by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Pundits and economists of the Keynesian persuasion have blasted European governments that have failed to boost their sagging economies through so-called “austerity” measures. As University of Georgia economics professor Jeffrey Dorfman explains in the latest Forbes magazine, that criticism has been misplaced.
The proponents of Keynesian-style deficit spending argue against austerity by claiming that it has failed in Europe. They point to the U.K., Italy, Greece, and onward, shouting that European government spending cuts have led to slow or negative growth and sky-high unemployment rates. The only problem with these arguments is that all the purported facts are misstated.
In reality, very few countries in Europe have actually reduced government spending. There have been riots in protest of proposed or imagined cuts in spending, but not much actual cutting. For those who have reduced government spending, the results have been better than the conditions experienced in the countries that have continued to expand government spending. If we actually look at the data, rather than simply making unsupported claims, a completely different picture emerges.
Many countries in Europe have supposedly tried austerity programs to aid the recovery from the recent recession. Austerity as promoted by conservatives and the IMF and as decried and derided by Keynesians (led by Paul Krugman) is generally defined as cuts in government spending and/or reductions in government deficits. We constantly read how Greece, for example, is being forced to cut government spending as a condition of international aid.
Using data from Eurostat (the official statistics agency of the European Union), I calculated the change in government spending from 2008 to 2012. In fact, the data tell us that only eight out of the thirty countries in Europe that are listed have reduced government spending over that period. Of those eight countries, only Iceland and Ireland have been prominent austerity examples in the news. (The others are Bulgaria, Ireland, Latvia, Lithuania, Hungary, Poland, and Romania.) …
… The data on relative GDP growth show that only two of the eight countries that practiced austerity performed worse than the average. Those two countries are Iceland and Ireland. Iceland had a complete meltdown of their banking system, so it is clearly a special case. Ireland had a big real estate bubble that popped, which helped cause a bank crisis, and an enormous government deficit. It was definitely one of the countries in big financial trouble.
While two of the eight countries that have tried austerity had GDP growth that was worse than the EU average from 2008 to 2011, that still leaves six of the eight that performed better than average. Further, the two countries with the best relative performance in all of Europe, Poland and Lithuania, are both in the austerity group along with Bulgaria with the fourth best relative GDP growth.
Thus, this data suggests that for most of the European countries that have tried austerity, it has worked. That three out of the four best performing countries have followed austerity would seem to be strong evidence that austerity should not be casually dismissed. It certainly seems to have worked most of the places it has been tried.