in the name of the stimulus. It is an EU-member
government's overarching responsibility.
Which again means we are in the hands
of the politicians. Given the quality of politicians these days –
whether in Europe or the US – we can only pray.
* Now that Reinhart and Rogoff have published their corrected figures, their original claim seems to hold up. A 1% difference separates growth in countries indebted above 90% of GDP (lower growth) from countries with a lower indebtedness (higher growth).
6 comments:
Interesting piece, Olav. I would just like to add something of a mirror image to your reasoning, given that I have understood your argumentation on austerity correctly. Looking at economic stimulus, I definitely think the nowadays widespread thinking that this might be needed in bad times (at least if politicians have been wise enough to save in prior, good days) is reasonable and can relieve the burden of unemployment and recession to some extent. What puzzles me, though, is that while stimulation often is asked for, the more detailed reasoning of what kind of stimulation that is needed is only seldom discussed. Building new houses and business districts I Spain with EU money, for example, might be a good idea - if there is a market for it. If not, it is only a very expensive way to keep construction workers busy for some time. Similarly, education as a cure to long term unemployment might be a god idea in bad days - but only if it helps the students to get a new job afterwards. If not, it is only an expensive way to give us teachers some work for a shorter time. To me, this is not harder to understand than to realize that if my personal incomes are a bit too small, only spending that generates more income in the long run is rational and reasonable. Or am I missing something?
Of course, apart from pure stupidity, a more reasonable (part of the) explanation to massive public investment program that do not help the economy much could be that some stakeholders gain a lot from the stimulus packets. The losers are certainly not the same guys as those stakeholders. That might be an important difference between political and private economics, I guess...
Björn H
Thanks, Björn - a well-placed supplement to what I wrote about austerity. And I wholeheartedly agree, just consider the effects of the big stimulus package of the Obama administration. Apparently the effects have been only minor.
Perhaps accountability is the word. In its truest sense, it requires: stating the desired outcomes in tangible terms; stating the measures to be taken in tangible terms; reporting the measures taken and the outcomes achieved (both positive and negative). But that requires reason over inclination, which becomes more difficult as more citizens rise to power and privilege.
Bloggerbob, so true, but accountability is hard to come by in countries where people are as used to corruption as they are in Spain. I could see tremendous possibilities for stimulus projects in Spain, such as the construction of new housing to relieve the great need of ordinary people for a roof over their heads, instead of all the unsold tourist apartments and luxury houses on the coast. But municipal contracts for housing were the main instruments of past corruption. They would do it again! Moreover, they would transfer their corrupt skills to any new activity you could think of. I hate to be such a pessimist, but Spain's economy and politics are pretty rotten.
Olav, as you may well know, economics is not a science although economists like to pretend that are able to deliver a solution for the current crisis. The problem is that they differ about the diagnosis of the current crisis and consequently about the solution. Politicians who never look further then the next election are even more stupid as they are convinced that their decisions, whether it involves cutting the budgetary deficit, or to the contrary spending more, will be the magic formula to end the crisis.
It is too easy Olav to blame the different public culture in the southern countries for the current crisis. Those who really carry the blame are the stupid German politicians in particular who believed that they would make it easier for the rest of Europe to accept German unification by creating a so called monetary union that will end the dominance of the D-Mark replacing it with the Euro.
As long as each European country had its own currency it had to deal with its own financial mess, but in a euro zone the Germans were all at once also responsible for the mess in other euro zone countries. Cutting the deficits which politician like to call austerity and some political scientists prefer to call accountability is certainly not the magic solution.
The real problem for economic growth is the new global devision of labor. Europe has no other choice then to adapt to it. The challenge for Spain is to find a way to increase its exports to Asia and Latin America. The true solution is to make the new Chinese consuming middle class to buy a Spanish product like a seat car. With the help of the high ranking MBA schools in this country it may open new horizons.
Ben, your defense of Mediterranean honor in macroeconomic affairs is as impressive as it is misplaced. One of the many mistakes in the design of the euro-zone was the blue-eyed acceptance of the participation of the Mediterranean economies (among which I include France) in the structure, alongside the more strictly governed north and middle European countries. That, of course, would have left the euro-zone much smaller, but more solid and perhaps also more attractive to the Brits.
Otherwise you are right in pointing out that the real problem is the global division of labor.
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