The economic framework for austerity is getting even weaker

[Doc Savage Fan]

Why is that impossible to tell and why is that not incredibly important? Your 'healthy trajectory' has them reaching their pre-crisis GDP by somewhere around 2018. Yes, a decade later. As a counter-example the US has already exceeded its pre-crisis GDP.

I didn't say it wasn't incredibly important...I said it's impossible to tell how much of their negative GDP growth was the direct result of austerity measures vs other factors. If you have info regarding this, I would like to see it please.

Additionally, part of their severe recession came from a super high current account deficit... which has started to return. (ie: your optimism going forward may be very misplaced) This devaluation helped them export their way to recovery. Not only can every country not do that simultaneously for obvious logical reasons, but their growth is now slowing back down due to this. 2018 might be optimistic.

Yes, their external debt was very high (graph previously posted) and perhaps much of that was account current...I don't know. The good news is that their external debt as a percent of GDP has dramatically improved over the past 5 years. If you have account current info on current debt, please post as I would appreciate seeing.

Taking more than a decade to get back to your pre-crisis GDP while still having an unemployment rate around 11% even while massive emigration of jobless people fleeing your country are artificially reducing your working population is a success?

Again, if that's success I'm terrified of what failure might be.

So you want to compare the US economy to Latvia's as being equivalent as if it's somehow a valid comparison to prove your point? Perhaps you can think of a small country similar to Latvia that used deficit spending to spend their way to prosperity. Just one...that's all I ask.

Anyway, the US had negative GDP growth 4th quarter 2012 and a similar negative growth quarter will officially qualify the US entry into a double-dip recession. I understand that Germany is projected to be in double-dip recession by September. So, if you want to aggregate GDP growth numbers, you need to wait a few more years to see how this all plays out.

As a side note...I'm very interested to see how Japan's new strategy will play out. It will likely take many, many years in order to get a good perspective of the long-term effectiveness of such a strategy.

 

[fskimospy]

http://www.bloomberg.com/news/2013-04-17/fed-says-moderate-growth-across-u-s-was-led-by-housing.html

So when is austerity going to start hurting the economy?

Right about now, sadly. We will see how badly it is hurting the economy over the next 2-3 months.

I really did enjoy you quoting an article talking about how badly the jobs market was doing to try and argue that the jobs market was doing well earlier, though. Stupidity like that brings a smile to my face.

 

[fskimospy]

I didn't say it wasn't incredibly important...I said it's impossible to tell how much of their negative GDP growth was the direct result of austerity measures vs other factors. If you have info regarding this, I would like to see it please.

The biggest part was the sudden stop of massive investment inflows that they didn't make up for with fiscal stimulus. Their account deficit was more than 20% of GDP in the years prior. They could have left the Euro and devalued like Iceland, but instead they chose grinding austerity.

Yes, their external debt was very high (graph previously posted) and perhaps much of that was account current...I don't know. The good news is that their external debt as a percent of GDP has dramatically improved over the past 5 years. If you have account current info on cerrent debt, please post as I would appreciate seeing.

here's Latvia's current account deficit. Positive very briefly, going back down.

So you want to compare the US economy to Latvia's as being somehow equivalent as if it's a valid comparison to prove your point? Perhaps you can think of a small country similar to Latvia that used deficit spending to spend their way to prosperity. Just one...that's all I ask.

So are you saying that only small countries can successfully utilize austerity? If so, why advocate it for the US? If not, can you point to a successful implementation of austerity in this financial crisis in a large, developed economy?

As for small countries doing it, which ones do you suggest we look at? Nearly every small country powerfully affected by this economic crisis is in the Euro zone, which precludes the ability to use fiscal stimulus. Iceland did much better than Latvia, but they did so through a huge currency devaluation, something Latvia can't do.

Anyway, the US had negative GDP growth 4th quarter 2012 and a similar negative growth quarter will officially qualify the US entry into a double-dip recession. I understand that Germany is projected to be in double-dip recession by September. So, if you want to aggregate GDP growth numbers, you need to wait a few more years to see how this all plays out.

As a side note...I'm very interested to see how Japan's new strategy will play out...however it will likely take many, many years in order to get a good perspective of the long-term effectiveness of such a strategy.

Actually US GDP growth was revised up to a small gain so that's inaccurate. Interestingly, the low GDP growth number was due to the effects of... you guessed it... austerity.

 

[Doc Savage Fan]

Right about now, sadly. We will see how badly it is hurting the economy over the next 2-3 months.

...along with the adverse impact of all the recent tax increases which will significantly impact our economy moving forward. But I imagine this "little detail" is completely lost on those who rally against "austerity". Stupidity like that doesn't bring a smile to my face...it's just plain sad that some can be so blind to such blatant hypocrisy.

 

[fskimospy]

...along with the adverse impact of all the recent tax increases which will significantly impact our economy moving forward. But I imagine this "little detail" is completely lost on those who rally against "austerity". Stupidity like that doesn't bring a smile to my face...it's just plain sad that some can be so blind to such blatant hypocrisy.

Who do you think that little detail is lost on, specifically?

 

[fskimospy]

Also, when looking at who thinks austerity is only about spending levels let me ask my good friend Doc Savage Fan circa January 2013:

Let's put this in context. Here's the "austerity" that didn't work.

Austerity isn't the problem...it's out-of-control debt that's caused the problem.

Progressives are very good at twisting words to suit their agenda. Countries spending their way to prosperity is blatant delusion when they're already up to their ears in debt. But for some strange reason nobody will give them the money to spend their way to prosperity...how odd is that?

Be careful what you say about people who don't take taxes into account, as you're talking about yourself.

 

[Doc Savage Fan]

The biggest part was the sudden stop of massive investment inflows that they didn't make up for with fiscal stimulus. Their account deficit was more than 20% of GDP in the years prior. They could have left the Euro and devalued like Iceland, but instead they chose grinding austerity.

Yes, their external debt was very high (graph previously posted) and perhaps much of that was account current...I don't know. The good news is that their external debt as a percent of GDP has dramatically improved over the past 5 years. If you have account current info on cerrent debt, please post as I would appreciate seeing.

here's Latvia's current account deficit. Positive very briefly, going back down.

Not bad compared to this. I really don't see your concern...they're nowhere close to pre-crisis levels.

So are you saying that only small countries can successfully utilize austerity? If so, why advocate it for the US? If not, can you point to a successful implementation of austerity in this financial crisis in a large, developed economy?

As for small countries doing it, which ones do you suggest we look at? Nearly every small country powerfully affected by this economic crisis is in the Euro zone, which precludes the ability to use fiscal stimulus. Iceland did much better than Latvia, but they did so through a huge currency devaluation, something Latvia can't do.

I'm looking for any reasonable example of stimulus spending resulting in sustained GDP growth for a small country.

Actually US GDP growth was revised up to a small gain so that's inaccurate. Interestingly, the low GDP growth number was due to the effects of... you guessed it... austerity.

Which austerity measure are you referring to that caused the horrid 4th quarter GDP results?

 

[fskimospy]

Not bad compared to this. I really don't see your concern...they're nowhere close to pre-crisis levels.

They are trending back down after a small positive account balance. They need a lot more relative devaluation to stay competitive and they are losing it.

I'm looking for any reasonable example of stimulus spending resulting in sustained GDP growth for a small country.

Like I just said, in this crisis I'm not aware of what could be used as a counter example. This crisis is very different than most, so historical examples are poor. I assume that means you have no examples of successful austerity in large economies during this time.

Which austerity measure are you referring to that caused the horrid 4th quarter GDP results?

US military spending dropped close to 25% in that quarter in preparation for budget cuts.

 

[Doc Savage Fan]

Also, when looking at who thinks austerity is only about spending levels let me ask my good friend Doc Savage Fan circa January 2013:

Be careful what you say about people who don't take taxes into account, as you're talking about yourself.

Context is everything. However, I'm flattered that you made an effort to search for a post you could distort in such a dishonest manner. Your effort helps me place our "discussion" back into true perspective.

 

[Doc Savage Fan]

Who do you think that little detail is lost on, specifically?

You know better...but most don't.

 

[Doc Savage Fan]

They are trending back down after a small positive account balance. They need a lot more relative devaluation to stay competitive and they are losing it.

Looks pretty stable to me...and much better than the US numbers imo.

Like I just said, in this crisis I'm not aware of what could be used as a counter example. This crisis is very different than most, so historical examples are poor. I assume that means you have no examples of successful austerity in large economies during this time.

Well...I gave several examples where austerity resulted in positive results. If deficit spending is such a great idea to grow an economy...why weren't any of these countries given that opportunity. I'd love to see just one success story where this strategy actually worked for a small country. Is that asking too much?

US military spending dropped close to 25% in that quarter in preparation for budget cuts.

Some say the 13% increase in military spending in the 3rd Quarter just prior to the Presidential election was more than a little suspicious...especially in light of the large 4th quarter drop.

 

[fskimospy]

Context is everything. However, I'm flattered that you made an effort to search for a post you could distort in such a dishonest manner. Your effort helps me place our "discussion" back into true perspective.

No, the context was clear. Don't be too flattered, it took me about 30 seconds.

 

[First]

Anyway, the US had negative GDP growth 4th quarter 2012...

No actually the new numbers showed about a revised 0.1% GDP growth rate, this despite a massive drop in gov't defense spending and the sequester. Easily responsible for 1.5-2% GDP growth itself.

Btw, totally predictable.

 

[First]

Well...I gave several examples where austerity resulted in positive results.

No, if you're honest and/or well-informed, no one particularly important believes Latvia was a success story. Sorry.

If deficit spending is such a great idea to grow an economy...why weren't any of these countries given that opportunity. I'd love to see just one success story where this strategy actually worked for a small country. Is that asking too much?

Your notion that a small country has to be given as an example instead of larger economies like the U.S. or Canada is a perplexing request given that there is no good reason to limit yourself only to small countries. Feel free to argue why we should only give small country examples.

Some say the 13% increase in military spending in the 3rd Quarter just prior to the Presidential election was more than a little suspicious...especially in light of the large 4th quarter drop.

lol.

 

[Atreus21]

No one is saying that there is no limit to the amount of debt that a government can pile up, just that the acceptable number is much higher than some think it is.

How high is it?

It's debt, it's just debt we owe to each other. (for the most part) It is not debt of the same nature as individual debt, which is why comparing government and family budgets is a bad idea.

Right, I understand that, but that doesn't explain where the actual money came from. If money borrowed from China isn't part of the public debt, then where does it come from? Is it just printed? Is it from people buying bonds?

The reason I ask is that if it's from people buying bonds, then it's not simply a matter of saying "we owe it to each other". The government has to pay that back to its bondholders, with interest. Doesn't it?

 

[First]

Btw, another great article on R-R study cited in the OP, this time from Josh Barro of Bloomberg:

Because there were only seven countries in the data set that Reinhart and Rogoff used to calculate average GDP growth under high debt conditions, and because they weighted each country’s average growth equally, getting New Zealand wrong by more than 10 percentage points was a very big deal, shaving 1.5 percentage points off their estimate of average growth.

This error seems to negate the main reason that the Reinhart-Rogoff paper got so much attention in the first place, since observers tended to fixate on the growth cliff for high-debt countries, a cliff apparently created solely by this New Zealand-related oversight.

Early this morning, Reinhart and Rogoff put out a more detailed response saying they excluded the pre-1950 New Zealand data because it was newly available at the time they published the paper in 2010 and they had “not yet vetted the comparability and quality” of those data. They take exception to the claim that the omission of the pre-1950 data was “selective.”

Even if Reinhart and Rogoff had a plausible reason for leaving out these data, the huge effect of the exclusion demonstrates the fragility of their method: New Zealand is one of just a handful of rich countries that experienced a debt-to-GDP ratio over 90 percent since World War II, and leaving those years in or out materially changes the conclusion about the average growth rate of such countries.

Damning to say the least.

More:

Unfortunately for Reinhart and Rogoff, the most notable feature of this chart is not the trend. It is how weakly the data fit the trend. Is this a chart that suggests to you that countries seeking to improve real GDP growth should focus on constraining their ratios of public debt to GDP?

The answer to that is no.

 

[fskimospy]

How high is it?

Good question. So far Japan is chugging a long with a debt ratio of around 200% of GDP with no problems.

Right, I understand that, but that doesn't explain where the actual money came from. If money borrowed from China isn't part of the public debt, then where does it come from? Is it just printed? Is it from people buying bonds?

The reason I ask is that if it's from people buying bonds, then it's not simply a matter of saying "we owe it to each other". The government has to pay that back to its bondholders, with interest. Doesn't it?

Right, we have to pay ourselves back with interest. If you lent $100 to your wife and she paid you back $110, did your family become richer or poorer because of either transaction?

 

[Doc Savage Fan]

No, if you're honest and/or well-informed, no one particularly important believes Latvia was a success story. Sorry.

I know that this may surprise you...but some disagree with you. Sorry.

http://www.timesofmalta.com/article...ece-should-learn-from-Latvia-IMF-chief.422997

“It’s important for other crisis-ridden countries to learn from Latvia. The programme there was a success,” IMF chief Christine Lagarde told Swedish daily Svenska Dagbladet.

http://balticexport.com/?article=latvijas-ekonomika

Your notion that a small country has to be given as an example instead of larger economies like the U.S. or Canada is a perplexing request given that there is no good reason to limit yourself only to small countries. Feel free to argue why we should only give small country examples.

I'm not an economist by any stretch of the imagination...but I don't think it's unreasonable to compare strategies on this basis. The world has hundreds of small countries and I find it curious that not one single example can be produced to demonstrate that deficit-spending driven stimulus is superior to an austerity approach.

 

[fskimospy]

Looks pretty stable to me...and much better than the US numbers imo.

Why do the US numbers matter? I don't even know why you included them. A big part of Latvia's problem is that due to large inflows of money their economy became uncompetitive. In countries with their own currency (ie: the US), shifts in the value of currency account for this. Latvia is on the Euro however, so they can't do that. One of the driving forces behind Latvia's relatively poor recovery so far has been an increase in exports. When you start getting capital inflows again, you start losing competitiveness again. See the problem?

Well...I gave several examples where austerity resulted in positive results. If deficit spending is such a great idea to grow an economy...why weren't any of these countries given that opportunity. I'd love to see just one success story where this strategy actually worked for a small country. Is that asking too much?

I'm sorry, I think the countries you mentioned are catastrophic results. Taking a decade to regain pre-crisis GDP, more than 10% unemployment and your population fleeing the country in droves is not a success.

Some say the 13% increase in military spending in the 3rd Quarter just prior to the Presidential election was more than a little suspicious...especially in light of the large 4th quarter drop.

If you are attempting to claim that the DoD manipulated its budget to aid Obama's election just say it. (then provide some evidence) Regardless, you asked what austerity, I provided the information.

 

[First]

I know that this may surprise you...but some disagree with you. Sorry.
http://balticexport.com/?article=latvijas-ekonomika

You posting a reference is a failing grade in any good class I've ever taken or heard of. Try using your own words explaining why.

I'm not an economist by any stretch of the imagination...but I don't think it's unreasonable to compare strategies on this basis.

I know you feel it's reasonable, and I'm just asking why.

The world has hundreds of small countries and I find it curious that not one single example can be produced to demonstrate that deficit-spending driven stimulus is superior to an austerity approach.

I'm sure there are lots of examples, I just don't have the time or inclination to put in the effort for what'll be a losing cause with you (and others), seemingly, based on the excuses I'm hearing here.

 

[Doc Savage Fan]

OK...let's just say the Latvia was a horrible failure and move on. Where are all the success stories for small countries? I would like to understand what they did to solve their economic problems. I don't think this is an unreasonable request.

 

[Pr0d1gy]

OK...let's just say the Latvia was a horrible failure and move on. Where are all the success stories for small countries? I would like to understand what they did to solve their economic problems. I don't think this is an unreasonable request.

No country that operates under the Central Banking/Fed/IMF will ever truly recover.

 

[fskimospy]

OK...let's just say the Latvia was a horrible failure and move on. Where are all the success stories for small countries? I would like to understand what they did to solve their economic problems. I don't think this is an unreasonable request.

As I've said repeatedly, I'm unaware of any analogous small countries. What you are asking for does not exist to the best of my knowledge. This doesn't change the fact that we have quite a few cases of larger countries undertaking stimulative policies to good effect.

 

[Atreus21]

Good question. So far Japan is chugging a long with a debt ratio of around 200% of GDP with no problems.

Could you source that? Wikipedia sez as of June 2011 that it's 45%, unless I'm reading it wrong. The link below is the List of countries by external debt, and I thought that might exclude public debt. But they list the US as having 16 trillion of external debt, which must therefore be figuring in the public debt.

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Right, we have to pay ourselves back with interest. If you lent $100 to your wife and she paid you back $110, did your family become richer or poorer because of either transaction?

I don't see how that's an accurate comparison. A bondholder expecting a return on his investment is not comparable to me expecting my wife to return the money lent to her.

 

[Doc Savage Fan]

As I've said repeatedly, I'm unaware of any analogous small countries. What you are asking for does not exist to the best of my knowledge. This doesn't change the fact that we have quite a few cases of larger countries undertaking stimulative policies to good effect.

I don't see what real choices there are for a small country. Latvia was hit extremely hard by the financial crisis and a huge housing bubble. They had no real alternatives except to borrow money from the IMF. At that point they made a choice to implement spending cuts and tax increases which were a severe hardship on a short-term basis. However, 5 years later, they've paid back the bulk of their IMF loan and now have stable GDP growth in the 3-5% range for the last several years. Their external debt-to-GDP ratio has also improved dramatically. There is no question that this country is still reeling from the crash; however, it now appears that they're through the worst of it and major trends going forward are positive. Here's a portion of an interesting article comparing Latvia to Greece.

http://www.timesofmalta.com/article...ece-should-learn-from-Latvia-IMF-chief.422997

Greece should learn from Latvia – IMF chief

Crisis-ridden Greece and other debt-wracked European countries should learn from Latvia’s successful reform programme, the head of the International Monetary Fund urged in an interview yesterday.

“It’s important for other crisis-ridden countries to learn from Latvia. The programme there was a success,” IMF chief Christine Lagarde told Swedish daily Svenska Dagbladet.

“An important point is that the politicians owned the reform programme. They realised that structural reforms were needed and took a lot of brave decisions,” she said.

“Another lesson is that cutbacks need to be made early on,” she said, noting the risk of reform fatigue if austerity measures are not introduced at once.

Latvia received a €7.5 billion bailout from the IMF in December 2008, after it suffered the world’s deepest recession during the global economic crisis when its economy shrank by a cumulative 25 per cent in 2008-2009.

Coupled with a biting austerity drive, the bailout saw growth return to the ex-Soviet Baltic state of two million last year when it clocked a 5.5 per cent expansion.

You apparently disagree with the approach Latvia chose. What do you think they should have done that would have improved results beyond what was achieved by using an austerity strategy?