Krugman On Austerity: How About Looking At The Facts For A Change?

  New York Times economist and editorial writer, Paul Krugman, has headed the Left’s crusade against austerity, both in the United States and across the industrialized world. To Krugman, “austerity” does not denote a careful husbanding of government money. Rather austerity denotes unwisely large cuts in government spending that, he claims, threaten economic growth and recovery. Krugman bases his opposition to austerity on an empirical assertion that we can test; namely: “Across the advanced world, big spending cuts have been associated with deeper slumps.” Krugman’s testable hypothesis, therefore, is: Countries that experience large reductions in government spending grow more slowly (or not at all or worse). Just as some people speak before they think. Krugman seems to believe his asserting something to be true makes it true. The scientific method does not work this way, however. It requires that we first gather the facts on government spending and growth. Second, we must use these facts to test the Krugman hypothesis of a positive relationship between government spending and growth.   The scientific method, so applied, shows Krugman’s facts to be wrong (where are the “big spending cuts”) and it refutes his hypothesis. Not a good day for Mr. Krugman. time, he should gather and test the facts before he writes. First to the facts: Krugman’s serial attacks give the impression that government spending was decimated after 2009 in the name of a false austerity credo. Wrong! Organization of Economic Cooperation and Development data (updated using OECD data annex) show that, of the thirty top industrialized economies (not counting China), twenty six  have more government spending today than at their elevated spending in 2009 (Hungary spends about the same as it did in 2009). Only three (Greece, Ireland, and Portugal) spend less. All thirty spend more than in 2006, as the government spending was being cranked up. Nor are the “austere” Ireland and Portugal outliers with respect to growth.  Ireland’s growth since 2009 is matched by Denmark, Finland, and Netherland and Portugal’s growth by Italy and Spain (all countries that increased their spending). Only Greece stands out with a large cut in spending and GDP shrinking almost 6 percent per year. But only a fool would base a theory on the unique circumstances of Greece. Greece’s public spending collapsed, not because of dictates of the austerity devils, but because its public-finance disarray ruled out private lending to Greece. Barring neighborly handouts, Greece has had to live (shudder the thought) on its own dwindling revenues -- a victim of unsustainable spending and low tax collections. Its neighbors are loathe to bail it out. Now to hypothesis testing: Economists use fancy statistical methods (called econometrics) to test hypotheses like Krugman’s “more government spending produces higher growth.” Krugman, however, seems so certain of the power of his hypothesis that it should be visible via simple correlations. I offer a simple and direct test. Here is what I have done: I correlate for the thirty countries the increase (or decrease) in government spending share of  GDP against the country’s average annual growth rate, both for the four-year period 2009 to 2013. Therefore, I am looking at the entire “crisis” period, rather than a year or two. A positive correlation would support the Krugman hypothesis. A zero or negative correlation refutes it. The result: There is no correlation whatsoever between spending increases and growth for the four year period. (The correlation coefficient explains a microscopic eight tenths of one percent of the variation). Yes, my statistical procedure is simple and direct. But this is what the scientific method is all about. Let some one else do it in a different manner and prove me wrong. But wait! Krugman has other evidence. He points to a “widely cited report” by a consulting firm that claims that stingy Republican spending will lower U.S. growth. Krugman can have his consulting firm as long as I can have my own, which claims the opposite.  As time passes, we’ll see which of the dueling consultants is correct. The fact that some consultant predicts something does not make it true. But there is more! Krugman claims a mea culpa from the International Monetary Fund – an admission that its pro-austerity policies were wrong. The IMF report, however, is far from an admission of guilt. It finds (using very indirect methods) a short term initial negative relationship that quickly tapered off. The IMF concludes that “there is no single multiplier (Multipliers measure the effects of government spending and taxation on GDP) for all times and all countries… Our results should not be construed as arguing for any specific fiscal policy stance in any specific country.” Hardly the IMF “walking austerity back” that Krugman implies. Krugman is a habitué of the “settled science” ploy. He tells his readers that only fools and crackpots do not understand that if we want growth we must have more government spending. We must crank up government spending as long as necessary until the nirvana of “prosperity” is achieved. (By that time, we also have a government that spends half of GDP). Well then, Keynes himself would be a fool in Krugman’s book. He wrote that stimulus spending can be used only for short periods. In the long run, growth is determined by other factors. Science is never settled, despite Krugman’s claims. In an earlier post, I pointed out that most of the Nobel prizes to macroeconomists have gone to scholars who dispute the so-called Keynesian consensus. The one “Keynesian” Nobel laureate (Lawrence Klein) had to abandon his statistical models of the Keynesian system when they proved unworkable. I guess Krugman has decided to leave his readers ignorant of this rather vital fact. They must go elsewhere to learn it. Do not believe it when Krugman pulls his next “settled science” out of his magician’s hat.

READ THE ORIGINAL POST AT www.forbes.com