Monday, September 19, 2011

Austerity Doesn't Work

A short post tonight. I have been playing with my new find - the data sourcing and chart-making system at the St. Louis Fed; called FRED, for Federal Reserve Economic Data. There is a ton of economic and financial information, for the US and selected international countries. You can tailer your graphs for a certain time period; you can adjust the scales; and you can combine data sets. It's a blast!

I have been wondering how austerity is working in England and some of the GIIPS countries. I have read in a variety of blogs that the evidence is not good at all for the "austerians" ( a play on the Hayek/von Mises-inspired Austrian school that leads the charge for cutting government and deficits); but I wanted to see for myself.

The following four charts show Real GDP and Unemployment trends, 2000 - Q1orQ2,2011, for England, Portugal, Ireland and Greece. Unfortunately FRED does not have much 2011 current GDP info on the GIIPS. Take a look at the charts and assume that the GDP line is moving down in 2011:

GDP was flat to down in most recent months in the UK. Unemployment continued up.  In the New York Times on June 22, 2010, shortly after Cameron and the Conservatives swept into office, the fierce austerity proposals were called "an historic gamble". From my vantage point, it does not look like it's working out that well.

And here are Greece, Ireland and Portugal:

In all cases, assume that the GDP line (left scale; blue on top for Greece; red in the lower two for Ireland and Portugal) moves down in the uncharted months of 2011.

Why does anyone think austerity works? Dollars/euros are dollars/euros. Those that come via government spending do not poison the economy. And when you remove these government dollars, bad things happen. If your economy is overheated, and there is too much demand pushing against the country's productive capacity, then there is a reason for retrenchment, for pulling dollars out of the economic flows, through cutting deficits or raising taxes - but not when unemployment is high and the economy is flat on its back. The "austerian" arguments are absurd.

And remember: Europe is one year ahead of us. We can look at what has happened as a result of their choosing different forms of harsh austerity. None of it is good at all. Why in the world do we want to copy their path? 

The answer is that we don't. The path is a guaranteed loser. Here's hoping we all wake up in time to make a difference.

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