Tragedies and Recoveries

Reading Time:

David Brooks wrote in his column today that the U.K. and Germany are the success stories of Europe:

After the financial crisis, there was a big debate over how much governments should go into debt to stimulate growth. The two nations most associated with the “austerity” school — those who were suspicious of debt-based stimulus — were Germany and Britain. This will not settle the debate, but these two nations now have some of the strongest economies in Europe and their political leaders are in good shape [yes, emphasis added].

Unfortunately, when Paolo Mauro and I looked systematically at the recoveries of all advanced economies, Germany and Britain did not shine. Under our classification, they fell into the same group as Japan, Sweden, Austria, and Denmark -- this means that:

  • Their loss of output during the harshest years was not too severe: cumulatively, it was less than 8 percet of GDP.
  • But the economic recovery in all these countries has been very disappointing: on an annualized basis, their post-crisis growht was less than one half of their pre-crisis growth rate.

Many countries have done better than that. Belgium, Canada, Norway, United States and (as a surprise to some people) France are among the countries whose annual real GDP growth after the crisis (after 2009) turned out to be more than half the pre-crisis (2000-2007) rate.

What about the point about austerity? Mr. Brooks and other pundits can pick their favorite interpretation, of course -- but consider the experiences of two countries in the south of Europe and compare them to two central European economies:

Using one senstible measure of tighetening, Greece was a leader in austerity while the Slovak Republic was the unambiguous leader in "anti-austerity" (it had the largest increase in government expenditures per citizen between 2007 and 2014).

These are just four countries (many more are here), and your judgment about the desirability of particular fiscal policies needn't even be based on what happened to GDP. Just keep in mind that the link between public policy (including fiscal policy) and growth is unlikely to be described very accurately in the opinon pages.

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