Senator Whitehouse's Mistaken Austerity Addition

COMMENTARY Budget and Spending

Senator Whitehouse's Mistaken Austerity Addition

Jun 7th, 2013 3 min read
Salim Furth, Ph.D.

Research Fellow, Macroeconomics

Salim is a Research Fellow in Macroeconomics at The Heritage Foundation.

On Tuesday I testified to the Senate Budget Committee about the effects of the debt on our country’s growth expectations. These tend to be dry, academic affairs, but this one had a bit of drama.

At one point, Rhode Island’s junior senator, Sheldon Whitehouse, rose to question my numbers and to call me meretricious, which is an SAT word for lying. Turns out the mistake was on his part, though I won’t question his honesty and will instead chalk up his error to an obvious unfamiliarity with economic data.

Senator Whitehouse, to put it simply, badly misread an OECD report.

The main reason our numbers did not match was that they pertain to different time periods. We were debating over whether European countries have engaged in fiscal consolidation, and whether their consolidations have been composed of mostly tax increases or spending cuts. The OECD data I used to examine the fiscal adjustments reflect what has already happened since 2007, the actual record. His numbers ignore the spending governments added in 2008 and 2009, and consider data from 2010 to 2015, relying mainly on promises of future spending cuts.

But even when I tried to replicate the result provided by Senator Whitehouse with the data from the OECD report on which they were based, I found that the numbers didn’t add up. Actually, they added up too much, counting some austerity measures six and seven times over!

The OECD tables on which Senator Whitehouse’s data are based have footnotes that explain the data they represent. The key word in these footnotes is “cumulative”:

Fiscal balance is the general government financial balance and gross debt is general government gross financial liabilities (Maastricht basis) as a per cent of nominal GDP projected by the government. Fiscal consolidation is the cumulative consolidation volume as a per cent of nominal GDP projected by the government. The composition of consolidation is expenditure reductions and revenue enhancements in the actual year (cumulative, total 100%). Nominal GDP growth forecasts are the government’s estimates of nominal GDP. Fiscal consolidation in the national currency is based on the government’s quantified measures (cumulative), except the latest bank rescue package.

“Cumulative” here means that if a government cuts spending (or raises taxes) by $5 in 2010, $4 in 2011, and $3 in 2012, the table will record $5 in 2010, $9 in 2011, $12 in 2012. Make sense?

But Senator Whitehouse added up those already added-up numbers, getting $26. He triple-counted the first $5. So for the countries with seven data points, he counted the first-year cuts seven times over!

His error is most obvious in the last column of his table, here:

He claims that Ireland has “announced fiscal consolidations” of 95 percent of GDP, an incredible number. The correct number is 18 percent (as you see on page 36 of the OECD’s report). But what’s 77 percent of GDP among friends?

This is clearly the result of incompetence, not dishonesty. Why? Because when the projections are considered correctly, they tilt even more toward spending cuts. That is, European countries have raised taxes and done some spending cuts already since 2010, and in the future, they say they will cut spending more — Whitehouse’s mistake underweights the future “spending cuts” he wants to show have been a large part of European austerity packages.

The oddest part about all this is that one can easily find the OECD’s correct data in Figure 1.15, on page 41. The data can also be freely downloaded as an Excel file from the OECD.

If Senator Whitehouse had analyzed the projections accurately, he could have learned a few things. For one, it should come as no surprise that most of the spending cuts he counts are in the future. Through 2011, just 25 percent of the spending cuts he counts had come to pass in the median country, but 44 percent of the tax increases had been undertaken.

But ultimately, I would not value the Fiscal Consolidation Survey, which Whitehouse used, above the OECD’s core data, which I used. The data is reported in nominal, cyclically unadjusted terms. Senator Whitehouse actually made the error that the Washington Post’s Dylan Matthews incorrectly accused me of, not using potential GDP as the denominator. In fact, the senator’s error is doubly bad: By reporting everything in nominal terms (not controlling for inflation), he overstates the future cuts that he needs to make his case that European governments are cutting spending substantially.

First appeared in National Review Online's "The Corner."