A Lesson for Krugman, et al, about Canada’s Real Fiscal Restraint vs. the United Kingdom’s Faux Austerity

Demonstrating that he’s probably not a fan of Mitchell’s Golden Rule, Paul Krugman recently asserted that fiscal austerity has failed in the United Kingdom.

Citing Keynesian theory and weak economics numbers, he warned about “the austerity doctrine that has dominated elite policy discussion” and says that the British government made a mistake when it decided to “slash spending.”

In support of the New York Times columnist, another blogger commented on the “sharp retrenchment in public spending” in the U.K. And a Bloomberg editorial also supported Krugman’s position, stating that recent events “undermine the conservative idea that slashing government spending will somehow bring about a confidence-driven economic boom.”

There’s only one small, itsy-bitsy, teeny-weeny problem with all of these statements. They’re based on a falsehood. Government spending in the United Kingdom has not been slashed. It hasn’t been retrenched. It hasn’t even been cut.

I first made this point back in 2010. And I also noted that year that the supposedly conservative Chancellor of the Exchequer advocated a big increase in the value-added tax was good since it would generate “13 billion pounds we don’t have to find from extra spending cuts.”

I then repeated myself last year, pointing out once again that government spending was expanding rather than shrinking.

To be fair, spending hasn’t been growing as fast in the past couple of years as it did last decade. According to European Union data, government spending in the United Kingdom grew by an average of 7.6 percent each year between 2000-2008, so the recent annual increases of 2 percent-4 percent may seem frugal by comparison.

But at the risk of stating the obvious, slower spending increases are not budget cuts. Unless, of course, proponents of big government decide to use the dishonest political definition that spending is cut when the budget doesn’t increase as fast as previously planned. But if that’s the case, then they are turning Keynesian economics into a political gimmick.

Not only haven’t there been any spending cuts in recent years, but it also appears that there won’t be any in future years. The Centre for Policy Studies just put out a report comparing “austerity” in the United Kingdom today with the fiscal discipline that took place in Canada during the 1990s.

As seen in the table, and as I noted in a previous post, Canada actually reduced spending.

In the United Kingdom, by contrast, spending has been climbing. And that’s projected to happen even in future years.

To be sure, spending in the U.K. won’t grow very fast (assuming the government sticks to its plans, which may be an unrealistic assumption).

But spending that grows slowly is not austerity or retrenchment.

Which is unfortunate, because that’s precisely what is needed in the United Kingdom. And the Canadian experience shows how genuine fiscal restraint generates big benefits.

Let’s also look at some more information from the CPS report.

The Canada of 1994 in many ways resembled the Greece of today. …Spending was to fall 8.8% over two years. Large cuts in transportation, industry, regional development, and scientific support were made. The size of the federal government was to decline from 16.2% of GDP in 1994 to 13.1% in 1996. Public-sector employment was to fall by 14%. The new discipline paid off quickly. Federal government spending as a share of the economy fell more rapidly than planned. Provincial government spending also decreased significantly from 25% of GDP to 20%. …Ottawa offered a historic deal to the provincial governments: unprecedented freedom to make their own welfare policies. This was localism in action – and it unleashed a wave of fruitful experimentation and innovation in the provinces, while spending was cut at the national level. The results were stunning. Large numbers of Canadians, previously trapped in poorly designed benefit programmes, returned to the workforce. By 2000, the number of welfare beneficiaries in Canada had declined by more than a million people, from 10.7% in 1994 of the population to 5.1% in 2009. …Cuts  ranged  from  5%  to 65% of departmental budgets and included cuts to health budgets. In the end, programme spending (everything except interest payments on the debt) fell by 9.7% in nominal terms (or C$11.9 billion) between 1994-95 and 1996-97.

So what were the results of this fiscal discipline? Let’s go back to the report.

Fast-forward again to 2007, and Canada seemed to be back on track. The country’s economy grew at an average rate of 3.3% between 1997 and 2007, the highest average growth among the G-7 countries, including the US. Canada’s job-creation record was nothing short of stellar. From 1997 to 2007, Canada’s average employment growth was 2.1%, doubling that of the US and exceeding employment growth in all other G-7 countries. Perhaps most importantly for future economic prosperity, during the same period Canada outperformed the G-7 average almost every year on business investment. …Canada weathered the recent recession  better than its G-7 partners. … None of Canada’s major financial institutions had to be bailed out

And this also was a period of tax cuts.

…coupled with stronger economic performance than expected, meant Ottawa could then cut taxes, including personal and corporate income taxes, capital gains taxes, and the corporate capital tax. In this period:

• Corporate Income Tax (federal) was reduced from 28% to 21% with further cuts planned;
• Capital Gains Tax were reduced to 14.5%;
• Personal Income Tax rates were finally indexed to inflation;
• Federal capital taxes were abolished.

It certainly seems that genuine fiscal restraint worked in Canada.

To be fair, though, Krugman isn’t arguing against small government in his column. He’s arguing for short-run Keynesian stimulus policy. And it’s possible to be in favor of more spending in the short run and smaller government in the long run.

Moreover, I’m not arguing that genuine spending cuts are immediately expansionary, as some research has indicated. I’m sure that happens in some cases, but it’s not a hard and fast rule.

And I imagine that there are cases where the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.

My argument is that the short-term impact of spending restraint – whether positive or negative – is trivial compared to the long-run benefits of better fiscal policy. A small public sector means labor and capital get used more productively, and it presumably also allows a less punitive tax system.

This video has more information about Canada’s fiscal policy success, along with data about similar episodes of genuine austerity (properly defined) in Ireland, Slovakia, and New Zealand.

Even the United States has enjoyed periods of semi-impressive fiscal discipline, most notably during the Reagan and Clinton years. Unfortunately, the modest progress achieved during those periods has been wiped out by the profligacy of the Bush-Obama years.

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More Wonderfully Vicious One-Liners from the Late-Night Talk Shows

In recent weeks, I’ve shared several clever jokes making fun of noble and wonderful people such as myself (i.e., libertarians).

Let’s now have some fun by mocking despicable and loathsome people (i.e., politicians).

There are several good jabs at Gingrich below, but the first two Leno one-liners against Obama are very effective and funny.

Jay Leno:

• President Obama spoke at the National Prayer Breakfast. The president said that his Christian faith is the driving force behind his economic policies. So I guess instead of blaming Bush, it’s now all Jesus’ fault.
• A hiker who was lost in a blizzard said he stayed alive by digging a snow tunnel and burning dollar bills for warmth. Today he was offered a job as President Obama’s economic adviser.
• Obama said that he says a brief prayer every morning, but then Joe Biden shows up anyway. So I don’t know if it would really work.
• The House of Representatives has passed a bill that prohibits people from using welfare money in strip clubs or liquor stores. I agree with that. Strip clubs and liquor stores should be off limits for people who get government funds — you know, like congressmen.
• You know a really sad thing about Valentine’s Day? Some people can’t have the person they really love, so they settle for someone else. But enough about the Republicans and Mitt Romney.
• New Jersey has passed a bill legalizing gay marriage. Now comes the hard part — finding gay couples who want to actually live in New Jersey.
• Congratulations to Mitt Romney. He got an honorary Grammy for best spoken word for being able to speak out of both sides of his mouth at the same time.
• Things are not looking good for Romney. His popularity has really dropped. Right now he’s running behind Syrian President Assad.
• Mitt Romney said he is not concerned with the very poor. That statement worked out well for Marie Antoinette, didn’t it?
• Romney knows how President Obama thinks. Because when he was governor of Massachusetts, he thought the exact same way.
• Ron Paul was not in Florida, he was campaigning up in Maine. They think he was afraid that if he went to Florida, they’d grab him and put him in an old folks home.
• President Obama was in Disney World today where he unveiled his new plan to create jobs. He was joined by Mickey Mouse and Minnie Mouse but not Goofy. He had to stay behind to tend to his vice presidential duties.

David Letterman:

• Kim Jong Il would have been 70 years old today if he hadn’t died a couple of months ago. But don’t worry. Osama bin Laden threw him a surprise party in hell. (not political, but this is such a nice thought that I wanted to share)
• Mitt Romney is sinking in the polls. That is the magic of a Donald Trump endorsement right there.
• Newt Gingrich is against same-sex marriage. Well, actually, he’s against same-marriage sex.
• Newt Gingrich says that people who ride on subways here in New York are the elite. I was on the subway today and one of the elites sitting next to me was smoking crack.
• Newt Gingrich has criticized “New York elites” who ride the subway. One of those subway elites threw up on my pants this morning.
• Mitt Romney is quite a guy. At one point he and his wife bought a zoo and fired all the animals.

Jimmy Kimmel:

• President Obama’s approval rating is up to 50 percent. Only half the country dislikes him. Apparently his strategy of not being any of the Republican candidates is paying off.
• Part of me thinks that Rick Santorum is running for president just to show his high school crush she should have gone to the prom with him.
• Newt Gingrich didn’t bother to campaign in Colorado, Missouri, and Minnesota. But he’s vowed to stay in the race until the Republican convention. However, Newt doesn’t have a great track record as far as sticking to his vows go.
• During a debate, Mitt Romney said he grew up in the real streets of America. Yes, the real streets, where people pull up next to you and ask if you have any Grey Poupon.
• Gingrich is lining up impressive endorsements. Todd Palin, Gary Busey, and now, Chuck Norris. I’ll tell you, his endorsements could beat up Mitt Romney’s endorsements.

Conan:

• Yesterday Newt Gingrich, Rick Santorum, and Mitt Romney all said that if elected president they would eliminate porn. In a related story, President Obama has already been re-elected.
• Mitt Romney went to a McDonald’s and ordered burgers and fries and apparently everything was going well until Romney asked the cashier if she could break a $1 million bill.
• Snoop Dogg endorsed Ron Paul for president. Snoop said he likes Paul’s positions on everything from legalizing pot to legalizing pot.

Jimmy Fallon:

• Rick Santorum said women might not be suited for military action because their emotions aren’t suited for combat. Which can mean only one thing: He’s never seen an episode of “The View.”
• Because of large crowds at his campaign events, Mitt Romney will now receive protection from the Secret Service. Not to be outdone, Ron Paul will now receive protection from a mall cop on a Segway.
• President Obama took Michelle out to a steak restaurant for her birthday, marking the first time in months the words “Obama” and “well done” appeared in the same sentence.

Craig Ferguson:

• In Manhattan, the New York Giants had their own ticker tape parade. They don’t use much ticker tape on Wall Street anymore. Stock brokers just toss government bailout money from the windows.
• Rick Santorum says Newt Gingrich is too hot, Mitt Romney is too cold, but he’s the “Goldilocks candidate.” Yes, nothing gets voters excited like comparing yourself to tepid porridge.

And to preempt a bunch of emails from people who are too lazy to use the search function, you can read previous posts with similar jokes from the late-night talk shows by clicking here, here, here, here, here, here, here, here, here, and here.

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