Remember 2010, when everyone was arguing about whether governments hit by the Great Recession should be cutting their way back to health?
Here’s a chart that shows the cutters were probably wrong.
The Center for Economic And Policy Research’s Ben Wolcott has calculated the magnitude of countries’ attempts to balance their books through austerity, versus ones that took a less severe approach.
“…If the pain caucus predictions were correct, we would expect to see a strong positive correlation between changes in the structural balance and employment rate,” he writes. “In this worldview, as countries like Greece and Spain cut their budgets in order to qualify for international support, increased confidence in financial markets would return them to full employment quickly.”
That didn’t happen. The X-axis below shows the extent to which countries tried to achieve greater structural (i.e. non-cyclical) fiscal “balance” through spending cuts and tax increases. The Y-axis shows employment. Nearly every country that kept government spending mostly the same, or even increased it, in the throes of the Great Recession now has higher rates of employment four years on.
Those who attempted to convince the market of its fiscal discipline do not.
This image very crisply suggests what Keynesians have been arguing in more nuanced ways for four years, namely that many countries cut fiscal spending too soon, prolonging the negative impacts of the Great Recession for workers.
Wolcott goes no to note how this phenomenon has played out in Japan:
No country has a debt level anywhere near Japan’s which is now approaching 250 per cent of GDP. Nonetheless the country’s new Prime Minister, Shinzo Abe, pushed through a vigorous stimulus program that began to take effect early in 2013. The economy responded as would be predicted by textbook Keynesian economics, growth accelerated, the inflation rate increased modestly, and the employment to population ratio rose by 1.7 percentage points, the equivalent of 4 million new jobs in the United States.
No one is suggesting fiscal discipline is never called for. But this chart shows that it’s a really bad idea to go for it when everything is collapsing.