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Austerity and Stimulus: A Response to The Washington Post

Posted By Salim Furth, Ph.D On June 7, 2013 @ 3:42 pm In Economics | Comments Disabled

Globe, Earth, sits on pile of cash, money

Journalists should check with both sides before committing pen to paper, especially those at respectable outlets like The Washington Post. It would have served Post reporter Dylan Matthews well if he had followed this dictum. In a blog post, Matthews attempted to refute testimony I gave before the Senate Budget Committee yesterday. He checked only the side of the argument offered by Senator Sheldon Whitehouse (D-RI). He didn’t check with me.

Had Matthews done so, I would have reminded him that the main points of my testimony were that “austerity” is too broad a term to be useful and that structural reform is the best way forward, but one must respond to specific criticisms.

Matthews’ only substantive criticism betrays his unfamiliarity with the data in question, which is labeled “Cyclically adjusted surplus or deficit as % GDP.” Cyclically adjusted data is reported as a percentage of potential GDP: The entire point is that it is independent of economic performance. The data I used is on page 238 of the recent OECD Economic Outlook [1].

The numbers Furth is using here have both a numerator and a denominator. The denominator – the countries’ GDP – is biasing results in this case. Ireland is actually a perfect example… [I]ts deficit-to-GDP ratio went up slightly, from 7.35 percent to 7.48 percent. But that’s only because the economy shrank massively during that time period.

Had he referenced the original data – or actually asked me, as a journalist should – he would have learned that the denominator is more precisely potential GDP. At worst, I am guilty of sloppy labeling, and I apologize for that.

So let it be stipulated for the record: Ireland grew its cyclically adjusted deficit since 2007.

Matthews moves on to a 2011 study by the European Trade Union Institute (ETUI) and a graph showing cuts in exactly nine country-years. My data incorporated 224 country-years. It is no doubt true that spending was cut in several places in 2011, but Matthews studiously ignores the years before.

But let’s take a look at that ETUI study. It is entitled “Withdrawal Symptoms [2].” Withdrawal from what? “The turnaround from stimulus to austerity came suddenly in the Spring of 2010.”

Wait, that’s like what I said [3]: “Despite a Keynesian approach to spending, many governments have raised taxes to cut the deficits they built up with all the new spending.”

The ETUI report goes on to record that planned austerity measures from 2010 to 2013 would be a mix of (more) spending cuts and (less) tax increases. But the “stimulus” of 2008 and 2009 is unanalyzed. I applaud governments where they are actually cutting government wage bills and transfer payments. But that does not change the fact that many massively grew government in response to the financial crisis.

Matthews then repeats Senator Whitehouse’s claim that because European governments plan to cut spending in the future, it cannot be true that they increased spending in the past. In fact, as the ETUI report and the OECD data confirm, spending rose dramatically during the recession. And Senator Whitehouse’s data was mostly projection [4] at the time of its publication, so it was really not germane to the discussion, nor in conflict with my graph, which is clearly titled “Most Governments Have Increased Spending Since 2007.”

But Matthews fully associates himself to Senator Whitehouse’s inflammatory attack on my integrity:

“I am concerned that your testimony to this committee has been meretricious,” Whitehouse told Furth. “I am contesting whether you have given us fair and accurate information.” It’s a fair concern, given what the OECD has actually said on the subject.

That Matthews evades any mention of the blindingly obvious dating issue, or any discussion of the actual merits of the data series I used or the dating choices I made, is disappointing.

The main thrust of my testimony [3] was to point out how much variety has occurred in terms of policy and how uninformative the word “austerity” is as a blanket description of Europe. Unless Matthews and those who thoughtlessly amplify him [5] are willing to dig into the data, they won’t be able to contribute positively to our understanding of recent policy.

AusterityChart1_130607 [6]

 

 

AusterityChart130607 [7]


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2013/06/07/austerity-and-stimulus-a-response-to-dylan-matthews/

URLs in this post:

[1] OECD Economic Outlook: http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2013-issue-1_eco_outlook-v2013-1-en

[2] Withdrawal Symptoms: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/05/yes-europe-really-is-in-the-throes-of-austerity/

[3] what I said: http://www.budget.senate.gov/democratic/index.cfm/files/serve?File_id=9ddbf627-3827-490d-a02a-d0ce25e025d2

[4] mostly projection: http://blog.heritage.org/2013/06/05/meretricious-senator-whitehouse-is-projecting/

[5] those who thoughtlessly amplify him: http://krugman.blogs.nytimes.com/

[6] Image: http://blog.heritage.org/wp-content/uploads/AusterityChart1_130607.jpg

[7] Image: http://blog.heritage.org/wp-content/uploads/AusterityChart130607.jpg

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