Last weekend I watched a video clip in which Veronique de Rugy explained that “economists” define austerity as a combination of spending cuts and tax increases that reduces a country’s budget deficit. This definition is interesting. The commonly understood definition by most people is probably a lot closer to the first sentence in the Wikipedia definition for austerity.

In economics, austerity refers to a policy of deficit-cutting by lowering spending often via a reduction in the amount of benefits and public services provided.^[1] Austerity policies are often used by governments to try to reduce their deficit spending^[2] and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.^[3]

The problem I have is the phrase, “sometimes coupled with tax increases”, in the second sentence. This definition implies that tax cuts are a minor part of an austerity program. Since Veronique is a senior research fellow at the Mercatus Center at George Mason University and Wikipedia agree that tax increases are part of the austerity definition I am puzzled why Wikipedia did not include references to support the tax increase part of their definition. This minor part of the definition seems to be playing a bigger than anticipated part in several “austerity” programs. This ambiguity was not lost on Veronique. In her National Review article, There’s Austerity and Then There’s Austerity, she said that “Austerity means different things to different people.” She went on to say that if a country’s goal is to reduce their debt then the successful plan most likely will consist “of spending cuts rather than a mix of spending cuts and tax increase”. She appears to be consenting to including tax increases as part of an “austerity” program as long as you recognize that the research says these programs typically do not work. In another article, Fiscal Austerity in Europe Doesn’t Mean Large Spending Cuts, she pointed out that European countries do not seem to have cut spending as part of their “austerity” programs. It is at this point I started wondering whether the European “austerity” programs would be more accurately described as “business as usual but with more taxes”. We know that the common man’s definition of austerity consists primarily of cutting spending. We also know that although economists recognize that some austerity plans in the past contained a balanced mix of spending cuts and tax increases but those plans typically did not work.  So why does our government and media seem willing to stretch the definition of “austerity” to include these balanced mix programs when it is unlikely this inclusion will be successful at reducing the budget deficit or beneficial to the general population? At what point do we clean up our language and start calling programs that consist primarily of spending cuts as “austerity” programs and those programs that consist of a mix of spending cuts and tax increases as something else? In What Successful Fiscal Adjustments Look Like the “typical successful fiscal consolidation consisted of 85 percent spending cuts”.  I propose that any “austerity” program that has less than 85 percent spending cuts be called something else. Maybe we should call the balanced approach like they are using in Europe, Krugman spending cuts. Heh, Heh.

Here is a percentage chart I did of Non-Farm Payroll Job Growth since 2010 using FRED data. This is seasonally adjusted data they get from the BLS. The idea of this chart is to see the job creation performance in Ohio, Wisconsin, Illinois, and Indiana compared to the US. Ohio and Indiana led the pack although all of these states had percentage increases less than the percentage increase for the US.

Here are the two highlights from this post, A Tale of Two States, or: If They’re Going to Recall Walker, What’ll They Do to Brown?.

SACRAMENTO, Calif. (AP) ”” California’s budget deficit has swelled to a projected $16 billion ”” much larger than had been predicted just months ago ”” and will force severe cuts to schools and public safety if voters fail to approve tax increases in November, Gov. Jerry Brown said Saturday.

Gov. Scott Walker’s administration released improved budget projections Thursday that would leave [Wisconsin] with a $154.5 million surplus a year from now.

The problem for the United States is that California is 13.09% of the economy in 2010 according to http://www.usgovernmentrevenue.com/ versus 1.71% for Wisconsin. If we look at the historical trend using a date from before the real estate collapse(2007), we get a cumulative growth of 1.40% for California versus 3.55% for all of the states combined. If 2008 was the peak of the real estate boom then it is easy to conclude that California has been stagnating for some time and we have flawed decision making that transcends the real estate bubble. Since I doubt a recovery in real estate construction will help California’s economy any time soon, they are being hit with the double whammy, real estate bubble and self inflicted wounds from bad decision making. When your plans for growing the economy fail, the only plan left is hoping that austerity measures will keep enough of your tax base around until the economy recovers. Pitting teachers, police, and social welfare programs against each other in a budget battle is never pretty. It should be interesting to see how voters respond in Wisconsin with the recall vote and in California with the tax raising referendums. Does running a balanced budget matter to voters?

Veronique de Rugy started the uproar when she wrote this article, Fiscal Austerity in Europe Doesn’t Mean Large Spending Cuts. The graph everyone is linking to is:

This article evidently rubbed the folks at The Economist the wrong way and they piped in with this analysis.

Progress through last year is quite striking, given that the crisis only began in earnest in 2010. It has occurred despite truly pitiful growth (and ongoing recession in Greece). And there is more to come.

But what of the complaint that this is all due to tax increases, which don’t count, for some reason? That, too, is mistaken:

Read more: http://www.businessinsider.com/economist.online.21554444.xml#ixzz1uTxwRJfl

For a person who has looked at a lot of graphs and tables in my life, the Economist analysis and graph is odd. I am not sure what these stacked bars, percentages, and projected expenses are supposed to tell me about austerity. Is that the total change in government spending since 2009? What does 2011-2013 projected spending have to do with spending over the last two years? So I downloaded the OECD data, reproduced Ms. de Rugy’s charts, and noticed this tidbit. If 2009 is the baseline then the Economist chart for Germany must be wrong. The OECD government final consumption data for Germany was $591.4 billion in 2009 and $630.1 billion in 2011 at current prices and current PPPs. Obviously this means that Germany increased their spending rather than reduced it. A similar argument can be made for France. Although the 2011 data was not available for France, it is unlikely France’s 2011 data will be below their 2009 number.

If we can agree that the OECD government final consumption data is a valid measure of austerity since it measures government spending and incorporates changes in purchasing power, then we can conclude that austerity is probably occurring in all of the countries in the graph except Germany and France.  The overall level of reduced spending in these “austerity”countries(excluding Greece) is less than -3%. It is interesting to note that only Greece and Ireland are spending less than they did 2008 while most of the countries are well above their 2008 levels. Austerity seems to be defined as slightly less spending than you spent in 2009 but higher than what you spent in 2008. Since most of the countries listed in the chart are spending at 2008 levels or higher, I agree with Ms. de Rugy that the European austerity except for Greece has not meant large spending cuts. Austerity has not occurred in Germany and France and has been pretty mild in the rest of the “austerity” countries.