Saturday, January 10, 2015

What is Dead can never Die: American Austerity Edition

Yesterday, Sir Mathew Yglesias proclaimed that "2014 is the year American austerity came to an end"

Which kind of cracked me up. I guess the syllogism is (1) we had austerity, (2) austerity hurts growth, (3) growth picked up in 2014. (4) Therefore Austerity is over.

Here's the data series from 2000 through q3 of 2014 (and it's the same data Matt is using):

From this graph I concluded one of two things must be true depending on one's definition of austerity.

Either austerity means nominal cuts and we never had any of it, or austerity means cuts relative to trend and we are still savagely in its grasp.

Relative to the 2000-2009 decade trend, total government spending is roughly 35% lower in q3 of 2014 than it should be. Hard to say austerity is over by that metric.

When I tweeted this at Sir Mathew, he responded that it "seemed like semantics". One of us, and it could easily be me, does not know what that word means.


Michael Gillespie said...

Since austerity is a noun that is constructed from a qualitative adjective (austere)and since qualitative adjectives are always relative (e.,g., large means larger than x but also smaller than y) the confusion is inevitable. We were less prone to spending from 2009-2014 and thus austere in comparison to the period from 2002-2009 and with the uptick in 2014 that seems to be over. If we measure austerity in terms of what the world might look like, i.e., an ideal model, for someone like Rand we were never austere but for someone like Marx we always are. The relativity problem with qualitative adjectives is almost always solved only quantitatively. In terms of trends, what is obvious from the graph (assuming we can generalize on the very recent data, is that the bubble that persisted from 2008-2014 is over and we are back on the track we followed from 2002-2008. The use of qualitative adjectives almost always leads to confusion and is often the reflection of underlying ideological assumptions that imagine that the world should be one way or another and that we either are or are not on that track rather than looking at the world that actually is. Politics in this sense is always about values because it is always about the ends that we imagine we should be pursuing and these value judgments (or prejudices) inevitably inflect the ways in which we talk about data.

Warren Anderson said...

To me austerity is a complete nonsensical word since it has no definition. Is it an actual cut in government spending, is it higher taxes or is it a decline in the growth rate? One man's savage austerity is another man's bigger government.

It looks like the growth rate of government picked up so for Yglesias austerity is over. For me (and I assume you) government spending never seemed to really fall by any significant amount, so there never was an austerity.

Austerity is in the eye of the beholder.

Mungowitz said...

I want to applaud MAG's comment above. It is brilliant post-modernist satire. All it is missing is something "signifiers" and "signified."

On the merits, if you look at the graph, there is no statistical foundation for positing a regime change in 2014. It's still flat.

And if gov spending rises FOLLOWING gdp growth, that invalidates the Yglesias thesis, which was that increased gov spending CAUSED the gdp growth. Economy turned up BEFORE gov spending, no matter how you read that graph.

MaxSpeak said...

The great Satan Krugman has suggested how the numbers back up austerity (lower trend growth in spending, as you note) leading to lower-than-otherwise growth. Yggy is an easy target.

mwbugg said...

May I suggest you read Kevin Drum where the same same data are plotted adjusted for inflation on a per capita basis. It seems more realistic and may make you think your conclusions.

Tom said...

If the original Vox article is to make any sense, Sir Matt has to explain what he means. Since he declined, even after the issue was raised, you are dueling with smoke.

The Mother Jones defense doesn't help: they didn't define their terms either and their graph shows nothing special about 2014.

Gary Marshall said...

I would just like someone to explain the value of these government expenditures. If the expenditures bring little value to the nation for the costs involved, such as hiring a bunch of people to dig holes in the morning and fill them up in the afternoon, then the money would have been better left in the hands of those that actually produce valued goods. If not, if the money went to train electrical engineers, then value should exceed costs.

It doesn't matter what the size of government expenditure is. What matters is the purpose for which the money is spent. Often it just goes to squander.

So the problem is not what government expenditure is. The problem is the lack of a tool to discern good government expenditures from bad ones.

Zeev Kidron said...

Being called an idiot does not offend me, if good cause is given. SO:

Given that Government is nothing more than a transaction machine, taking from some and giving to others (sometimes partially to the same people). Given that on both sides these transactions are complex and costly.

Can we use transaction cost tools to judge Government expenditures?

Even if under this framework we might discover (probably will) all Government expenditure generates higher transaction costs and reduces efficiencies in the economy Vs. the other alternative, i.e. leave the money and resources with the people who owned them and earned them originally.

This at least is a value neutral analysis, passing no moral judgement on the "social costs" and "social benefits" of any given expenditure.

weareastrangemonkey said...

Yglesias' claim is consistent with the data presented.

People (especially Keynesians) generally define austerity policies as cutting real government spending (some might include raising taxes). If inflation is greater than the rate at which nominal expenditure is increasing then real government spending is falling. That is,

inflation+flat nominal expenditure=austerity.

It follows then that real government expenditure was shrinking over a good chunk, if not all of, the period from 2010 to 2014 (as inflation was around 2%). We see that nominal expenditure began to grow again in late 2013 or early 2014. If that growth is sufficiently high then this implies that the process of shrinking real government expenditure has ceased. In which case austerity, as defined as the process of reducing real government expenditure, began around 2010 and ended around 2014.

In most NK models with liquidity traps reducing real government spending near the zero lower bound will, ceteris paribus, have a negative effect on economic growth. Ceasing to shrink real government expenditure ought then, in these models, to be followed by higher economic growth. This is also what you would get out of the old school IS-LM analysis.

The prediction of the broadly defined Keynesian crowd would be: cutting real government expenditure when interest rates are close to zero will harm the economy. Ceasing to stop cutting real government expenditure will see a rebound in growth. This is what we have seen.

I hope that this helps clear up your misunderstanding.

Triclops said...

Thanks for the clarification. Could you discuss the importance of the magnitude of change in real government spending?