Barro Responds to Krugman
Two interesting European cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth—the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?
The OECD countries most clearly in or near renewed recession—Greece, Portugal, Italy, Spain and perhaps Ireland and the Netherlands—are among those with relatively large fiscal deficits. The median of fiscal deficits for these six countries for 2010 and 2011 was 7.9% of GDP. Of course, part of this pattern reflects a positive effect of weak economic growth on deficits, rather than the reverse. But there is nothing in the overall OECD data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth.
Full editorial by Robert Barro in the WSJ.
Greece, Spain and Italy are apt to experience negative growth when budgets are balanced. But I don’t see any way around that. The economy is not sustainable when government spending has crowded out most other types of investment. I suspect the countries most able to get their financial house in order are the ones who exercised financial restraint in the past?
European countries may have a tougher time exercising fiscal austerity because they have adopted a socialist system with considerable public spending in social services; unlike the U.S. which is a capitalist nation.
The arguement for Keynesian stimulus spending would be more credible if the government involved weren’t already stretched to the limit of its borrowing ability. (Like Greece, the U.S., etc.)
I agree with Joe. In theory, the Keynesian idea of stimulating demand seems viable. In practice, not so much.
Paul Krugman says to cure the deficit we need “death panels and sales tax.” In other words, someone (the Government) needs to make tough decisions about expensive medical procedures. And to raise revenue, we need a value added tax.
http://www.youtube.com/watch?v=FBssPHDAL9U
Another, smaller item contributing to the fact that Germany and Sweden have done so well is that they have more vibrant industry, in many areas.