The New York Times has a long article on the cost of British “austerity”, which begins as follows:
PRESCOT, England — A walk through this modest town in the northwest of England amounts to a tour of the casualties of Britain’s age of austerity.
The old library building has been sold and refashioned into a glass-fronted luxury home. The leisure center has been razed, eliminating the public swimming pool. The local museum has receded into town history. The police station has been shuttered.
The article is full of similar examples. I read the entire piece, but was not able to find any evidence that the UK’s problems were caused by “austerity”. So I decided to see if I could find such evidence. Let’s start with cross sectional evidence, and then switch to time series. Here are the ratios of government spending to GDP in some major economies:
Germany: 43.9% (2017)
Britain: 41.1% (2017)
Canada: 40.8% (2017)
Australia: 36.2% (2015)
Switzerland 34.0% (2015)
So the UK is a fairly normal developed economy. In case you think I cherry-picked the data, this graph shows the UK is pretty normal:
It’s true that there are many examples of European countries with larger welfare states, and less poverty than the UK, such as Sweden (G/GDP = 49.6% in 2015), but there are also examples of European countries with high spending and lots of poverty, such as Italy (50.2%) and Greece (53.8%). So high government spending is no cure-all.
It’s not obvious why a country devoting 41.1% of its GDP to government spending is not able to provide basic government services and a safety net for the poor. Does the NYT produce similar pieces for the other 4 countries listed above, with similar G/GDP ratios as the UK? I’ve never seen such articles.
Admittedly, cross sectional data is not the complete story. Perhaps the UK differs in some fundamental way from Canada, and requires much higher government spending. So let’s look at time series data:
Britain’s G/GDP ratio:
2000: about 35%
2010: 47.8%
2017: 41.1%
The NYT might claim the recent decline in the G/GDP ratio shows that Britain is engaging in austerity. But this ignores the cyclicality of government spending. During a deep slump like the Great Recession, GDP falls and government spending on automatic stabilizers rises sharply. In addition, the Labour government did substantial discretionary fiscal stimulus, which pushed the G/GDP ratio up to an unusually high peak in 2010. No one expected spending to stay at those levels; indeed even the Labour Party promised a significant reduction, had they won the 2010 election.
Right now, the UK has very low unemployment (4.2%), and thus fiscal stimulus is not needed. Indeed in some respects they are doing even better than the US, because unlike in the US, British labor force participation is quite high:
Notice how the ratio has recently soared far above levels of 2000-07, a period when the UK was widely viewed as doing quite well. There is no current need for fiscal stimulus. (In addition, the UK is not at the zero bound.)
Now consider the big rise in the G/GDP ratio from 2000. At the time, the Labour government of Tony Blair had been in power for 3 years and was extremely popular. It was a period where the UK was widely viewed as doing well (remember “cool Britannia”?) And yet at the time government spending was only about 35% of GDP, and had been falling.
The increase in the ratio from 2000 to 2018 was not due to the business cycle; as we’ve seen the UK job market is very strong, according to virtually any measure. Rather it is a secular increase, reflecting a decision by various UK governments to expand the size of the state. It’s hard to overstate the size of that increase—an extra 6% of GDP is HUGE. It’s nearly three times the UK defense budget, or almost twice the US defense budget. And yet despite that massive growth in government, and despite the fact that British spending is comparable to many other developed countries that are doing just fine (and which also face the challenge of growing numbers of retirees), the NYT presents the UK as a sort of dystopia, created by severe “austerity”.
I have an alternative explanation. Progressivism leads to a virtually infinite number of “unmet needs” Patch one hole (say health care) and lots more will pop up, such child care, or free college education. Patch those holes, and still more unmet needs will pop up, such as housing and high speed rail. Combine that with the inefficiency of big government, as well as all the problems identified by public choice models (i.e. special interest groups), and you have a recipe for continual disappointment.
Each time I visit France my first reaction is; “Where the heck did all these homeless people come from?” Doesn’t the French government spend 57% of GDP? Yes they do, and yet somehow Paris has homeless people all over the place. Maybe they need to spend 67%. Or 77%.
PS. Italy’s spending over 50% of GDP. How’s that Western European welfare state working out?
PPS. Those who believe that economic performance reflects “culture” should expect Italy to do better than America. After all, the poorest performing major group in Italy (southern Italians) are an above average success story in the context of America’s ethnic mix. That data point presents problems for conservative cultural determinists, but also for any progressives who want to brush off Italy’s failures by pointing to the dysfunctional culture of the “Mezzogiorno”.
READER COMMENTS
Robin
May 29 2018 at 6:06pm
Whilst the NYT article wasn’t perfect, I think it’s unfair to look at total government spending. As someone who works in local government in the UK, I see the very real cuts that have been levelled at local services – around 33% since 2010, not adjusting for inflation. It is local government that provides many of the public amenities that the article looks at, such as museums, leisure centers, libraries and parks, homelessness services and drug prevention. So these services have seen a genuine cut in funding in the last 8 or so years. I’m less sure how it compares to 2000, but I suspect if you adjust for inflation and especially the increased cost of an ageing population (elderly care comes under local govt), then there is less money going around. This has produced a lot of innovation and dynamism in the sector, but also there have inevitably been reductions in the quality of some services – especially the less vital services like libraries and museums (who can justify spending money on a museum that could be used to help the homeless, or foster children?)
Where has all this money gone? I suspect the ‘cost disease’ of education and healthcare has sucked up a lot. NHS spending goes up, with arguably diminishing returns on healthcare. The total failure of government to effectively allow sufficient housing/building supply has also screwed the government as much as it has many poor and young people, with increased costs for relatively little improvement.
So I think you’re argument holds up when looking at the UK as a whole – we don’t have to be in this situation with the spending we’re making. But the services focused on by the NYT have seen genuine cuts to the amount of money going into them. It’s partly a problem of the UK’s hyper-centralised government, with Westminster hoarding the money and power for itself, whilst it starves local government of funds, or the legal powers to do anything much about it.
Robin
May 29 2018 at 6:27pm
I dove into the data here to explore my previous suggestion for why the costs had risen:
https://www.ukpublicspending.co.uk/breakdown
It seems the greatest rise is in ‘accounting adjustments’, which means nothing to me other than some strange financial wizardry is going on. But it’s risen from about 1.5 to almost 4% of GDP since 2000! The NHS story is partially true, but only slightly – spending has risen from about 5 to 7% of GDP there. These are the main contributors, along with a sizeable growth in pensions.
Dark Hippie
May 29 2018 at 6:39pm
A good argument, more government spending isn’t a panacea for social problems. However the UK suffers from very poor productivity (and wage growth) so the recover is weak.
Maybe this is off topic but have you any thoughts on Richard Jones’s case for a government industrial strategy?
http://issues.org/34-2/the-second-coming-of-uk-industrial-strategy/
He thinks government policy can be used to increase productivity as UK companies don’t seem to be increasing it on there own
Mark Z
May 29 2018 at 7:19pm
None of the things the NYT mentions as ‘costs’ (in the paragraph quoted) are actually bad things, unless one starts from the assumption that everyone should work for the government and any decline in a government activity is inherently bad. Otherwise, the closing of a library or police station and opening of an apartment building is fine.
On the topic of ‘cultural determinism’, I think a point worth mentioning is that there was a great deal of self-selection in who chose to move to the US vs. staying in the Mezzogiorno. Additionally, many (according to some estimates from 30-50%) who came here ultimately returned. The ones who stayed were likely disproportionately those better able to assimilate and find work.
Ben
May 30 2018 at 3:45am
The UK government has done a few things that have lead to this austerity hitting the poorest the hardest:
1) awarded pensioners with boatloads of new money
2) seen very poor economic growth since 2008
3) cut welfare and local government spending far, far more than any other area
AT
May 30 2018 at 4:17am
There’s a reason why the old police station’s been shuttered:
https://prescotonline.co.uk/index.php/2018/01/31/new-prescot-police-fire-station-now-open/
“After a 12-month construction project, Prescot Community Fire & Police Station has opened at the junction of Manchester Road and Cables Way. The purpose-built facility replaces the former Prescot Police Station on Derby Street”
Iskander
May 30 2018 at 5:38am
I think robin has a good point here – UK (England at least) is remarkably centralised. This is in part a legacy of the 1980’s when some local councils went a bit crazy (e.g Liverpool). Thatcher had to centralise in order to sort things out.
On the productivity front: how much technological/organizational progress has benefited sectors that the UK specialises in? Construction, finance, retail etc.
S D
May 30 2018 at 5:39am
I looked at the European Commission’s AMECO database, specifically total government expenditure excluding interest as a share of GDP.
This is as good a measure as you will get on what the state is doing in the economy.
I averaged 2003-05 and 2016-18 – this should rule out any crisis related effects.
In the first period the ratio was 38.3%. In the second period it was 38.5%.
There has been ZERO structural change in the size of government vis-a-vis the economy in the UK in this period.
Thaomas
May 30 2018 at 6:31am
Surely “austerity” cannot be a percentage of government spending in GDP. “Austerity” is the public sector investing less in activities that have positive NPV’s, whether for misguided fears of deficits or from a desire to reduce the size of the public sector per se.
Jon Murphy
May 30 2018 at 9:04am
@Thaomas-
I don’t think that definition of austerity really makes sense. Given the incentive structure facing governments, where they do not feel the costs of their actions but can hand out the benefits, just about any government action can consequently be called “austerity.” The Obama stimulus package, if it has a negative NPV, would be classified as austerity. War, which often has a negative NPV, would be considered austerity. Bailouts, government agencies, etc.
If anything, moving into areas with positive NPV would make more sense to be called austerity.
Will C
May 30 2018 at 10:53am
Amazingly, way way down in the article: “Britain spends roughly the same portion of its national income on public spending today as it did a decade ago, said Paul Johnson, director of the Institute for Fiscal Studies.”
Swami
May 30 2018 at 12:47pm
Not sure what to make of the “Mezzogiorno” culture comment.
Googling it reveals that the average Italian makes $53K per cap, vs $53K for average of all European-Americans. I fail to see any above average success.
In addition, we can add the effects of selection of those choosing to come, those choosing to stay, and the problem of what parts and what share of those staying a century have retained any significant “cultural” habits that would impact economic success.
To a great extent, Italian American today reflects a surname and a mother who cooks great food. Culture does matter a lot (as defined by Mokyr, North, Greif, etc). But surnames and pasta, not so much.
Scott Sumner
May 30 2018 at 1:11pm
Robin, You said:
That’s precisely my point. I don’t doubt the specific examples, I just think it’s a mistake to attribute this to “austerity”, aka “total government spending.”
Dark, Keep in mind that fiscal stimulus (if it works) can only address employment, not productivity.
Mark, Perhaps, but I don’t see conservatives making the same point about recent immigrants from Nigeria or the Philippines. (Where I suspect the selection effects are even stronger.)
Ben, What austerity? I think you missed the point of the post.
Iskander, Good point about productivity.
SD, And in 2000 the spending levels were even lower.
Thaomas, You said:
Actually, that’s exactly what it is. I has nothing to do with investment, your preferred definition.
Will, I saw that too. (Buried way down in the article.)
Frank
May 30 2018 at 2:36pm
I thought you have suggested in the past that the inferior economic performance of southern Italy as compared to northern Italy (or of Mediterranean Europe as compared to northwestern Europe) was evidence in favor of a cultural
explanation.
Mark Z
May 30 2018 at 4:57pm
Scott,
The selection effects could also be weaker, since it is comparatively easier to survive in America today unassimilated and without a job than it was in 1900; the gap in standard of living between America and Nigeria or the Philippines today also seems larger than between the US and Italy in 1900, so arguably anyone is more likely to stay in the former case. I could of see it going either way.
Also, I don’t agree with the automatic conflation of emphasis on culture, conservatism, and anti-immigration sentiment. Thomas Sowell emphasizes the importance of culture (some might call him a cultural determinist) in conjunction with the success of various immigrant groups and criticizes nativist affirmative action (Malaysian policies against the Chinese minority, for example).
E. Harding
May 31 2018 at 11:00am
Post was good in its points on peoples’ infinite desires for government spending and their incoherent definitions of “austerity”, but the swipe at culturalist theories of South Italy towards the bottom was not a good joke (and lowered my IQ by about five points just reading it), for reasons I don’t think I need to seriously point out. Make better jokes, next time, Sumner. Like “you just hate roads”.
Thaomas
May 31 2018 at 12:27pm
@ Joh Murphy,
I believe the logic of your argument would be that just about any REFAINING from spending should be “austerity†on my definition because you assume that government would always over estimate the benefits of almost any spending meaning that an NPV test will almost always be positive.
In defense of my criterion for spending, I would say that whatever the bias due to mis-estimation of benefits, it is counter-cyclical calling for more spending and higher deficits when the Fed is keeping interest rates low and there are differences between the marginal cost and market price of inputs into public spending projects and less spending and lower deficits as interest rates rise and unemployment of resources falls.
Do you have a different criterion for when governments should spend money?
@ Scott
I do not see how a percent of GDP can be a sensible definition of austerity. Perhaps changes in the percentage could be argued to be meaningful, but that makes international league tables problematic.
Samuel Taylor
May 31 2018 at 1:49pm
This is a pretty shallow analysis, which goes on to draw totally the wrong conclusion. The ground truth does actually matter! The point about, road maintenace raised in the article, for example, is totally correct. In Manchester the roads are genuinely dangerous to drive in many places, with potholes 15cm deep or more. This was emphatically not the case when I lived there in the mid-2000s. The same decline is easily noticed in the provision of many other public goods (some of the recent policing statistics are quite shocking).
This can be explained by looking at a breakdown of *what* the public finances are being spent on. Over the last decade the proportion going on (inflation indexed) pensions has ballooned, as has the spending on the NHS, what with the aging population. The government is also, for god only knows what reason, injecting billions of pounds annually into the housing market via the help to buy scheme. Education spending has been roughly flat in nominal terms, as has welfare and spending on local government has utterly cratered, leading to many of outcomes described in the article. As someone who actually spends time in areas outside London, I can see with my own eyes much of the evidence of the cuts to local services. Fewer public health workers for the elderly, a much diminished police service which implies (as recently noted by Alex Tabarrok) a concomitant increase in crime.
ChrisA
May 31 2018 at 2:11pm
Very good post Scott. People were originally arguing that “austerity” was going to prevent the economy growing. But it didn’t as you predicted at the time (not only was there no austerity, but even if there had been it wouldn’t have mattered due to monetary offsets). So now to save face they have to argue that it is actually making the UK somehow a horrible place to live instead. Some people have provided some examples of this above, what is interesting is that most of these places are governed by Labour councils, these are basically welfare projects for unions so of course they are badly run, and no amount of money will change that. For some reason the voter in the big former industrial cities of the UK accept this.
Scott Sumner
May 31 2018 at 7:18pm
Frank, I do believe culture is a significant factor, which partly explains the difference between southern and northern Italy. I’d guess immigrants from northern Italy do at least slightly better in America than immigrants from southern Italy. But culture also interacts with the political regime. In southern Italy the regime partly reflects southern Italian culture, less so in America.
My point was that immigrants here do pretty well despite the culture of their home country.
Mark, Yes, but it’s also harder to get here today, so the selection effects might be stronger.
Thoamas, So how do people define austerity? (That is, the pundits that always harp on the issue.) They don’t use your definition, and you can’t beat something with nothing–you need a plausible definition.
Samuel, Everything you say is exactly my point. I’d encourage you to read the post again, as that is exactly what I was saying.
ChrisA, Just to be clear, I’m not arguing that the UK doesn’t have many of the problems pointed to by the critics, just that it has nothing to do with austerity. Spending 41.1% of GDP should be more than adequate to provide good public services. I’m not expert enough to know why they are not being provided, but it obviously isn’t due to “austerity”.
JBL
Jun 1 2018 at 4:20am
I made similar points when I moved to London from Australia a few years ago. But for some reason “austerity” in the UK means to most people “shifts in government spending away from social welfare”. I don’t know why and it sure is confusing.
El Cid
Jun 1 2018 at 6:53pm
Have economists on this blog looked at this issues through the lens of sectoral balances and then charted the implications:
(I – S) + (G – T) + (X – M) = 0
The quote below is attributed to http://bilbo.economicoutlook.net/blog/?p=21389
“Each of the terms on the left-hand side of the equals sign represent the balance between spending (sources) and income (uses) for each sector. The net result of the two flows is the balance flowing in that sector over the period that the national accounts are expressed for.
Equation is therefore called the sectoral balances view of the national accounts.
The sectoral balances derived are:
The private domestic balance (I (Investment)– S Savings)) is positive (deficit) if the private domestic sector is spending more than it is earning; and negative (surplus) if the sector is spending less than it is earning overall.
The Budget Deficit (G (Fiscal spend)– T (Taxes)) is positive (deficit) if the government is spending more than it is taking out of the economy in taxation; and negative (surplus) if the government is not adding as much spending to offset the taxes it is taken out of the economy.
The External balance (X (Exports) – M (Imports)) is positive (surplus) if the nation is generating export income in excess of the spending that is lost to the domestic economy through import spending; and negative (deficit) if the import spending is larger than the flow of income coming in through exports.
This way of expressing the sectoral balances makes it easy to understand that the sum of the balances for each sector must necessarily sum to zero. The sources of income must be exactly equal to the uses. That doesn’t mean that each sector has to be in balance at all times and in the real world that is almost never the case.
What it means is that the surpluses and deficits have to cancel out when we consider the economy as a whole”.
The macroeconomic implication is if a nation with a sovereign currency has a regular external account deficit and the government fiscal spend is, over the years being squeezed to produce a budget surplus (T>G), the private sector (include councils) must reduce its spending (contract) or take on increasing debt (unsustainable) to maintain expenditure. Where the external sector is in regular deficit the money in the private sectors (include councils) pockets/wallet/accounts is the sum of government deficits or government debt.
For more read: http://bilbo.economicoutlook.net/blog/?p=39457
JB
Jun 2 2018 at 7:49am
Just a note: government spending, from the OECD where I think your graph is taken, includes transfer payments, while g as defined in macroeconomics, does not. So if I understand correctly, government spending/gdp can be over 100%, while g/gdp can not. It also meshes more with the fact that 4 out of 10 people do not work for the UK government. Perhaps g/gdp could be an alternative measure of austerity, and apparently spending on pensions have been rising in the UK raising the share of government spending that is not g.
Roger Sweeny
Jun 2 2018 at 10:02am
If I spend most of my income on trips to Las Vegas but live in a one-room apartment, eat ramen noodles, and drive a beat-up old car, do I have an “austere” lifestyle? I wouldn’t say so.
Adam Eran
Jun 2 2018 at 11:14pm
El Cid’s comment is the most on point. You can also consult Mark Blyth’s work (e.g. his book Austerity: The History of a Dangerous Idea) for more about what’s actually going on.
I don’t see inflation adjustments in the above cited anti-austerity pitch.
I can tell you I’ve read U.S. spending on higher education has declined 55% since 1972. Gee, I wonder why students, who could previously graduate without debt from land grant colleges, perhaps working part-time, now have to take on an enormous debt burden to do so…?
Part of the anti-austerity propaganda is to assert that governments are “spending big” without adjusting for inflation or new programs. I’ve seen John Stossel assert government was much smaller in the 1920s, for one example. Yeah, but no Social Security or Medicare then. So what?
Well…we must cut back!
Of course no such talk greeted the Iraq war (costing $3 – $7 trillion, says Nobel Laureate Joe Stiglitz), or the sub-prime/derivatives bailout (the Fed extended $16 – $29 trillion in credit to the financial sector in 2007-8).
This is one step from the implied austerity of commodity-backed currency. Says Blyth: we can either have gold-backed money or democracy. Not both.
Roger Sweeny
Jun 3 2018 at 10:33am
Scott,
The paragraph beginning “I have an alternative explanation” is one of the wisest things I have read recently.
Weir
Jun 3 2018 at 8:05pm
The old police station was replaced with a new one this January, but that’s only the start of it. Everything in the NYT’s second paragraph needs a correction.
The local museum didn’t recede into town history. It’s open, and its new home was built in 2012. The old library building was sold, but that’s because the library itself was given a new building. Two new pools were built to replace the old one. The new building cost 16 million pounds. Another new building is going up for the arts, and that’s 20 million pounds.
Larry Siegel
Jun 4 2018 at 1:23am
>I can tell you I’ve read U.S. spending on higher education has declined 55% since 1972. Gee, I wonder why students, who could previously graduate without debt from land grant colleges, perhaps working part-time, now have to take on an enormous debt burden to do so…?
Grr, it’s not true:
https://fee.org/media/27293/government_spending_higher_education_student.png?width=600&height=436.70103092783506
Government spending on higher education, per student, has risen about 50% since 1972, after adjustment for inflation. Also the number of students has risen tremendously.
Roger Sweeny
Jun 4 2018 at 11:47am
Adam Eran,
I can tell you I’ve read U.S. spending on higher education has declined 55% since 1972.
Perhaps you are misremembering because that is wrong. Googling a little, I found the graph on this piece, “Inflation-Adjusted Government Spending Per Higher Education Student.” As you can see, it goes from less than $4,000 in 1962 to over $9,000 in 2016.
Now, the piece is from the Foundation for Economic Education, which is a libertarian-leaning organization, so there may be some fiddling done to make the increase seem larger. But everything I know says the direction is right and the increase is substantial.
Do you remember where you read it?
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