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Thursday, May 10, 2012

If austerity is so terrible, how come Germany and Sweden have done so well?

By Susan Duclos

The title question is the sub-header of a piece written by Robert J. Barro, who is a professor of economics at Harvard and a senior fellow at Stanford's Hoover Institution and his top headline is "Stimulus Spending Keeps Failing."

The whole piece is a must-read but I will put a teaser below:

The weak economic recovery in the U.S. and the even weaker performance in much of Europe have renewed calls for ending budget austerity and returning to larger fiscal deficits. Curiously, this plea for more fiscal expansion fails to offer any proof that Organization for Economic Cooperation and Development (OECD) countries that chose more budget stimulus have performed better than those that opted for more austerity. Similarly, in the American context, no evidence is offered that past U.S. budget deficits (averaging 9% of GDP between 2009 and 2011) helped to promote the economic recovery.

Two interesting European cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth—the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?

Read the entire article.

Barro's arguments are ones that  Keynes worshipers fail to address and, in fact, do everything possible to avoid.

NRO points to another piece which details a little more about Sweden's austerity plan and their results.

This post, by Carpe Diem’s Mark Perry, reports on Sweden’s successful experimentation with austerity. The following is from the U.K. Spectator’s report:
When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg (pictured above) has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.
Three years on, it’s pretty clear who was right. “Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,” he says. “Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.” Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

EconLog also points to Barro's piece but says that he would prefer that Barro would have dropped the word "austerity."


Despite the liberal  assertion that austerity is a dirty word, really it is a policy of deficit reduction, entitlement reform, and lower spending.

Our National Debt is over $15 trillion. According to our governments own figures, our fiscal policy is unsustainable without reform. The federal government is on track to exceed a $1 trillion deficit for the fourth straight year.

Priority polling finds that the our deficit/spending/national debt (dependent on the wording of the polls) is among the top three priorities and concerns of the American public.

Not only is austerity good policy, but Americans want government to rein in spending, cut our debt and deficits, and reform entitlements to make them sustainable so they will still be around in the future.

Budgeting is not always pleasant, but it is necessary if you want to keep paying your bills.

Austerity, done right, works.

The only people that think austerity is a dirty word are tax-and-spend liberals.

[Update] Via comments, we are sent to Zero Hedge and piece by President of Americans for Limited Government, Bill Wilson.

Another must-read piece that explains how so-called "austerity" policies in France, Greece and other places were never implemented.

First off, austerity was never really tried. Not really.

In France for example, according to Eurostat, annual expenditures have actually increased from €1.095 trillion to €1.118 trillion in 2011. In fact spending has increased every single year for the past decade. The debt there increased too from €1.932 trillion €1.987 trillion last year, just as it did every year before.
Real “austere”. The French spent more, and they borrowed more.

Quite more to read there.

(Changes were made to this post.)