Thursday, March 8, 2012

Sean Rosenthal on Krugman's claim on British "austerity"

On a number of occasions, Paul Krugman has claimed that "austerity" measures are hurting the British economy and should be ended immediately in favor of more spending. Sean Rosenthal demonstrates that the British government has both raised taxes (which Krugman ignores) AND run large budget deficits.

Rosenthal writes:
Interestingly, Krugman neglects to provide any data on British government actions. In particular, although he asserts that British policies have simply been to "slash spending," he neglects that Britain ignored the advice of free-market supporters by increasing tax rates significantly, such as raising the top marginal income-tax rate to 50 percent, the capital-gains-tax rate to 28 percent, and the value-added-tax rate to 20 percent. More damaging to his view, as can be seen on tables 25 and 27 of this Organisation for Economic Co-operation and Development (OECD) document, British spending has experienced no significant cuts and still represents a sharp increase compared to prerecession levels.
This does not exactly square with Krugman's claims, but that hardly is unusual.

15 comments:

LK said...

"Sean Rosenthal demonstrates that the British government has both raised taxes (which Krugman ignores) AND run large budget deficits."

The UK has

(1) raised taxes, and
(2) cut spending.

That is contractionary fiscal policy. It may not be as Ireland or Latvia, but it is contractionary without doubt.

The facts are easily obtainable:

"Treasury chief George Osborne on Wednesday announced the country's largest cuts to public spending since World War II as part of a five-year austerity plan.

Osborne confirmed he had ordered 83 billion pounds ($130 billion) in spending cuts through 2015, which he claims are necessary along with tax increases to wipe out a spending deficit that reached 156 billion pounds last year. "


http://www.msnbc.msn.com/id/39754325/ns/world_news-europe/t/uk-faces-sharpest-spending-cuts-wwii/

The budget deficit has also fallen in every year:

£154.7 billion (2009–2010 fiscal year)

£149 billion (2010-2011 fiscal year)

£93.5 billion (2011-2012 fiscal year to date (April 2011-January 2012).

http://en.wikipedia.org/wiki/Economy_of_the_United_Kingdom

"he neglects that Britain ignored the advice of free-market supporters by increasing tax rates significantly"

And you neglect to mention that Keynesian would also reject raising taxes in situations where the economy is weak or in recession.

American Patriot said...

If it wasn't for ignoring reality, the left would not have any arguments to make.
Here are their rules (whether you are talking about economy, man made global warming, tax payer funded goodies like contraceptives, healthcare, this, that, etc...):
1) Ridicule the opponent (Alinsky rule #5)
2) Ignore relevant data - or even change it as in the case of James Hansen of NASA.
3) All else failing, reframe the question, make straw arguments, take things out of context, etc....

So, you see why none of you can get likes of LK to stop trolling around? They can counter your reasoned arguments with their own made up ones and never lose.

That is the insidious nature of arguing with progressives.

macroman said...

1 are tax increases not part of austerity?

2. Perhaps the important point is not what spending/GDP or deficit/gdp was in 2007 compared with now, but the gradient of these numbers now, or since Cameron's election?

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Major_Freedom said...

LK:

UK's deficit is still higher than pre-recession levels.

http://www.debtbombshell.com/britains-budget-deficit.htm

Of course you can say "contractionary" if the baseline is previous higher deficits in the short term past, rather than previous lower deficits in the longer term past.

Just because the deficit rose to 12.5% of GDP in 2010, it doesn't mean that this level should be "locked in" as the reference point baseline for deciding whether or not UK has expanded its deficit or not in response to a recession.

Since the UK's current deficit, even in an economy out of recession, is still higher than pre-recession levels, Rosenthal is correct to say that the UK government is running "large budget deficits."

Anonymous said...

Look who didn't read the article to see the actual data.

I would love to live in Lord Keynes' world where a government minister "announces" budget cuts and they magically occur.

Moreover, where cuts are actual cuts, not just "decreases in the rate of growth."

I wish my own household budget cuts were of the governmental kind!

The Patriot said...

As I said, you cannot argue with progressives. You will not win...at least in their minds; and to top it all, you'll be left frustrated.

LK said...

"Rosenthal is correct to say that the UK government is running "large budget deficits."

Your powers of observation do you credit. I do not, nor did I deny, that above.

The issue is whether the net effect of UK's annual fiscal policy in fiscal years 2010-2011 and 2011-2012 under the Tory-Liberal Dem coalition has been contractionary in each relevant fiscal year and in relation to each previous fiscal year. The answer is yes on both counts: raising taxes and cutting proposed spending is contractionary.

"UK's deficit is still higher than pre-recession levels."

Well, duh. Of course it is.
This statement does not refute anything in my previous comment.

Sean Rosenthal said...

Hey, thanks for the repost. :)

As to the comment discussion, @lord keynes, I acknowledged that the budget deficit is smaller. In fact, I stated:

"Similarly, although the British deficit as a percent of GDP fell from 11 percent in 2009 to 9.4 percent in 2011, this deficit still amounts to a huge surge compared to the 2007 level of only 2.8 percent and, with the exception of this recession, exceeds all other deficits in Britain since World War II."

I even go on to politely note:

"Although critics of spending cuts can legitimately interpret British data to fit their theories..."

My point regarding your criticism was not that Britain today disproves Keynesian economic theory. Rather, my point was threefold:

1) Britain still has a very large budget deficit, larger in fact than any prerecession budget since WWII. If you look at the rest of Europe, it's also one of the largest budget deficits in Europe. I'm okay with people publicizing that Britain has a smaller deficit than before, I would just like them to be honest and explain that the deficit is still very large; it certainly is compared to countries like Canada and Germany which have basically recovered.

2) There were no actual spending cuts, just reductions in the rate of increase based on the baseline. Since you're okay with using wikipedia as a source, note that the 2011 budget was $711 billion, http://en.wikipedia.org/wiki/2011_United_Kingdom_Budget, which is larger than the 2010 budget of $697 billion http://en.wikipedia.org/wiki/June_2010_United_Kingdom_Budget. That's about a 2% increase, which adjusted for inflation is spending about the same amount of money. It's certainly not any sort of draconian cut.

3)The comparison to the Great Depression is extremely deceptive since the Britain of the Great Depression ran balanced budgets while the Britain of today has a very large budget deficit [albeit smaller than a year or two ago]. Based on the actual data, what Krugman is arguing is "Britain with a balanced budget in the 30s recovered faster than Britain with a very large deficit now, so therefore, the present deficit is too small and if it was 10 percent or more instead of around 9 percent, then Britain would have outperformed the balanced budget economy of the 30s." That's just a dumb argument. The only reason he gets away with it is because he implies Britain implemented basically the same policy now as it did in the 30s, which is just simply untrue.

I don't think any country or date proves or disproves a theory, but I didn't make the comparison between the two time periods; Krugman did. My point is just that, so far as his comparison between the great depression and the present is considered appropriate, the evidence from the specific comparison made by Krugman supports the proponents of cutting spending and balancing the budget.

LK said...

Sean Rosenthal@March 9, 2012 9:32 PM

(1) "Britain still has a very large budget deficit, larger in fact than any prerecession budget since WWII.

And that is because this was, by historical standards, the worst recession since WWII:

http://www.guardian.co.uk/business/2009/dec/22/britain-still-in-recession

Anyway, the budget deficit is mostly caused by the collapse of tax revenue.

If you look at the rest of Europe, it's also one of the largest budget deficits in Europe."

And yet as a % of GDP Ireland and Greece where austerity has been pursued are worse - and Ireland especially is much worse:

http://www.gfmag.com/tools/global-database/economic-data/10395-public-deficit-by-country.html#axzz1ojkFgnqb

Anyway, since each European nation had differing levels of recession and differing levels of fiscal stimulus, your comparing apples and oranges.

(2) "There were no actual spending cuts, just reductions in the rate of increase based on the baseline. "

That is true, yet the UK has raised taxes and cut proposed spending. That is contractionary fiscal policy. Period.

It doesn't seem to sink in to some people that you don't require absolute spending cuts to have contractionary fiscal policy.

(3) "Based on the actual data, what Krugman is arguing is "Britain with a balanced budget in the 30s recovered faster than Britain with a very large deficit now, so therefore, the present deficit is too small and if it was 10 percent or more instead of around 9 percent, then Britain would have outperformed the balanced budget economy of the 30s."

He says no such thing - you have put words into his mouth, a straw man which you then knock down.

His actual words:

"On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States. "

He does not say that "Britain with a balanced budget in the 30s recovered faster than Britain with a very large deficit now." He says "British unemployment was much higher in the 1930s than it is now."

Sean Rosenthal said...

1) Ireland and Greece are both running large budget deficits and have increased taxes.

Okay, Canada and Germany don't count because of apples and oranges. Let's look at countries that have experienced much worse recessions that Britain and have experienced recoveries. How about Estonia? Estonia's unemployment rate rose all the way up to about 18%. What was their policy response? They cut taxes, cut spending, and balanced the budget. Since then, their unemployment rate has fallen to 11 or so percent. They still haven't recovered fully, but the actual policy of reducing the size of government was followed by a rapid recovery. I'm not sure how Keynesians explain it except to say it doesn't count because it's a small country or some sort of dodge like that. [see the OECD chart I posted in the article or the article you posted on Ireland and Greece for data on Estonia, and here for unemployment http://www.google.com/publicdata/explore?ds=z8o7pt6rd5uqa6_&ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:sa&scale_y=lin&ind_y=false&rdim=country_group&idim=country:ee&ifdim=country_group&tstart=947480400000&tend=1323493200000&fdimy]

2)I admitted that the reducing deficit kind of fits the Keynesian hypothesis. I don't actually agree with you that reducing the deficit is contractionary under Keynesian economic theory though; all deficits are expansionary, and smaller ones are just less expansionary under Keynesian theory.

Anyway, you mentioned in 1) but I thought it was more fitting to respond in 2) that Britain's deficits have mostly been a falling tax base and not increased spending. That's not true. In 2007, Britain was spending $587 billion, http://en.wikipedia.org/wiki/2007_United_Kingdom_Budget. As mentioned above, they're now spending $711 billion in the "austere" budget that has allegedly had rapid spending cuts; that's about a 20% increase. Call it not enough if you'd like, but it's a pretty substantial increase.

3) Yeah, in a sense I'm putting words in his mouth because he didn't provide any data so any data is putting words in his mouth.

Nevertheless, he remarks very clearly (abridged version of what I included in the article):

"It turns out that by one important measure — changes in real GDP since the recession began — Britain is doing worse this time than it did during the Great Depression...[T]his nonetheless represents a stunning failure of policy. And it's a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years."

How does it reflect that if the British policy now, by ANY standard, is much more expansionary and keynesian-style than the Britain of the 30s? Again, the only reason he can make an assertion of this sort is because he doesn't include any data, and including the data (aka putting words in his mouth) shows it to be a pretty obviously absurd argument.

And his statement on unemployment in Britain is correct. It's a real mismatch to compare the current unemployment in Britain with Britain during the Great Depression. This is because Britain started the Great Depression in 1929 with 10% unemployment due to other bad policies since returning to the gold standard badly in 1925. It's really hard to compare contemporary unemployment in Britain to Great Depression unemployment since Britain prior to the bust had a higher unemployment rate (around 10%) than Britain presently has at its worst point(around 8%).

But he DOES say that Britain recovered faster in the 1930s than now, which is what I quoted in the article and above. That was the central point of his article, and he has repeated it since. Including data, he is saying that balanced budget Britain in the 30s recovered faster than large budget deficit Britain now.

LK said...

"They still haven't recovered fully, but the actual policy of reducing the size of government was followed by a rapid recovery. I'm not sure how Keynesians explain it except to say it doesn't count because it's a small country or some sort of dodge like that. "

"Rapid recovery" is the most absurd distortion of the truth. The domestic sectors of these Baltic economies were gutted and they had depressions followed by double digit unemployment which has fallen slowly.

If you want a success story, try Australia: no depression, no actual recession at all, owing to a rapid Keynesian stimulus. Some slight mistakes (such as allowing the property bubble to begin again), but on the whole successful.

Or try Germany:

http://socialdemocracy21stcentury.blogspot.com.au/2010/09/germany-success-of-keynesianism-and.html

Major_Freedom said...

LK:

The issue is whether the net effect of UK's annual fiscal policy in fiscal years 2010-2011 and 2011-2012 under the Tory-Liberal Dem coalition has been contractionary in each relevant fiscal year and in relation to each previous fiscal year. The answer is yes on both counts: raising taxes and cutting proposed spending is contractionary.

That presumes the status quo fallacy. Rosenthal's statement was now about temporal changes, but a cross sectional characterization of what currently exists.

If one year spending increases by 1000%, and then the following year it is cut 50%, then your silly logic would say that spending fell. Well sure, it did fall if you choose the peak. But it would still be "very high". That is the logic Rosenthal is using, and is "the issue."

"UK's deficit is still higher than pre-recession levels."

Well, duh. Of course it is.

That's the point being made that you neglected to address.

"Britain still has a very large budget deficit, larger in fact than any prerecession budget since WWII.

And that is because this was, by historical standards, the worst recession since WWII

This was or this is? Rosenthal is referring to the CURRENT deficit, not past deficits.

The UK is no longer in recession, and yet it STILL has a large deficit. That's the issue you are evading.

Major_Freedom said...

LK:

"Rapid recovery" is the most absurd distortion of the truth. The domestic sectors of these Baltic economies were gutted and they had depressions followed by double digit unemployment which has fallen slowly.

If you want a success story, try Australia: no depression, no actual recession at all, owing to a rapid Keynesian stimulus. Some slight mistakes (such as allowing the property bubble to begin again), but on the whole successful.

The property bubble is CAUSED by Keynesian advocacy of central bank inflation into the banking system, which lowers interest rates and artificially stimulates asset prices like home prices.

Furthermore, in order to maintain an NGDP trend growth, Australia's aggregate money supply M3 has been on an unsustainable exponential growth path. It cannot possibly keep doing this. At some point it will either bring about hyperinflation, or it will have to save the currency and thus bring about a deflationary depression.

You are, not surprisingly, ignoring the costs of myopic, destructive Keynesian "stimulus" that rewards bad investment decisions.

Major_Freedom said...

LK:

"Rapid recovery" is the most absurd distortion of the truth. The domestic sectors of these Baltic economies were gutted and they had depressions followed by double digit unemployment which has fallen slowly."

"If you want a success story, try Australia: no depression, no actual recession at all, owing to a rapid Keynesian stimulus. Some slight mistakes (such as allowing the property bubble to begin again), but on the whole successful."

"Slowly" is the most absurd distortion of the truth. The public sectors of these economies were gutted and they were already in a depression, but they followed with recovery with an almost 50% reduction in the rate of unemployment, and they continue to improve.

If you want a success story, try 1920-1921 US: inflation induced boom, then bust, then very little government intervention at all, owing to a rapid free market stimulus. Some slight mistakes (such as the Fed decreasing the discount rate to banks thus preventing further corrections), but on the whole successful.