Introduction
Attention in the US has switched from unemployment and the need to create jobs to austerity and the need to reduce the government deficit. But austerity eliminates jobs rather than creating them. Is the US recovery strong enough so government austerity will not end it?
As background, take a look at Table 1. It highlights that we are living in two very different economic worlds
- the older, recession-weary, and debt-ridden developed nations and
- the rapidly growing countries of Africa, Asia, and Latin America.
Table 1. – Growth, Deficits, and Debt, 2011
| GDP | Fiscal | ||
|
Region |
Growth Rate | Balance (% GDP) | Debt
(% GDP) |
| Advanced G-20 | 2.5 | -7.8 | 108.5 |
| Emerging G-20 | 7.4 | -2.7 | 33.6 |
Source: IMF WEO Database
Advanced nations are growing at less than half as fast and emerging countries; their government deficits are more than twice as large, and their debts are three times large. Does this mean developed nations should give up on stimulus and adopt austerity programs? In what follows, this question is examined by looking at:
- three European nations that have been forced into austerity programs (Greece, Ireland, and Portugal), and one that might be forced to take the same medicine (Spain);
- The US where everyone is talking about the need to cut the government deficit.
Unemployment
Let’s start with the reason for the large government deficits: the global recession resulting from the panic associated with the US banking collapse.
Table 2. – Unemployment
|
Country |
2009 |
2010 |
2011 (proj.) | 2012 (proj.) |
| US | 9.3 | 9.6 | 8.5 | 7.8 |
| Portugal | 9.6 | 11.0 | 11.9 | 12.4 |
| Ireland | 11.8 | 13.6 | 14.5 | 13.3 |
| Greece | 9.4 | 12.5 | 14.8 | 15.0 |
| Spain | 18.0 | 20.1 | 19.4 | 18.2 |
Source: IMF WEO Database
The US has had government stimulus packages of $700 billion and $917 billion in the last three years plus a bank bailout of $787 billion. In addition, the Fed has pumped about $1.5 trillion into the economy. The result? The US unemployment rate is starting to fall. In Greece and Ireland, now operating under IMF-enforced austerity programs, we see a different story: high unemployment with projections it will go even higher. In Portugal, probably the next country to be forced into austerity, the unemployment rate is increasing even before the program starts. Spain’s unemployment rate is higher than any other country in Europe, and an austerity package would make it go higher.
GDP Growth
Projected GDP growth in these five countries reflects unemployment projections. The US is expected to grow in coming years while the Euro nations are struggling. If Portugal or Spain is forced to accept an IMF austerity program, their growth rates will be less than projected in Table 3.
Table 3. – GDP Growth
|
Country |
2009 |
2010 |
2011
(proj.) |
2012
(proj.) |
| US | -2.6 | 2.8 | 2.8 | 2.9 |
| Spain | -3.7 | -0.1 | 0.8 | 1.6 |
| Ireland | -7.6 | -1.0 | 0.5 | 1.9 |
| Portugal | -2.5 | 1.4 | -1.5 | -0.5 |
| Greece | -2.0 | -4.5 | -3.0 | 1.1 |
Source: IMF WEO Database
Fiscal
Both Portugal and Spain have reduced their budget deficits since 2009. Further reductions will be needed if they enter into austerity programs. The drastic reductions enforced by the IMF can be seen in the Greece and Ireland data. The second US stimulus plan enacted at the end of 2010 will cause the deficit to increase in 2011.
Table 4. Budget Deficits (% GDP)
|
Country |
2009 |
2010 |
2011
(proj.) |
2012
(proj.) |
| Portugal | -9.3 | -7.3 | -5.6 | -5.5 |
| Spain | -11.1 | -9.2 | -6.2 | -5.6 |
| Greece | -15.4 | -9.6 | -7.4 | -6.2 |
| Ireland | -14.4 | -12.2 | -10.8 | -8.9 |
| US | -12.7 | -10.6 | -10.8 | -7.5 |
Source: IMF Fiscal Monitor
Government Debt
Information on government debt is presented in Table 5.
Table 5. – Gross Government Debt , (% GDP)
|
Country |
2009 |
2010 |
2011
(proj.) |
2012
(proj.) |
| Spain | 53.2 | 60.1 | 63.9 | 67.1 |
| Portugal | 76.1 | 83.3 | 90.6 | 94.6 |
| US | 84.6 | 91.6 | 99.5 | 102.9 |
| Ireland | 65.5 | 96.1 | 114.1 | 121.5 |
| Greece | 126.8 | 142.0 | 152.3 | 157.7 |
Source: IMF Fiscal Monitor
For the Euro countries, both government deficits and debt are important because without their own central banks, the only way they can finance their debts is via borrowing from others. And borrowing in private markets has become very expensive for them: for ten-year bonds, the Greek government is now paying 12%. In contrast, the US pays only 3.44%, with the Fed having bought 55% of all new US debt issued in the fourth quarter of 2010. Table 6 indicates what the government of these countries must borrow in 2011.
Table 6. Financing Requirements, 2011 (% GDP)
| Maturing | Budget | ||
| Country | Debt | Deficit | Total |
| US | 18.0 | 10.8 | 28.8 |
| Greece | 16.6 | 7.4 | 24.0 |
| Portugal | 16.0 | 5.6 | 21.6 |
| Spain | 13.1 | 6.2 | 19.3 |
| Ireland | 8.7 | 10.8 | 19.5 |
Source: IMF Fiscal Monitor
Austerity, IMF-Style
Germany is not at all happy about having to bail out its “weak sisters’, so it insisted that any bailout would have to be enforced by an IMF standby. As I have reported earlier, IMF standbys require a country to achieve certain targets to get bail-out money. Consider the standby for Greece. According to the 21 page memorandum of understanding (MOU) following the third review of the standby between the Greek government and the IMF, disbursements will follow the schedule set forth in Table 7. For each tranche, an IMF team will be sent to make sure the Greek government has reached the qualitative and quantitative targets set forth in the memo.
Table 7. – IMF Tranches for Greece
| Billions € | ||
| Dates | IMF | Eur. Union |
| 5/10/10 | 5.5 | 14.7 |
| 8/30/10 | 2.5 | 6.7 |
| 11/30/10 | 2.5 | 6.7 |
| 2/28/11 | 4.1 | 10.9 |
| 5/30/11 | 3.3 | 8.8 |
| 8/30/11 | 2.2 | 5.9 |
| 11/30/11 | 1.4 | 3.7 |
| 2/28/12 | 2.7 | 7.2 |
| 5/30/12 | 1.6 | 4.3 |
| 8/30/12 | 1.6 | 4.3 |
| 11/30/12 | 0.5 | 1.3 |
| 2/28/13 | 1.6 | 4.3 |
| 4/30/13 | 0.5 | 1.3 |
| Total | 30.0 | 80.0 |
What sorts of quantitative targets are included? Here is a sample:
- Floor on the modified general government primary cash balance;
- Ceiling on State Budget primary spending;
- Ceiling on the overall stock of central government debt;
- Ceiling on the new guarantees granted by the central government;
- Ceiling on the accumulation of new external payments arrears on external debt contracted or guaranteed by general government;
- Ceiling on the accumulation of new domestic arrears by the general government.
Does the US Need an IMF Standby?
With Washington dysfunctional and all the austerity talk, one might ask whether the US should enter into an IMF standby. Let’s look at the numbers. The US has enacted two stimulus bills. The first was for $700 billion, and the second was for $917 billion. The IMF has done the most comprehensive research on the effects of stimulus packages.[1] It concludes that a fiscal consolidation of 1% results in an increase of .3 percentage points in the unemployment rate. Applying that to the US situation, in the absence of the first stimulus bill, the unemployment rate would have increased to 11.3%. In the absence of both bills, the unemployment rate would now be 12.25%. Instead of having 11.7 million looking for full-time jobs, there would be 16.3 million out on the streets.
How robust is the US recovery? As I have suggested earlier, I am dubious until I see at least four to six months in which 200,000 new jobs are created each month. As Table 8 shows, the US is not there yet.
Table 8. – Monthly Employment Changes, (in thousands)
| 2010 | 2011 | |||||
| Nonfarm Employment | Oct | Nov | Dec | Jan | Feb | Mar |
| Monthly Changes | 171 | 93 | 152 | 68 | 194 | 216 |
Source: US Bureau of Labor Statistics
My prescription for the next few months? Keep the printing presses running. Once employment is really growing, bring in the IMF!
[1] “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation”, Chapter 3 of the IMF’s October 2010 “World Economic Outlook.”