Letter to the team at Fidelity Viewpoints

In your recent article Stimulus vs. austerity: Getting it just right you state the following: “We looked at a variety of countries faced with financial crises and high debt levels*. So far, it looks like the U.S. has been following the more successful recovery paths of Sweden and Finland rather than those of Japan, Spain, or even the U.K. The key now is how U.S. policymakers deal with the looming fiscal cliff.” You then proceed to make a case that, among other things, the ill-conceived timing of fiscal-tightening resulted in economic downturns. You essentially suggest that your three subjects simply didn’t engage in government spending sufficient to get themselves out of their respective fixes.

*Note; Sweden’s and Finland’s “high debt levels” as a percent of GDP were 40% and 38% respectively in 2008.

What troubles me about reports such as yours is that they all-too-often appear to represent the bounty from their author’s hunt for bias-confirming data. If—in your case—not, then I’m left to presume that the “variety of countries” you “looked at” didn’t happen (oddly) to include Canada, Switzerland, Lithuania, Latvia, and I’ll throw in Estonia—even though its debt level wouldn’t be considered high. That assumed, here’s some data—most of it taken from Michael D. Tanner’s June article Austerity Workson these five countries that might inspire you to re-think your thesis. And yes, I confess, this would be the bounty from my own hunt for bias-confirming data. However, while you and I may invoke the old correlation-ain’t-causation argument when critiquing each other’s case, we can’t deny that the data don’t lie.

Canada has been cutting government spending since the early 1990s. It has also cut capital gains taxes, and income taxes, and has brought its corporate tax rate down from 29% in 2000 to just 15% today. Its national debt is now only 34% of GDP, while ours is over 100%—and its budget deficit is just 3.5% of GDP, while ours is 8.3%. Canada is looking at 2.6% GDP growth this year — ours, 1.9%. Its unemployment rate is 7.3%, while ours sits at 7.9%.

In a CNBC interview yesterday, Cisco Systems CEO John Chambers stated that Canada is a great place to do business, and Cisco plans to invest heavily there in the years to come. He said “we could learn a lot from them”.

Switzerland abides by its constitution that limits its ability to grow debt and increase taxes. Consequently, its national debt is only 41% of GDP and on the decline, and it sports the lowest unemployment rate in Europe, 3.1%.

Lithuania dramatically cut spending on public sector wages and pensions. Sadly, however, they are offsetting those cuts with tax increases. Still, GDP is expected to come in at 2.2% this year.

Latvia responded to the recession with the toughest budget cuts in Europe. Half of all government run agencies were eliminated, one-third of all government employees were let go, and public sector wages were cut by 25%. Unemployment has dropped from 19% to 15%. This year’s budget deficit is just 1.2% of GDP and the national debt is only 37% of GDP and declining. GDP growth looks to come in at 3.5% this year.

Estonia cut government spending sizably and has “liberalized the country’s labor market, making it easier for business to hire and fire workers”. Result; a budget surplus, while servicing a national debt of only 6% of GDP. While it enacted a small increase in its value-added tax, “it deliberately kept taxes low on businesses, investors, and entrepreneurs, refusing to make changes to its flat 21 percent income tax. In fact, the government has put in place plans to reduce the income tax to 20 percent by 2015.” Its GDP looks to come in just north of 2% this year, after growing at an amazing 7.6% in 2011. Unemployment remains at a high 11.7%, however that’s a reduction of 38% from the recession-depth high of 19%.

Clearly, what you deem “premature fiscal consolidation” doesn’t always lead “paradoxically to rising and even more unsustainable debt/GDP levels over time.” In fact, as evidenced above, fiscal consolidation—whenever called for—may in fact lead to declining and totally sustainable debt/GDP levels over time.

Marty Mazorra

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