Friday, June 14, 2013

Sensible Commentary on Austerity

Conventional wisdom can turn on a dime. The position d'month is that the so-called policy of austerity has diminished economic activity so bad that it is at best a pandemic, and at worst a dead economic policy. One would think that for true economic austerity to have failed it must first have been tried. This is the great weakness in all of the arguments that appeal to recent European economic history criticizing fiscal soundness. In an excellent essay Martin Masse asks, "Is 'Austerity' Responsible for the Crisis in Europe?" His answer is a decided and well-documented now.

The value of his essay is to show that everything we have been hearing about the supposedly austere fiscal policy of European governments is woefully incorrect. Indeed general government deficits as a percentage of GDP is higher now than it was in 2007. Likewise government spending as a percentage of GDP has grown since then. Both total government revenue and total government spending has increased not decreased. , but that government spending is absolute terms is higher now than before the recession of 2008. With austerity like this, who needs financial profligacy?
Increased taxes to fund increased government spending is neither austere nor economically productive. As Masse notes, if we define austerity properly "as policies bringing about a reduction in the size of government, then these policies cannot be held responsible for the crisis in Europe because they were never applied."

The true measure of the economic scope of the state is the magnitude of government spending. By this measure, government is still growing, which is why Europe appears mired in recession again.  Indeed, as Masse concludes:
What Europe needs is smaller governments, not just in terms of public spending but also as regards deregulation of the job market and other structural reforms to encourage entrepreneurship, private investment, and job creation. There will be sustained growth in Europe only when governments, and not citizens or businesses, finally bear the brunt of austerity.

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