Monday, May 11, 2015

Comparative Austerity: Does Cameron re-election show that austerity works?

Here, as per the comments, an update picture of austerity in the UK in comparison to Greece and the US. I added Germany too this time. Data from the International Monetary Fund (IMF, WEO Database). Figures for 2014 and 2015 are estimates.

This graph shows total government expenditures rather than just consumption. Note that the UK has pursued austerity, but it has not been particularly more austere than the US. Germany has pursued moderate, very moderate, fiscal expansion. The decline in government spending in Greece has no parallel, as should be expected, since the country was forced to pursue austerity policies.

Again, this shows that David Brooks notion "that there were two countries that did what we call austerity," meaning Germany and the UK, and that is connected to the fact that "the two strongest political leaders right now in Europe are Angela Merkel and David Cameron," so that this is a vindication of austerity policies is, as I had noted before, preposterous.


  1. What is the rationale for using government expenditure alone as a measure of fiscal policy? Don't taxes and transfers matter too?

    1. Both spending and revenue are in part endogenous. Think of expenditures on welfare or unemployment insurance, which go up with a recession, and sales and income taxes that go down with the recession. The fiscal balance (the difference between spending and revenue) is, also, partly endogenous. Ideally you want the autonomous spending, the part that is not dependent on the level of income itself, to determine the impact on the economy, which would be the direct effect of additional demand in the economy. The effect of taxes is always more complicated, since it is indirect by affecting the ability of agents to spend, and, hence, affecting the size of the multiplier rather than the change in demand. In this case, w/o doing all sorts of complicated assumptions, spending gives you a pretty good comparative measure. Think about it. The endogenous component of government spending in a recession would increase. And here you have brutal reduction of spending in the case of Greece. That's NOT endogenous, that is austerity.

    2. That makes sense. But taxes and transfers are also partly exogenous (changes in tax rates, ui, etc), so there seems to be an implicit assumption that those things were less important for those 4 countries over that time frame than changes in G. Maybe that's a valid assumption, but I don't know. I see other people saying that the US has done better than the UK due to stronger stimulus.


Godley versus Tobin on Monetary Matters by Marc Lavoie

  The 4th Godley-Tobin Lecture given by Marc Lavoie, a co-author of Wynne Godley, and one of the leading Post Keynesian authors.