A Closer Look At "Austerity" In Britain

The forces that oppose absolutely any reduction of government spending anywhere and at any time use the current situation in the U.K. as their Exhibit A.​  But when you look at the situation more closely, it's a classic example of the "austerity" scam.  By the "austerity" scam, I mean the confused use of a term combining spending cuts with tax increases as a device to claim that spending cuts do not work, when in fact the destructive force is the tax increases.

​In the 2010 election, the Tories promised an attack on problems labeled as "debt" and "deficit."  From the 2010 Conservative manifesto:

A Conservative government will act now on debt to get the economy moving. We will deal with the deficit more quickly than Labour, so that mortgage rates stay lower for longer with the Conservatives.

​To achieve those goals they proposed a number of reductions (or at least slowed increases) in spending (one year public sector pay freeze, raising the retirement age, reducing welfare dependency, etc.) and very little about taxes.  Three years later, economic growth remains sluggish, to say the least:  1.1% for 2011, 0.1% for 2012, and a big 0.3% for the first quarter of 2013.

Of course this has the advocates of maintaining all government spending (posing as enemies of "austerity") ecstatic.  ​For example, from Britain's left-wing Guardian newspaper, an article from January 2013 titled "Austerity plan is failing, IMF tells Osborne."  (George Osborne is the Chancellor of the Exchequer.).  Excerpt:

​The IMF has never been wildly enthusiastic about Osborne's tough austerity plan for the British economy and has been saying for at least a year that the Treasury should ease off if recovery falters. But up until now it has tended to avoid telling Osborne that his policy is failing.  No longer, it appears. "We said that if things look bad at the beginning of 2013 – which they do – then there should be a reassessment of fiscal policy", Blanchard said.

​Or, from the New Yorker magazine, an article entitled "It's Official:  Austerity Economics Doesn't Work."

Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits. Osborne, relying on arguments about restoring the confidence of investors and businessmen that his forebears at the U.K. Treasury used during the early nineteen-thirties against Keynes, insisted (and continues to insist) otherwise, but he has been proven wrong.

That "any decent economics textbook" would undoubtedly be the Paul Samuelson opus, from the guy who made the most spectacularly wrong economic prediction of all time., namely that the demobilization from World War II and associated cuts in government spending would lead to economic disaster.

Well, do either these or the many other articles claiming vindication for opposition to "austerity" actually tell you what were the policies adopted by Britain during this 2010 - 2013 period?  No.  But Nicole Gelinas of the Manhattan Institute is just out with a long and detailed article in the current City Journal that goes into specifics as to what policies Britain has followed.​  So what were the actual policies?  Very simple:  after promising large spending cuts and few or no tax increases, what they actually did was immediately increase taxes; as to spending cuts, they may have slowed future increases, but overall spending has gone up and not down.

Start with the VAT:  ​"Just after Christmas 2010, the VAT rose from 17.5 percent to 20 percent."

And how about the income tax:  ​"In early 2010, Osborne waved through Brown’s earlier plan to boost income taxes by 25 percent for people earning more than £150,000 annually, for a top rate of 50 percent."   ​How did that big income tax increase do at raising revenue?

As Osborne acknowledged two years later, “the behavioural response has been larger than expected.” Supposed to raise £2.5 billion annually, the hike raised £1 billion or less—and once enough time passes, the government has concluded, “it’s quite possible” that the result “could be negative.”

​So, they did increase taxes, but did they also cut spending?

In his final budget document, in 2009, [former Labor] Prime Minister Brown had proposed to spend £646 billion for the fiscal year ending in 2011, up from £601 billion the previous year. In his first budget, Osborne lowered Brown’s £646 billion to £637 billion, and the government ended up spending even less than that: £629 billion. The deepest austerity that Britain had seen in a generation, then, was a 4.7 percent spending increase relative to the previous year. Yes, spending must keep pace with inflation if it’s going to buy the same quantity of goods and services. But the coalition’s 4.7 percent increase exceeded Britain’s 2011 inflation rate, which peaked at 4.5 percent.

​So in fact the big 2011 "austerity" budget actually represented a spending increase.  And Gelinas reports that the plan for the coming year calls for spending 672 billion pounds, yet another increase, and 43.1% of GDP.  Recall that Thatcher's great accomplishment was cutting government spending from 48% to 38% of GDP.

So when you read that "austerity" economics doesn't work, apply a very healthy dose of skepticism.  Find an example of a country that actually cut government spending meaningfully as a percent of GDP without major tax increases, and check the result.  Hint:  Latvia, Estonia.  ​

New York Courts Adopt New Pro Bono Disclosure Requirements

A number of years ago, New York imposed upon its lawyers, basically as a revenue-raising measure, a requirement to "register" every two years and, in connection with filing the form, pay a fee.​  Seemed pretty innocuous.  But what an opportunity for a little social engineering by the unaccountable!

A couple of days ago on May 1 we got an announcement from our Chief Judge, Jonathan Lippman, that the court system has now adopted a requirement that on the registration form each lawyer must disclose how much "voluntary unpaid pro bono services" he/she has performed and how much he/she has made in the way of "voluntary financial contributions . . . to organizations primarily or substantially engaged in the provision of legal services to the underserved and to the poor" during the two-year period prior to the registration.  At the same time, the courts amended Rule 6.1 of the Rules of Professional Responsibility to up the guideline for pro bono work from 20 hours per year to 50.

Don't worry though, people:  while disclosure is required, the actual work or contributions are "completely voluntary."  ​ From the report in Wednesday's New York Law Journal:

He [Chief Judge Lippman] added, "My every instinct is not to do mandatory pro bono. This is not a nose-under-the-tent kind of an approach."  But he said the mandatory reporting will provide court administrators with by far the clearest picture yet of the extent to which lawyers in New York are performing pro bono or giving money to pro bono providers.

The great and the good of course are of course unanimously behind this.  For example, this from ​New York City Bar President Carey Dunne:

"It presents a minimal burden on practicing lawyers," said Dunne, a partner at Davis Polk & Wardwell.

Or from Michael Grohman, head of the New York office of Duane Morris:​

"If you look at the balancing act of what we may be disclosing or divulging versus the ultimate increased benefit to so many who can't get this help by themselves, then the equities are strongly in favor of the underserved," he said.

The less well-heeled express a large measure of skepticism, viewing this as precisely the nose-in-the-tent on the way to mandatory pro bono.  For example, from W. Adam Mandelbaum in the NYLJ comments:​

Sure, it's voluntary, but the handwriting is on the wall. How many hours of pro bono does Mr. L do? It's always the guys with the guaranteed salaries and benefits that are willing to sacrifice every last drop of somebody else's blood who has to chase cases and pray for payment. How many hours of unintentional pro bono does a solo or small firm lawyer do a year?

But there is another aspect of this that I haven't seen anyone comment on, so let me.  So-called "pro bono" in New York has a long and ignominious history as the method by which lawyers unsatisfied with the grants made by the legislature to their preferred causes use the courts to circumvent the state constitution, with the goal of establishing "rights" to various handouts and giveaways that the legislature will not enact.  The game is particularly distasteful because the lawyers backing the cases "pro bono" are among the wealthiest of New York's citizens, yet they will not fund their causes with their own money, and instead seek through the courts to have the burden of their programs paid by far less wealthy average taxpayers.​

To take just one particularly notorious example, consider the long-running "homeless rights" litigation that began c. 1983 and may still be going on as far as I can tell.  Advocates sued the City for failure to provide homeless shelter on demand to anyone who asked.  The City (in a huge mistake by then Mayor Ed Koch) promptly settled, basically agreeing to provide the shelter.  And then the advocates have spent the past 30 years suing the City for failing to live up to its agreement.  Billions have been spent in complete circumvention of the legislative process for appropriating money and of the executive prerogative to manage the delivery of services.  The advocates found a sympathetic judge in the state court system and ran from there for decades.  Here is a report from the New York Times in 2002.  Excerpt:​

[The judge] has, for instance, ordered that the city make infant formula, bottle warmers and Pedialyte available to homeless families waiting for shelter assignments and told the city that it cannot interview families seeking shelter over a hot line but must meet with them in person. She has told the city that any women claiming domestic abuse should skip the normal fraud investigation, and she has forbidden the city to review homeless mothers for workfare eligibility while they await shelter.

​And this is just one case among many such.  For example, there are very similar decades-spanning "welfare rights" and "prisoner's rights" cases. 

I can say with confidence that I will not offend Chief Judge Lippman in the slightest by saying that he regards the work of these advocates as the highest calling of lawyers and that encouraging more such cases is exactly what he has in mind with his new pro bono ​rules.  The problem here is that there is a huge disagreement in the world between those who think that entitlement-based giveaways to the poor are helpful or harmful to the intended beneficiaries.  Is our Chief Judge using his powers to force people onto his side of this essentially political dispute?

Yesterday I submitted a letter to the editor of the Law Journal as follows:​

Chief Judge Lippman's recent amendment to the attorney registration rule, requiring disclosure of "voluntary pro bono services," raises a question of what is intended to count as "pro bono," or "for the good" of the poor.  The classic New York "pro bono" endeavor has very often been a counterproductive and destructive demand for government handouts and giveaways, all of which have manifestly failed to eliminate or reduce poverty, and serve mainly to deprive the poor of their dignity and independence.   I think particularly of the long-running and hugely expensive "welfare rights" and "homeless rights" cases.  These types of cases should more correctly be called "pro malo."  If we really seek to improve the lot of the poor, we should instead engage in efforts that would do some real good for them, like advocacy to reduce these poverty traps, reduce taxes and eliminate barriers to entrepreneurism throughout our economy.   Surely, such real pro bono activities must be what our Chief Judge is asking us to disclose.

They did not publish it this morning.  We'll see if it turns up on Monday.  I wouldn't count on it.​

​

At The Church Of Fallacy Economics, Burning The Heretics

I have refrained from commenting on it up to now, but there is something quite extraordinary going on in the world of economic policy, namely an incredible piling on against two economists who wrote a 2010 scholarly paper thought to support the view of "austerity" being a good thing.  The fallacy Keynesians are out in great force and viciousness.  It resembles nothing so much as the burning of heretics for daring to question the faith.

​​It started with economists Carmen Reinhart and Kenneth Rogoff, professors at Harvard, writing an article called Growth In A Time Of Debt in January 2010 for NBER.   In the article, the authors did a quantitative analysis of a large dataset, and concluded that at debt levels "above 90 percent" of GDP, "median growth rates fall by one percent, and average growth falls considerably more."   The consequences of this result for appropriate economic policy may not be obvious to the readers of this blog, but the explanation is not complicated.  In the world of fallacy Keynesianism, economic policy is divided into two alternatives, called "stimulus" and "austerity."  "Stimulus" means some combination of government spending increases and tax cuts, thus, debt increasing.  "Austerity" means some combination of government spending decreases and tax increases, thus debt decreasing (or, more likely, increasing a little more slowly).  So the Reinhart/Rogoff conclusion can be used to advocate that Keynesian "stimulus" policies don't work at least when debt has hit 90% of GDP.   More broadly, if you don't get your government spending under control before the debt his 90% of GDP, you will go into stagnation with no obvious way to get out.

You can understand how the advocates of endlessly increasing government spending would hate the Reinhart/Rogoff conclusion, let alone the fact that they come from big-name Harvard, where all the other economists worship at the Church of Keynes.  And the hatred was aggravated by the fact that known vampires like Paul Ryan had cited the Reinhart/Rogoff work in advocating for spending restraint.  Well, a couple of weeks ago a grad student named Thomas Herndon and others at much less big-name U Mass - Amherst published their own article at the Political Economy Research Institute, claiming to find "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics" in the Reinhart/Rogoff paper.   Let the inquisition begin!

I'll give just a few choice quotes from very many that are out there:​

"This is a mistake that has had enormous consequences," wrote Dean Baker of the Center for Economic and Policy Research. "If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere."

From the official Worst Economics Writer In America, Paul Krugman:​

So the Reinhart-Rogoff fiasco needs to be seen in the broader context of austerity mania: the obviously intense desire of policy makers, politicians and pundits across the Western world to turn their backs on the unemployed and instead use the economic crisis as an excuse to slash social programs.

And this, reported by Matt Clinch of CNBC:​

The two economists have also said they have received "hate-filled" and "threatening" emails since the debate began to rage two weeks ago.

Now I'm not going to get into the math of the Reinhart/Rogoff paper, whether it contains errors, and whether those errors are important to the result.  The evidence of the Reinhart/Rogoff paper is a minuscule part of the vast evidence that Keynesian stimulus doesn't work.  If it did, Japan would have boomed for the last 24 years.  If it did, Greece and Spain would be success stories instead of needing one bailout after another.  If it did, France, with spending at 56% of GDP, would be a growth model for all, instead of barely eking out 0.5% growth for the past 5 years and currently shrinking.  If it did, Latvia and Estonia would have collapsed when they dramatically shrank government spending as a percent of GDP a few years ago.  If it did, Hong Kong and Singapore would be basket cases instead of growth leaders.  All you have to do is look around for the most basic statistics as to national economic performance.

​But the Reinhart/Rogoff story is about the enforcement of orthodoxy in academia.  After the firestorm hit, the pair have sent out a series of waffling missives, defending their work but also partially backing down:

"Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis," they said in the Financial Times.

It may be enough to avoid burning at the stake, although perhaps not excommunication.  Remember all ye economists, this is what happens to all those whose work may suggest that government should be cut!​

Things The Government Gets Wrong By 180 Degrees -- Privacy

Despite what you may have heard about Supreme Court cases like Roe v. Wade, the Federal Constitution doesn't ever mention a right to "privacy," at least not using that word.  What it does mention, in the Fourth Amendment, is "[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures . . . ."  In other words, to the extent there is any right to privacy mentioned in the Constitution, it is a right as against the government only; there is no privacy protection as to other private individuals or companies.

That seems right to me.  It's the government that has the monopoly on legitimate coercive force, the government that can put you in jail, the government that can perpetuate its own power by getting and using potentially damaging information about its challengers and opponents.​  The serious threat to privacy is from the government.

Well, advance forward to today's upside-down world.  Today the Federal government passes endless laws and regulations supposedly to protect our privacy, but always those laws and regulations offer protections only against private actors.  As to the government itself, all the statutes just give the government more and more access to our information.​

​For example, consider the new Health Information Privacy rules coming out of HHS.  They are extremely complex and expensive to comply with.  God help the doctor or hospital that accidentally discloses your health information to the wrong private entity.  But don't worry, here in the list of permitted disclosures of your information we have no fewer than twelve exemptions for the government, for anything from "public health activities" to "health oversight activities" to "research" to "law enforcement purposes."  So if the FBI wants your health information, no more need for clearing a "reasonableness" hurdle with a judge or getting one of those those pesky warrants.  And besides, how can we expect to achieve perfect fairness in the delivery of healthcare if the government can't monitor the details of everybody's diseases and treatments?

Or consider the Fair Credit Reporting Act.  That's the Act that's supposed to protect your information in the hands of the credit bureaus from improper disclosure.   But after long lists of restrictions supposedly to those with a "proper purpose" to be seeking your information, we come to this in Section 1681(f): "a consumer reporting agency may furnish identifying information respecting any consumer, limited to his name, address, former addresses, places of employment, or former laces of employment, to a governmental agency."   Again, no need for subpoena or warrant.  If you are the government (at any level) ask and ye shall receive!

Well, you say, that's not too bad because it's only identifying information; they can't actually get the details of your financial transactions behind your back, can they?  Well, yes they can.  The main source of authority is Section 505 of the USA PATRIOT Act, authorizing what are called National Security Letters.  These are the things that the government can send to banks, cell phone companies, or ISPs instructing them to turn over all their information about you and, by the way, don't tell the subject that you have gotten this letter or it is a felony.  Any need for a warrant for that?  The government's position is no, because in dealing with a third party (such as a bank or telephone company) you gave up any "reasonable expectation of privacy."  Of course, it's impossible to challenge a NSL if the bank or telephone company doesn't tell you about it, and they are not allowed to tell you about it.

As noted by me here, in March a Federal judge in California declared unconstitutional under the First Amendment the portion of the NSL statute that purported to make criminal the public disclosure of the receipt of the letter.  With any luck that will get to a higher court and get affirmed.  But even if it is affirmed and sticks, you will be relying on the decency of your bank or telephone company to tell you if the government comes snooping around.  Meanwhile, you have no choice but to assume that the government is monitoring all your financial transactions and phone calls behind your back. 

It just seems like the concept of privacy has turned around 180 degrees from where it started out.

Is It Possible To Read Anything About Economic Policy That Is Not A Fallacy?

As described in Friday's post, that day's Wall Street Journal had several articles filled with economic nonsense coming out of the mouths of Europe's incompetent leaders.  On Saturday, the New York Times one-upped them with far more of same.  On page 1 we have Andrew Higgins with an article headlined "Europe Pressed To Reconsider Cuts as a Cure," and then on page B-1 Catherine Rampell writing "Federal Cuts Are Concern In Modest U.S. Growth."​  The fundamental proposition of both articles is that increasing government spending grows the economy while decreasing government shrinks the economy.  

Let me pick just a few choice quotes.  From Ms. Rampell:​

The so-called sequester is scheduled to strip $85 billion out of federal spending before Oct. 1, cuts that will have secondary effects throughout the private sector. Furloughed federal workers, for example, will spend less money at local businesses.  While lower government borrowing and spending can help free resources for business when the economy is operating closer to its capacity, that is not the case today.

Ms. Rampell even goes out to find some so-called economists to support the fallacious theory.  For example:​

“With fiscal tightening weighing on the spring and summer quarters, we expect weaker growth ahead,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, said in a note to clients.

And yet another from a professor at the University of Michigan:​

Justin Wolfers, an economics professor at the University of Michigan, said the government’s fiscal policy was a drag on the economy. . . .   “The bigger picture is that we have a fledgling recovery which needs help but isn’t getting it,” he said.

These people seem to have no idea that year in and year out the economies that are the most successful are the ones with the lowest government spending and the lowest taxes.  The Heritage Foundation compiles the data.   Examples:   ​

Hong Kong.  Government spending as a percent of GDP, 19%.  Top income tax rate 15%.  Five year compound economic growth rate 3.6%.  Unemployment rate 3.4%.​

Singapore.  Government spending as a percent of GDP, 17%.  Top income tax rate 20%.  Five year compound economic growth rate 5.7%.  Unemployment rate 2%.​

Do you know that both Hong Kong and Singapore have surpassed the U.S. in per capita GDP?​

Or how about Switzerland?  Government spending as a percent of GDP is 34.7%, far below any of the major European economies (Germany, France, Spain, Italy, U.K.).  Top income tax rate is 41.5%, but only 11.5% of that is Federal, and the rest varies by canton.  Compound five year economic growth rate is 1.7%.  (That compares to 0.5% in the U.S., 0.5% in France -- home of 56% of GDP government spending, and 1.1% in Germany where government spending is 45% of GDP.)  Unemployment rate is 4.2%. ​

Really, this isn't all that complicated.  And imagine how much more dramatic these differences would be if they stopped wrongly counting government spending at 100 cents on the dollar in GDP!  ​

Europe In The Grip Of Fallacy Economics

Today's Wall Street Journal contains multiple articles on the continuing sluggishness and/or decline of some of Europe's major economies, and the "remedies" proposed by their incompetent government-aggrandizing politicians.  The unquestioning acceptance of the usual fallacies is literally beyond belief -- and not just among the politicians, but also by the WSJ writers.  Help!

​Since the articles are behind pay walls, I will include quotes of the key parts.

The front page headline is about Spain:  "Still Sputtering, Spain Turns Away From Cuts."  Seems that the latest figures from Spain show that the unemployment rate has gone up to an astounding 27.2%  What's the proposed solution?  Better go easy on the "austerity"!  There's that deceptive word again, invoking the usual confused melange of tax increases and spending cuts to keep anyone from trying to shrink the government.   ​

On Friday, the government is expected to announce new, less-stringent deficit targets, which means it won't have to take significant new austerity measures.

​How did Spain get in this mess?  You won't find any information on that in these articles or in the quotes from various government officials.  But perhaps try the Heritage Foundation page on Spain here.  Deficits averaging near 10% of gdp since 2009.  Top income tax rate of 56%, higher than even California and New York City.  Uncompetitive corporate income tax rate of 30%.  Wild spending on ridiculous renewable energy boondoggles.  Government spending as a percent of gdp not as out of line as many others in Europe at 44%, but still way too high.   Do they really expect anyone to keep investing in their bonds if they keep running deficits of 10% of gdp indefinitely?  So they force the banks to buy the debt, and the banks are then insolvent, cutting off business lending in the private economy.   Since taxes are already uncompetitively high, Spain has only one way out of its mess, which is big shrinkage of the government.  They invoke the deceptive "austerity" bugaboo to ward that off.  You'd think at least the Wall Street Journal would be alert enough to call them out.

In another article on page A-16 ("Europe's Unemployment Problems Worsen") we branch out into other European economies like France and Portugal.​  "In France, the number of registered job seekers who are fully unemployed rose to more than 3.2 million, topping a previous record set in 1997."  What does the economic genius Francois Hollande have to say about that?

In, France, President Francois Hollande has championed the charge for greater emphasis on growth, arguing that more austerity at this point is a risk, not a remedy to Europe's crisis. . . .  With no economic growth expected this year, Mr. Hollande is pinning his hopes on state-sponsored incentives for employers to make good on his pledge to start bringing unemployment down by the end of the year. 

This would be the France where government spending already is an astounding 56% of gdp, the corporate income tax rate is 34.4%, and they're trying to implement a top personal income tax rate of 75%.​  The private sector has become a small and shrinking part of the economy, shoved off into some little corner.  Of course the economy is dying, and of course Hollande is recommending "growth" through yet more government spending.  If government spending at 56% of gdp brings sluggishness and decline, does anyone really believe that 60% will bring growth?  How about 80%?  Anybody with a brain knows that this is the route to North Korea.  But there is barely a single politician in Europe with a brain.  (That would be Vaclav Klaus.  Try to name another one!)  

Perhaps you think the Germans are a little smarter?​

But Jorg Asmussen, German Chancellor Angela Merkel's appointee to the European Central Bank's executive board, spoke out in defense of austerity, calling it the only way for countries to secure long-term stability.​

The Germans then are equally incapable of distinguishing spending cuts (government shrinkage) from tax increases (government growth) as elements of economic policy.  Pathetic.​

As to Portugal and Spain:​

Portugal this week presented an ambitious stimulus program aimed at growth, and the Spanish government is expected to outline a similar shift on Friday.​

Japan has had well over 20 years of "stimulus" and stagnation.  The U.S. blew through almost a trillion dollars on "stimulus," raised government spending by about 4% of gdp and has had a stagnation ever since.  France has government spending at 56% of gdp and stagnation.  What's the solution?  More government spending!​

We can confidently predict that the sequence of debt crises in Europe and the economic stagnation are not going to end any time soon.​