In today’s newsletter, the austerity debate again rears its head, this time in the form of a blog entry by economic heavyweight Paul Krugman. Dr. Krugman, a leading advocate of stimulus, stimulus and more stimulus to combat the economic ills of the past five years, has gone to great lengths to shout down any who advocate austerity as the path forward.
Over the weekend, Krugman published a short opinion piece, accompanied by a single graph, that calls into question whether Germany has truly achieved economic strength amid austerity. His graph features a single metric, change in structural balance as a percent of GDP from 2009-2013, and concludes that German austerity is a myth. “Public service announcement,” says Krugman, “Never, ever make claims about a country’s economic policies (or actually anything about economics) on the basis of what you think you’ve heard people say.”
Public service announcement, Dr. Krugman, it is dangerous to use any single metric to make your point. It is especially problematic when the single metric is misleading and incomplete. Using a snapshot from 2009-2013 ignores spending habits leading up to the crisis. Furthermore, comparing the percentage change in structural balance among nations as a proxy for austerity ignores each nation’s base from which the percentage change is calculated.
During the crisis, and years leading up to the crisis, Germany handled itself much better than most. If nothing else, it stuck to its manufacturing strengths when the rest of the developed world was morphing into service economies. Its middle class is stronger than that of any in the developed world. Its citizens do not speculate much in real estate either, not even for their primary residence. Germany has the lowest rate of homeownership in the developed world. In other words, Germany and its citizens employed austerity long before the crisis unfolded, rendering Krugman’s chart irrelevant.
Germany has experienced solid GDP growth in the days following the crisis. True, it engaged in a spending regime that was loose by its standards, but we must remember that Germany was under tremendous pressure to do so. In fact, Krugman has argued on numerous occasions that Germany should have done much more in terms of stimulus, deficit spending and forgiveness of peripheral debt. Now he wants to use Germany’s relative loosening as evidence against it.
When an economist of Krugman’s stature offers a single statistic such as this to make his case, it is a clear sign that there is more there than meets the eye.