More Austerity Success?

Tyler Cowen quotes Ari Shavit on Stanley Fischer:

…he [Fischer] utters the relevant figures in slow, measured, Anglo-Saxon Hebrew. In the years 2004 to 2008, Israel’s average annual growth rate was 5.2 percent. While the world was in crisis in 2010-11, Israel’s average annual growth rate was 4.7 percent.

…Fischer tells me there are four reasons for this success: reducing government spending dramatically (from 51 percent of GDP in 2002 to 42 percent in 2011); reducing the national debt significantly (from 100 percent of GDP in 2002 to 75 percent in 2011); maintaining a conservative and responsible financial system; and fostering the conditions required for Israeli high-tech to continue to flourish.

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J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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10 Responses to More Austerity Success?

  1. Matty says:

    Hmm, so austerity should be done before a crash rather than after?

  2. Troublesome Frog says:

    It’s kind of hard to see what declining government spending as a percent of GDP means when you’re at nearly 5% GDP growth. Unless it’s all inflation or population growth, there’s not much of a reason to expect the government to keep up with that. In fact, it looks like government spending per capita has been basically flat since 1990. Interestingly, it looks like they pulled that off by cutting military spending and increasing funding for social services. Not bad at all.

    I had to stop and go through all of the data because I get curious whenever I see trend numbers over several years broken in a really discontinuous way. It looks like they were steadly pushing down their government deficit spending until the global financial crisis pushed it back to what appears to be normal historical levels. Same with accumulated debt–the 2002-2011 trend is actually mostly a 2002-2007 trend. So I’m not sure I see a lot of belt tightening in response to the recession here.

    I don’t have the data handy, but as I recall, Stanley Fischer and the Bank of Israel did a darn good job of handling the financial crisis and subsequent slump–much better than most other central banks. Sharp guy.

  3. Troublesome Frog says:


    I think that’s pretty much it. If things are running smoothly, that’s a good time to get your fiscal house in order and reap the benfits of a more balanced budget and increased efficiency. Sort of like exactly what we didn’t do during the same period of time.

  4. J@m3z Aitch says:

    Sharp guy.

    Rumor is he’s going to be #2 at the Fed.

  5. Troublesome Frog says:

    I had heard that as well. It’s good to see that the Federal Reserve hasn’t yet become a place for cronies and political operators. God help us all when it finally does and the chairmanship goes to the biggest fundraiser or most loyal political enforcer. Maybe it’ll just be a NGDP futures market by then.

  6. Matty says:

    Hang on, *Israel* cut military spending? That certainly goes against my assumptions. I wonder what else I’m wrong about?

  7. Troublesome Frog says:

    Well, according to Wikipedia, it looks like the IDF’s budget is about $15B and $3.1B (>1% of their total GDP) of that is free money from us. So there’s that.

  8. Dr X says:

    T-Frog, thanks for doing some of the legwork. If we’re calling a decrease in Spending/GDP austerity without reference to per capita spending, is Clinton post 94 now considered the great austerity president?

    But the most obvious problem with Israel as an example of austerity is raised by Matty and T-Frog. Although direct comparisons between nations will have confounds, we should at least compare austerity with stimulus as response to recession.* Austerity during growth periods isn’t where the current argument lies, though depending on who you’re reading on the internets, you might get the impression that there are only two possible positions: austerity now and forever or stimulus now and forever.

    *Further, it’s argued by neo-Keynesians that in a recession, monetary stimulus should be used up to the zero bound and if at that point monetary policy proves inadequate, the govt should then move to fiscal stimulus. They don’t believe in neutrality of money.

    We all know this, right?

  9. J@m3z Aitch says:

    Austerity has become a very flexible term, or perhaps it always was. At any rate, the notable aspect is that Israel got its fiscal house in order while things were still good, and whether for that reason or some other, they didn’t have as hard a recession as so many other countries, in what was reportedly a global recession, and didn’t resort–or need to resort–to significant fiscal stimulus.

    I’ve frequently said that I’d be less hostile to fiscal stimulus in the U.S. if I was reasonably persuaded that we’d get our fiscal house in order once things were good again. But the U.S. tradition has been to see good times as free money to be spent on new and expanded programs. As dreadful as the Tea Party asshats are, at least they’re forcing the Democrats and mainstream Republicans into some semblance of fiscal constraint. So I guess I can’t call them good-for-nothing, despite being tempted to.

  10. D. C. Sessions says:

    As dreadful as the Tea Party asshats are, at least they’re forcing the Democrats and mainstream Republicans into some semblance of fiscal constraint.

    I’d be a lot more impressed if the same people had been in favor of “fiscal responsibility” ten years ago. As it stands, it’s hard to tell the difference between “fiscal constraint” and purely partisan warfare, to be reversed as soon as their side is in position to capitalize on it at the polls (see Osborne.)

    As for Israel, the original account is purely Keynesian: when the economy is roaring, apply fiscal brakes and pay down debt; when it’s slumping, apply fiscal stimulus. Canada likewise kept a lid on with a combination of moderate fiscal policy in the early naughties and a strong safety net providing automatic stabilization when the bottom fell out. Canada and (of all places) Texas also dodged the main crash with tight financial regulation.

    All absolutely bog-standard saltwater macro. What’s called “austerity” is the exact opposite: spend like a drunken sailor when times are good and clamp down when times are bad. We’ve had some rather interesting natural experiments on the two approaches in the past decade. The question is whether we’ve learned anything from them.

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