What "austerity"? By Scott Sumner

The New York Times has a long article on the cost of British “austerity”, which begins as follows:

PRESCOT, England — A walk through this modest town in the northwest of England amounts to a tour of the casualties of Britain’s age of austerity. The old library building has been sold and refashioned into a glass-fronted luxury home. The leisure center has been razed, eliminating the public swimming pool. The local museum has receded into town history. The police station has been shuttered.

The article is full of similar examples. I read the entire piece, but was not able to find any evidence that the UK’s problems were caused by “austerity”. So I decided to see if I could find such evidence. Let’s start with cross sectional evidence, and then switch to time series. Here are the ratios of government spending to GDP in some major economies:

Germany: 43.9% (2017)

Britain: 41.1% (2017)

Canada: 40.8% (2017)

Australia: 36.2% (2015)

Switzerland 34.0% (2015)

So the UK is a fairly normal developed economy. In case you think I cherry-picked the data, this graph shows the UK is pretty normal:

It’s true that there are many examples of European countries with larger welfare states, and less poverty than the UK, such as Sweden (G/GDP = 49.6% in 2015), but there are also examples of European countries with high spending and lots of poverty, such as Italy (50.2%) and Greece (53.8%). So high government spending is no cure-all.

It’s not obvious why a country devoting 41.1% of its GDP to government spending is not able to provide basic government services and a safety net for the poor. Does the NYT produce similar pieces for the other 4 countries listed above, with similar G/GDP ratios as the UK? I’ve never seen such articles.

Admittedly, cross sectional data is not the complete story. Perhaps the UK differs in some fundamental way from Canada, and requires much higher government spending. So let’s look at time series data:

Britain’s G/GDP ratio:

2000: about 35%

2010: 47.8%

2017: 41.1%

The NYT might claim the recent decline in the G/GDP ratio shows that Britain is engaging in austerity. But this ignores the cyclicality of government spending. During a deep slump like the Great Recession, GDP falls and government spending on automatic stabilizers rises sharply. In addition, the Labour government did substantial discretionary fiscal stimulus, which pushed the G/GDP ratio up to an unusually high peak in 2010. No one expected spending to stay at those levels; indeed even the Labour Party promised a significant reduction, had they won the 2010 election.

Right now, the UK has very low unemployment (4.2%), and thus fiscal stimulus is not needed. Indeed in some respects they are doing even better than the US, because unlike in the US, British labor force participation is quite high:

Notice how the ratio has recently soared far above levels of 2000-07, a period when the UK was widely viewed as doing quite well. There is no current need for fiscal stimulus. (In addition, the UK is not at the zero bound.)

Now consider the big rise in the G/GDP ratio from 2000. At the time, the Labour government of Tony Blair had been in power for 3 years and was extremely popular. It was a period where the UK was widely viewed as doing well (remember “cool Britannia”?) And yet at the time government spending was only about 35% of GDP, and had been falling.

The increase in the ratio from 2000 to 2018 was not due to the business cycle; as we’ve seen the UK job market is very strong, according to virtually any measure. Rather it is a secular increase, reflecting a decision by various UK governments to expand the size of the state. It’s hard to overstate the size of that increase—an extra 6% of GDP is HUGE. It’s nearly three times the UK defense budget, or almost twice the US defense budget. And yet despite that massive growth in government, and despite the fact that British spending is comparable to many other developed countries that are doing just fine (and which also face the challenge of growing numbers of retirees), the NYT presents the UK as a sort of dystopia, created by severe “austerity”.

I have an alternative explanation. Progressivism leads to a virtually infinite number of “unmet needs” Patch one hole (say health care) and lots more will pop up, such child care, or free college education. Patch those holes, and still more unmet needs will pop up, such as housing and high speed rail. Combine that with the inefficiency of big government, as well as all the problems identified by public choice models (i.e. special interest groups), and you have a recipe for continual disappointment.

Each time I visit France my first reaction is; “Where the heck did all these homeless people come from?” Doesn’t the French government spend 57% of GDP? Yes they do, and yet somehow Paris has homeless people all over the place. Maybe they need to spend 67%. Or 77%.

PS. Italy’s spending over 50% of GDP. How’s that Western European welfare state working out?

PPS. Those who believe that economic performance reflects “culture” should expect Italy to do better than America. After all, the poorest performing major group in Italy (southern Italians) are an above average success story in the context of America’s ethnic mix. That data point presents problems for conservative cultural determinists, but also for any progressives who want to brush off Italy’s failures by pointing to the dysfunctional culture of the “Mezzogiorno”.