Monday, May 14, 2012

In which we don’t know what austerity means

I nodded approvingly when Tyler Cowen posted about the apparent lack of austerity in Europe. He claimed that he must have hid a nerve based on the shrillness of the comments. (I detected a smirk behind this statement.) But by and large I agreed that based on the flatness of the budget deficits there did not appear to much 'austerity'.

I later came across Ezra Klein's posts (here and here) and realized that I was mistaken. He points to the need to remove cyclical components (automatic stabilizers that kick in during a downturn) to get at the structural deficits to measure the degree of austerity. Doing so would reveal the extent of belt-tightening across the Euro zone. I stand corrected.

But Tyler refused to back down. In a follow up post, he says: 

Most of the time “austerity” is a misleading word and more precise concepts — readily intelligible I might add — are available.  There really are some times when we should relabel austerity as “mostly tax increases,” but many people are reluctant to do so.

I interpret this to mean that what he meant to say when he posted those charts was that the charts showed tax increases, not budget deficits, you foolish readers, you. Huh? And does he mean tax rates increases, total tax receipts, average tax receipts or what? I would hazard that while Tyler chides us for being imprecise about what austerity means, he himself is imprecise about what tax increases means.

The more serious problem of course is that we are trying convey complicated issues using simple graphs. The usual approach is to of course do what MR just did and then to follow it up with Ezra Klein's charts and then to argue why one set of graphs is better than another or perhaps to highlight what the possible confusions can be and to come up with some reason why the blogger prefers one set over the other.

This was not one of MR's better posts. He got all hoity-toity and essentially says, "Dude, you don't really understand - that's not a graph on deficits! It's about tax increases!"

Update (5/15/2010): Does this mean the Spaniards are protesting tax hikes or budget cuts? Tyler once again makes the case that austerity is really about tax hikes rather than spending insisting implicitly that the chart he first posted was really about tax hikes. Again - huh? I agree that that the definition of 'austerity' is vague - as far as economists are concerned. But this post should have been before he tried passing off a chart on budget deficits as tax hikes.

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