The Revolution in Spanish Fiscal Policy

Spanish Prime Minister Mariano Rajoy gives a press conference at the Alfandega House in Porto, on May 9, 2012, before their meeting at the XXV Spain-Portugal summit.

Photo by MIGUEL RIOPA/AFP/GettyImages

Veronique de Rugy’s paper “Fiscal Austerity in Europe Doesn’t Mean Large Spending Cuts” has prompted quite the spell of blog posts, introducing what I think is a lot more heat than light.

One issue, on which I think there’s now agreement, is that Europe’s “austerity” drive has featured both tax-side and spending-side changes. For the purposes of assessing things like the Alesina argument about “expansionary fiscal contraction” or generalized arguments that deficit reduction will boost “confidence” and therefore business investment both the tax and spending stuff is relevant. Europe has tried both and it hasn’t worked. In terms of spending, I think it’s confusing to do what de Rugy did and put nominal spending figures for a whole bunch of different countries on the same chart. So let’s just look at Spain. What’s more, since what we’re interested in is economic growth rather than Spain’s level of prosperity (even in the depths of this depression Spain is still a richer country than Argentina which is richer than Mexico which is richer than Honduras) the relevant issue is change in spending:

We can argue until the end times about the correct English word to describe these trends. So to try to use jargony value-neutral language let’s just say a Noteworthy Change in Spanish fiscal policy occurred. And let’s also say that this Noteworthy Change occurred in the direction that you would expect to be favored by people associated with the Mercatus Center and the George Mason University economics department. If the entire argument is really over whether or not this Noteworthy Mercatusward Change in Spanish fiscal policy deserves to be called “cuts” rather than “rapid deceleration” then I suppose we’ve all wasted our time.

In a followup blog post to the paper de Rugy deployed a different rhetorical register and asked “show me the ‘savage’ spending cuts in Europe, please.”

“Savage” is of course not a technical term. But it seems to me that when we’re shifting to that kind of language, use of nominal spending data becomes irrelevant. If the quantity of unemployed people doubles, consumer prices go up 1 percent, and your spending on Unemployment Insurance goes up 10 percent then you’ve both increased nominal UI spending and imposed a fairly savage reduction in the generosity of the program.