Sunday, April 28, 2013

A Note To Erika Johnsen of Hot Air -- Austerity is Dead

Hot Air is one of the conservative blogs I read.  And while they're good at explaining conservative political opinions, they are absolutely horrible about explaining economics.

Case in point.

Erika Johnson is up in arms about the French criticizing the German's continued insistence on austerity as the primary method of dealing with the EU's problem. She writes:

French President Francois Hollande is in a world of political hurt right now in terms of his failure to reignite the stagnating French economy, his flailing administration’s poor ethical reputation, and his attempts to simultaneously satisfy both his campaign pledges and his EU-promises, it looks like his party is thinking about deploying the ol’ unite-behind-a-common-outside-enemy tactic to try and rally the troops. That’s right: German Chancellor Angela Merkel, because all of these debt crises and austerity measures are totally all her fault, you guys! 

First, France is in a world of economic hurt.  She got this one right.  It's a big reason I'm bearish on the economy there (see here and here).

But it's also obvious that she hasn't been paying attention to economics for, I don't know, about 4 years.  You see, Ms. Johnson, there has been a debate about "austerity" and it's policy implications.  First, notice that countries that implemented austerity just aren't growing as advertised.  For example, there's Spain:

Spain admitted on Friday that it would need two extra years to bring its budget deficit back below the EU limit of 3 per cent of gross domestic product, a relaxation of its austerity targets that won tacit approval from Brussels.

The delay reflects the continuing weakness of the credit-starved Spanish economy, which is set to shrink by another 1.3 per cent this year before returning to modest growth in 2014. Government finances have been hit hard by the bursting of Spain’s debt-fuelled housing bubble, which led to a surge in unemployment and forced Madrid to nationalise a string of troubled banks.

Spain has been implementing austerity for a few years now -- and look how much good it's done the country:

That is a track record of success that I'd hang my economic policy hat on.

And then there's the UK -- which just narrowly missed printing a triple dip recession (there's a sign of progress) with a whopping .3% GDP reading in the latest report.  Their plan of fiscal consolidation is going so well that .. "The chancellor’s rolling five-year plan to eliminate the underlying deficit, originally intended to achieve its objective by 2016, will be extended until 2018 because of low growth."  Where's the stellar growth from austerity? 

You can see similar track records all across countries that are implementing austerity.

And her sudden love of Germany is a bit odd.  After all, they have and encourage strong labor unions, promote alternative energy and have socialized medicine.  They also used fiscal stimulus to limit the effects of the recession   Doesn't their success invalidate the majority of her economic theories?

So, a note to Ms. Johnson.

Please make sure you're up-top-date on current economic theory before commenting on economics.   Recent developments have invalidated austerity based policy.  Your nemesis Paul Krugman is in fact the victor:

For the past five years, a fierce war of words and policies has been fought in America and other economically challenged countries around the world.

On one side were economists and politicians who wanted to increase government spending to offset weakness in the private sector. This "stimulus" spending, economists like Paul Krugman argued, would help reduce unemployment and prop up economic growth until the private sector healed itself and began to spend again.

On the other side were economists and politicians who wanted to cut spending to reduce deficits and "restore confidence." Government stimulus, these folks argued, would only increase debt loads, which were already alarmingly high. If governments did not cut spending, countries would soon cross a deadly debt-to-GDP threshold, after which economic growth would be permanently impaired. The countries would also be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates. Once government spending was cut, this theory went, deficits would shrink and "confidence" would return.


The argument is over. Paul Krugman has won. The only question now is whether the folks who have been arguing that we have no choice but to cut government spending while the economy is still weak will be big enough to admit that.