I'm fascinated that there's still a debate on the question of whether the best way to help the economy in the long run is by higher taxes on the rich plus government stimulus versus austerity and lower taxes. You would think that with so many governments around the world trying one policy or the other for the past hundred years we would have an unambiguous track record to inform us. One of those approaches - stimulus versus austerity - must be better than the other, right?

Instead of clarity, I see proponents of government spending and higher taxes cite the Clinton administration as a time when higher tax rates coincided with a booming economy and a more balanced budget. Proponents of austerity point to Estonia's recent success in belt-tightening. Where's my clarity, damn it?

I declare a link war!
In the comments, give me links to support one argument or the other with historical examples. Keep your comments brief, please, with just a summary of the link. I'll compile them and declare a winner.

My bias going into this is that the best approach to stimulus versus austerity depends on whatever else is happening in the economy. If you have a dotcom boom happening, you can probably raise taxes with impunity and balance the budget too. If not, perhaps the austerity thing makes more sense. That's my starting point. I'd like you to change my mind.

Link on!

[Update: This link will be hard to beat. Thanks to Kuvuplan for that.]

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-3 Rank Up Rank Down
Sep 14, 2012
As usual, Scott, you don't even know enough about the topic to ask a coherent question. :^D

Stimulus OR Austerity is a False Dilemma fallacy. The answer is "neither".


(that's part three of a series... I suggest you read them all, as well as the accompanying links to studies)

Sep 14, 2012
Another Grant article -

Sep 14, 2012
See James Grant's article -

-1 Rank Up Rank Down
Sep 14, 2012
tkwelge, I can't believe I'm having to post again about this. If you bothered to check your list, you'd see that all of the Scandinavian countries have comparable tax burdens; Denmark's is even higher than Sweden. Other European countries like France, Belgium and Austria have comparable tax burdens, and these are indeed generally in an eb period (e.g. the new taxes of the Hollande presidency aren't recorded). European taxes are much higher than American taxes on average, and Scandinavian taxes are certainly much higher. Indeed, high taxes are a central feature of the Nordic model. And it's unlikely to have anything to do with being a "small country", as the example of France shows. And even if it is, that's simply an argument in favour state micromanagement as opposed to low taxes.
Sep 14, 2012
Here's what some Paul Krugman guy (who won a Nobel prize in economics) thinks.


In a sentence, austerity never helped the economy which already was in a crisis (or downturn).
Sep 14, 2012
Hi All

Another link to add


Mike Moore
Sep 14, 2012
What is stated in the Kuvuplan link is no doubt true - that one should decrease government spending and increase taxes on top of booms and do the opposite during slumps. The author calls this countercyclicality.

But one can take this thinking one step further. Let me explain by giving an analogy

As most stock market traders know, there are trends within trends. A longer term trend will contain several medium/shorter term uptrends and downtrends within it.

The most dangerous time in the market is when the longer term trend is changing, say from an uptrend to a downtrend. For eg, the market may peak and then fall slightly making a medium term bottom. A trader focussed only on the medium term trend may buy at the time. But the signal will prove to be wrong because the recent bearishness of the longer term trend will now override the shorter term bullishness. The market will continue to decline. Thus shorter term signals which were proved effective time and again (when the long term trend was an uptrend) will start going wrong once the underlying long term trend changes (to a downtrend).

Getting back to economics, there was a time when government spending was less. People generally looked out for themselves. There was little social security, health care, housing, etc financed or subsidised by the government. The world was on the gold standard which limited the supply of money. In such a scenario, more government spending would have resulted in increased liquidity in the system and a consequent economic turnaround.

Today, most governments around the world are already involved in every aspect of our lives. Both, the state as well as the individuals are up to their ears in debt. The system is awash in liquidity. And we are in a recession!

The point I'm making is that the long term trend of shifting from the gold standard (where the sheer shortage of money prevented the government from spending much) to a world in which governments are unconstrained in any way from printing and spending money has been overstretched and may be nearing an end.

In which case, economic measures which worked earlier, when the world was moving from a state of limited supply of money to a virtually unlimited supply of money, may simply fail to work going forward (since now everybody takes an unlimited supply of money as a given). In which case, even countercyclicality may not work.
-5 Rank Up Rank Down
Sep 14, 2012
Problem is:

The root cause of the problem is rich people spending money badly. They then advocate austerity for the poor people to try to fix things. That's not going to work, you need to stop spending the money badly.

Neither does spending even more money badly ("stimulus"). Especially when you take the extra money from the people you're supposed to be helping.
Sep 14, 2012
Why this bias for links?
Do opinions have more credibility if they are written somewhere else on the net and then linked to rather than directly on your blog?
Sep 14, 2012
If you don't like the Heritage Institute, the Fraser Institute (out of Canada) has an interesting paper linking economic freedom and entitlement freedom to per capita income.

(PDF Warning)

Summary, economic freedom is HIGHLY correlated with high per capita income, entitlements have little to no correlation, and any correlation appears to be negatively correlated with per capita income.
-2 Rank Up Rank Down
Sep 14, 2012

and pretty much everyone will agree that the countries that are more economically free are doing quite well.
-3 Rank Up Rank Down
Sep 14, 2012
>and Europe's taxes have ebbed as well.

WHich is why I used pre recession numbers. ANd I would argue that Sweden's results aren't typical. It's one small country, meaning that most of its economic calculation is still external. Look at every single example involving a large country.
-6 Rank Up Rank Down
Sep 14, 2012
tkwelge, a 35% difference in tax burden is still a massive difference, and Europe's taxes have ebbed as well. The fact is that the Nordic model, with its high tax burden, is producing better results than the American model.
-2 Rank Up Rank Down
Sep 13, 2012

This link is a huge misrepresentation of the facts. The link basically argues, for example, that "profligacy" in the early 90's was responsible for the dot com era expansion, wheras this data:


SHows that deficits were falling during that entire period. And this was one of the few periods where government spending, including all levels, actually stagnated instead of exploding:


So after a long period rising deficits and government spending increasing as a percentage of GDP, government spending as a percentage of GDP declined and the economy expanded dramatically.

Sep 13, 2012
> Sweden has twice the tax burden per capita of the USA, but a higher quality of life by most measures.

Completely false. Tax revenues in the US are largely down due to the recession, since people pay less in taxes when they aren't turning a profit and property values are falling instead of rising. If you include state, federal, and local taxes before the recession and compare it to the revenue in Sweden before the recession:


Sweden, 47.1% 2008.

While the US has had an average rate of taxations of about 35% during non recessionary times:


That's far from "double."

Sweden's median household income PPP adjusted is just over 2/3rds that of the USA (2007)!


Sep 13, 2012
@GreenSK: You are right, that in the huge space of people with economic opinions out there, Krugman is 90% correct. There are the idiots who don't understand aggregate demand, and think the economy "needs to suffer" to somehow make up for past sins. There are people like Scott Adams, who are trying to figure out which fiscal policy will save the economy, without even realizing that monetary policy is vastly more important.

In this space, Krugman does understand what is happening, and that the current recession (like the Great Depression) is due to a lack of aggregate demand.

But Krugman still has a huge hole, and he deserves great criticism for not strongly suggesting monetary stimulus in 2008. The fact that he finally, years later, comes to the party and endorses monetary stimulus "also", doesn't make up for his past failures. Whatever Krugman himself really understands, he wrote years of blog posts that caused people like you to worry about "the zero lower bound". Krugman is to blame for your misunderstanding. He should have (and probably did) know better.

You think that "unconventional policy has been tried", and you believe it has failed. But you also cite Krugman's (weak) explanation about why he refused to mention monetary policy for years: because the effectiveness of monetary policy depends on setting expectations about the future. What you (and Krugman) miss is: the Fed should have set strong and clear expectations about the future path of monetary policy. (NGDPLT is one such excellent policy.)

The QE in Japan, and the QE that has so far been tried in the US, was a one-time thing. Such an action, with no guidance for the future, is EXPECTED to fail.

Finally, you say "normal monetary policy" is "setting the interest rate". I don't mind the label "normal", but go back to your original post. This is your justification for fiscal stimulus: "the rules change when interest rates fall to near-zero levels. If it were possible to reduce interest rates below zero, it would be a simple matter to use monetary policy to stimulate the required demand to pull out of recession. But negative interest rates are impossible because people can always keep cash. Therefore we're stuck in a trap where normal monetary policy doesn't work: the famous "liquidity trap" of Keynesian economics."

You say that "normal" monetary policy doesn't work, and therefore we need fiscal stimulus. Where in that paragraph do you consider effective monetary policy that isn't "normal"? What reader would read your paragraph, and realize that it's only technically true because of that critical word "normal"? That your entire argument falls apart, if you just delete the word "normal"?

This is what Krugman did for years, from 2007 to maybe 2011. It doesn't matter what he really understood. Unfortunately, he incorrectly convinced a lot of people that monetary stimulus was impotent, using tricky language like you yourself (accidentally?) used in your original post.
Sep 13, 2012
-1 Rank Up Rank Down
Sep 13, 2012
The link by Kuvuplan is good. All I would add is a question. What do we mean by "national debt"? Does it make sense that an entire nation of 300 million people can be indebted to a few private companies? Why can't we just tax them instead of bothering with the debt business? Sweden has twice the tax burden per capita of the USA, but a higher quality of life by most measures. So maybe instead of all these shenanigans about "debt", the route to prosperity is to simply tax the rich and distribute wealth more evenly.
-2 Rank Up Rank Down
Sep 13, 2012
>In the World War II and Recovery section: ... "In the U.S., massive war spending doubled economic growth rates, either masking the effects of the Depression or essentially ending the Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts."

Again, wikipedia misses almost the entire story. The only reason that GDP growth clocked so high during WW2 was that the government put price controls in place. This masks real inflation, since the prices appear lower for the cpi data, even though your real ability to acquire those items is severely limited. For example, if I have a thousand dollars, and a loaf of bread costs a dollar, the statistics will say that I can buy a thousand loaves, but if the sign says "2 loaves per customer max" (or I have to use a coupon), then my real buying power with 1000 dollars is not a thousand loaves.

The recovery after the war had far more to do with the adoption of the Bretton Woods gold exchange standard, which made the US dollar THE reserve currency of the planet, and all other economies dependent on their ability to acquire dollars. Also, the US had the lowest manufacturing costs at the time, and after ww2, tariff barriers against US goods were dropped, such as those that had propped up the stirling block, which contributed to the international slow down during the great depression, which itself was caused by an attempt to prop up the pound, not a "market failure."

-1 Rank Up Rank Down
Sep 13, 2012
Furthermore, even though you can improve GDP and employment numbers with additional stimulus, monetary and fiscal, you will eventually reach an end game, as we've seen with japan. TECHNICALLY stimulus has saved japan from high unemployment and a stagnant economy (real wages have been slowly rising in Japan during the entire "lost decade"), but what happens when your population growth rate slumps, debt to GDP reaches a ridiculously high level (which is only possible in Japan thanks to a high savings rate), and foreigners decide not to accept your debt anymore? Krugman's long term analysis pretends none of these issues are really a problem, and this is why even the most moderate economists suggest that countries get their fiscal house in order at some point.

And the argument that "once the economy recovers, we won't need stimulus anymore" is bunk, since even during the "boom" years in Greece, they were borrowing more money at the government level than the real economy was even expanding by!


If you don't have an economy that is really productive, you'll be forced to just continue borrowing forever, and then when another really big recession hits, you'll be even worse off.

Again, there is always an endgame, and their ain't no such thing as a free lunch.
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