Home > Fiscal Policy, Global Crisis > Bringing Krugman to Europe

Bringing Krugman to Europe

February 11, 2013 Leave a comment Go to comments

Well, not him, actually (I wish I could); I need to content myself with his latest post on austerity. Krugman argues that austerity is happening (it is trivial, but he needs repeating over and over again), showing that in the US expenditure as a share of potential GDP is back to its pre-crisis level (while unemployment remains too high, and growth stagnates).

I replicated his figure including some European countries, and with slightly different data. I took OECD series on cyclically adjusted public expenditure, net of interest payment. This is commonly taken as a rough measure of discretionary government expenditure. I also re-based it to 2008, as most stimulus plans were voted and implemented in 2009. Here is what it gives:

Fig1PostFeb112013

Even if I did not plot exactly the same data, the US series seems in line with Krugman’s post, as in 2013 the OECD forecasts them to be back to 2008 levels.
Also, not surprisingly, the Eurozone peripheral countries have implemented sharp contractions (if I had to extend the range to include Greece’s 2013 level, it would have made all the other series unreadable). The large and relatively healthy EMU countries, notably France and Germany, did not expand expenditure like the others during the peak of the crisis, and are also reverting back to normal. The figure confirms the lack of symmetry of the adjustment that is taking place in the EMU. Countries that could afford to sustain global demand, joined the austerity herd.
This latter point is better made by looking at another of my favourite figures, the fiscal impulse. Cleaning government borrowing from cyclical components, and taking yearly changes, we can obtain a measure of the discretionary stance of fiscal policy. Here is what it looks like, if we cumulate it from 2008 to 2013:

Fig2PostFeb112013

This needs no comment in particular, except maybe remarking that France had a very restrictive cumulated stance, even more than Germany. For the rest, same old, same old. Too much austerity, in the wrong countries.

Krugman certainly has many reasons to complain about fiscal policy in his country. I just wish we had the same down here. I would be even happier if I had the Japanese government (and that’s before Shinzo Abe)

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  1. February 11, 2013 at 6:01 pm

    Krugman is lucky. US headmasters are more keynesian than European game-rulers…

    I’ll play the devil’s advocate. EVEN IF “periphery” needs some adjustment, this consolidation must be coupled with a deep fiscal easing from the “core” in order to generate demand. I can’t see how periphery could increase its imports, if its customers reduce their purchases. The Euro-project is on the path of collapse since France and Germany don’t want to be the euro-engines anymore. Desperate graph…

  2. Michael
    February 12, 2013 at 11:53 am

    The Euro project is about to self-destruct. By imposing fiscal austerity in a deep slump at the same time as the ECB refuse to accommodate enough (in order to keep the dicipline and force polirticians to implement even more self-defeating austerity), the current deficient aggregate demand gets even more deficient.

    This is classic textbook stuff: If the government tries to save at the same time as the private sector is deleveraging and increasing its savings, the recession becomes a depression. The result is mass-unemployment, huge output gaps, idle resources and idle capital. Permanent loss of output, scarring of the workers, hysterisis, and bad equilibriums.

    We have the wost possible leaders at a crucial point of history:
    Merkel still caught in the Household Fallacy, Hollande got elected to stop the auterity and instead he passed a 1930s budget with a contraction of up to 2.5% of GDP, the bean counter Rajoy being exposed as head of a corrupt party, Monti saving in a depressed economy,

    It’s very depressing. We live in a time of ignorance and economic illiteracy.

  3. February 12, 2013 at 12:11 pm

    I can see no solution other than a fully fledged federal state

  1. February 12, 2013 at 2:30 am
  2. February 27, 2013 at 5:42 pm
  3. March 1, 2013 at 3:49 pm

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