A short while ago, the esteemed Adam Smith Institute (ASI) produced this chart as part of a post from Sam Bowman:
I criticised the chart in this post on four grounds:
- the figures were not adjusted for inflation
- the figures were shown in Euros, which meant that the UK's spending in 2009 was overstated because of the devaluation of sterling
- the figures were not quoted in relation to the size of the countries' economies
- there was no allowance for cyclicality (automatic increase in government spending as benefits bills increase in economic downturns due to unemployment and wage cuts).
And I produced a lot of charts of my own showing that when the above are taken into account, the conclusions of Sam Bowman's post - that there hadn't yet been any serious spending cuts and there was far worse to come - were only partly justified.
So what did the ASI do? They issued the same chart AGAIN in a different post, by Vuk Vukovic. And he produced from it an even more mistaken analysis.
I pointed this out in a comment on the blog, and to my amusement the ASI then replaced the chart with this one:
Spot the difference? Yes - these are real rather than nominal figures. But the chart is are still in Euros and we don't know if allowance has been made for translation differences for the UK, there is still no attempt to relate the spending figures to economic output (GDP) and it still makes no allowance for cyclical factors. So this chart is no more meaningful than the previous one.
Showing absolute figures without reference to the size of the economy gives a completely misleading impression. To help make my point, here's a silly chart of my own:
This chart shows European government debt absolute figures, irrespective of GDP - in Euros, so no allowance for sterling depreciation. Who exactly has the biggest debt pile? Yup, that's right. Since 2009, Germany. And Greece has the lowest (of these countries, anyway). So if we take absolute figures only, ignoring the size of the economy - which is what the ASI does with their chart - then it should be German debt on which yields are heading for the moon. It should be Germany facing default and exit from the Eurozone. It should be Germany facing sanctions and fines. Shouldn't it?
But when you plot European debt in relation to GDP - as it is usually shown - the picture changes completely:
Germany's debt pile looks - er, quite large, at 82% of GDP, which is well above the Maastricht convergence criteria. In fact it looks about the same as France's and the UK's. Spain's debt/GDP is actually lower at the moment, though I reckon that will change radically when it is forced to bail out its banks and its regions, as will happen pretty soon. But Germany's debt certainly isn't the largest in the Eurozone when you compare it to GDP. That honour, surprise surprise, belongs to Greece.
In fact the debt to GDP chart is no more sensible than the absolute debt chart. Debt is accumulated deficits over years, whereas GDP is an annual figure; it could therefore be argued that quoting government debt in relation to GDP compares apples and oranges. It certainly tells you absolutely nothing about the ability of the assets of the country to support that level of debt - which is the country's solvency. What would arguably be better would be to map the COST of debt - interest payments and refinancing - in a given year against GDP. That at least would give some idea of the ability of the economy to service the debt. However, I digress.
To be fair to the ASI, their chart does show that governments in Europe generally are increasing their spending rather than reducing it - which is the point they were making. But it isn't that simple. My final objection to their graph is that it takes no account of cyclical factors. All of the countries in the ASI's graph are in recession at the moment: Greece's recession is the worst in recorded history. When people are losing their jobs and experiencing wage cuts - which is what happens in recessions - the benefits bill automatically increases, so Government spending increases as the economy contracts. So there may be real cuts in government spending in other areas, but the effect of these on the total Government spending bill may be wiped out by the automatic increase.
Attempting to reduce the benefits bill is completely counterproductive. Benefits soften the impact of unemployment and wage cuts, but they do not fully replace the lost income - nor should they, or there would be no incentive for people to seek work. People therefore suffer reduction in their real incomes, and that causes a real demand decrease in the economy despite the automatic increase in government spending. Without those benefits the demand reduction would be far greater. Therefore cyclical increase in government spending does not constitute economic stimulus in the sense of actively trying to create growth, whatever Vukovic may think. All it does is prevent demand falling off a cliff.
Vukovic argues that "entitlements" - which would include unemployment and in-work benefits - should be cut to "reduce dependency on the state". He suggests that the private sector cannot expand because the public sector is crowding it out. But unemployment in Spain is at 25% and youth unemployment is at an all-time high across Europe. There is clearly spare capacity - lots of it. It is NOT POSSIBLE for the public sector to be crowding out the private sector at the moment. What is actually happening is that the private sector is retrenching - it is hoarding cash, paying off debt and waiting for better times. There is no evidence that the private sector in any of these countries is yet ready to provide the jobs and wages that are needed to enable the benefits bill to reduce naturally. Cutting benefits would therefore cause real deprivation. It is a simply appalling idea that shows a comprehensive lack of understanding both of the situation in Europe and, frankly, of basic economics.
Edward Harrison produced a post earlier today in which he bewailed the fact that people don't seem to understand national accounting. Vukovic's post demonstrates this in spades. Government spending cuts DON'T "allow the private sector to expand" when the economy is operating at less than full capacity. Unless they are matched by equivalent tax cuts they force the private sector to bear more cost, which reduces its ability to save and to invest.
I am certainly not arguing for out-of-control government spending such as that demonstrated by Greece in the years prior to the financial crisis. Nor am I suggesting that structural reforms are not needed in many of these countries. But trying to cut the absolute amount of government spending in a recession will make the recession even worse, and attempting to reduce or dismantle unemployment and in-work benefits (automatic stabilisers) will cause real suffering. Even the IMF - hardly a supporter of profligate government spending - is now suggesting that the pace of fiscal consolidation should be gentler and automatic stabilisers should be allowed to do their job.
The ASI might as well have titled Vukovic's post "How to have an even longer and deeper recession in Europe". Because that's what he is proposing.