Tuesday, August 14, 2012


Last week, Arthur Laffer published a piece in the Wall Street Journal in which he presented data purporting to show that among industrialized nations, "those that stimulated the most from 2007-2009 saw the least growth in subsequent GDP rates."  Some critics (follow links from Paul Krugman) pointed out that the things he measured didn't make sense:  most obviously, the growth data covered 2006-9, which isn't "subsequent" to 2007-9.  But that led me to wonder what you would see if you did a straightforward comparison of change in government spending and change in GDP.   I looked at three periods:  2005-7, 2007-9, and 2009-11, which roughly you could call pre-crisis, crisis, and recovery (such as it is).   Here is the relationship in graphical form:

That is, little or no relationship.  Countries in which spending grew a lot in 2007-9 (e. g., Chile and the Slovak Republic) and countries in which spending fell (e. g., Israel and Switzerland) grew about equally much, on the average, in 2009-11. 

It turns out that spending in 2009-11 is related to GDP in 2007-9--the higher the GDP growth (or smaller the losses), the higher the subsequent spending growth.  In other words, countries that had suffered the most in 2007-9 tended to subsequently follow "austerity" policies.   

An interesting point is that some of the countries that are generally regarded as examples of austerity had substantial spending growth in 2007-9, 2009-11, or both. For example, these numbers show Ireland and Estonia as having tried stimulus in 2007-9.  Laffer used IMF data, and I did too.  I don't know is the mismatch reflects a problem in the IMF data, or in what "everyone knows," or some technical issue in the definition of government spending. 

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