Austerity Forecasts for the UK (1980-2060)

The AUST index (see the details below) captures a number of issues of importance in UK Politics: (1) Increasing military expenditures to meet Russian Challenges and US withdrawals from NATO, (2) Increasing Health Expenditures to upgrade the National Health Service (NHS) and at the same time, (4) Not reducing Education Expenditures and (5) Not increasing overall Government expenditures.

Notes

• Shefner, 2015 here and here Austerity and Anti-Systemic Protest, JWSR.
  
  
  

UK AUST Measurement Model

The AUST index has three components that explain 96% of the variation in the indicators. AUST1 = (Overall Growth), AUST2 = (GE+G+GE-GH) and AUTS3 = (G+GM-GE-GH) where GE=(Government Education), G=(Total Government), GE=(Government Eduction), GH=(Government Health) and (GM=Government Military).

Overtime, AUST1 increased and reached a asymptote around 2010, AUST2 peaked in 1975 and 2010 and AUST3 increased from 1975 until 2000 and then started increasing again after 2010.

UK AUST1 AICs

The best AUST1 model takes the W-index as input.

UK AUST1 W Input Model

The AUST1 W-Input model is stable with negative effects from W3 (World Commodity Markets).

Over time

W3 peaks around 1980 and increases again after 2010.

World-System (1975-2150) Breaking Cycles of Austerity in France

 

The background graphic above was from a protest in Aug 2012 (you can see the small peak in AUST1--see the Operational Definitions in the Notes below--in the overlay time series plot). Emmanuel Macron took office in 2017, right after AUST1 hit bottom. His government has been riding the AUST1 Recovery wave since then. From my Business-As-Usual (BAU) model of French Austerity (here), AUST1 can be expected to peak in the next few years and decline after that. However, the decreasing Cycles of AUST1 will continue well past 2150. 

The BAU model, however, is not the best model for French Austerity. In the long-run, AUST is better seen as being driven by the EUL20 model (which is also steady state). In future posts, I will look at Austerity in the European Union (EU). In the short run, the best model is a Random Walk (RW)--validated by the Macron Administration's inability to form a government and retain a Prime Minister. The attractor path for the RW model is presented above (dashed red line). The RW attractor path suggests that AUST1 should be kept at a low level aside from random movements.

Austerity is a difficult component of Neoliberal Theory (see below). Especially, the dominant controller, AUST1, depends on external forces such as US Military support and the Russian-Ukrainian War which is forcing military expenditure up and creating the budgetary crisis with Health, Education and Welfare.

For an understanding of why Austerity has become such an issue in France, keep in mind that the Economy of France is becoming a Steady State Economy (see the FRL20 Model). One interesting hypothesis is that cyclical processes such as Austerity become more important as the system reaches a steady state and the dream of unending exponential growth (Techno-Optimism) is over. Promises can no longer be made that growth will solve Social Inequality problems. The New Axis of Evil can be used to motivate increased military expenditure but, to avoid reducing Social Expenditure, Debt will have to be used to drive the economy, creating another focus for Protest and wide-spread civil unrest.

You can experiment with the FR_AUST model here. For more information about how the models are constructed see the Boiler Plate.

Notes

More reading:

• Six Futures for France
• French Debt, Collapse of the Government, and COVID-19
• Shefner, 2015 here and here.
• Macron has No Good Options
• How Does the Economy of France Work?

Theoretical Considerations (it's bigger than just Austerity):

Austerity, as a theoretical concept, is part of Neoliberalism (see the graphic above and Shefner, 2015 here and here). I will explore the other aspects of French Neoliberalism in future posts.

The data for the AUST index is taken from the World Development Indicators (WDI). The indicators and definitions are listed in the table above. NOTE: AUST is entirely measured by budgetary categories as percentages; the cyclical nature of the index is a result of percentages hitting up against limits [0%,100%].

The AUST index contains three components that explain 94% of the variation in the indicators. 

AUST1 = (0.433 GED + 0.4571 MIL - 0.4477 G - 0.393 GE - 0.4701 GH)  

AUST2 = (0.822 GHE - 0.357 GED - 0.377 GE) 

AUST3 = (Overall Growth) 

AUST1 and AUST2 are historical feedback controllers for the budgetary categories defining Austerity. AUST1 focuses on controlling Education, Military expenditure, Overall Government Expenditure and Health Expenditure. AUST2 focuses on controlling Health and Education Expenditure.

In the Economy of France, Austerity, Debt and Globalization (KOF) are closely related. The relationship can be seen from the Measurement Matrix above when DEBT and WorldGlobal (KOF) are added to the model. In future posts, I will investigate all the indicators of Neoliberalism in France.

The state space of the French Economy is dominated by three components explaining 98% of the variation in the underlying indicators: 

FR1=(Overall Growth)

FR2= (CO2+EF-KOF)

FR3=(LU-L-N) 

FR2 and FR3 are Historical Feedback Controllers regulating Environmental Impacts of Globalization and Unemployment, respectively. EF is the Ecological Footprint and KOF is the Index of Globalization.

You can run the FRL20 Model with code available in Google Sites.

World-System (1970-2060) US Debt Crisis

The US just had another debt crisis to join France (here), Germany (here) and Canada (here). Debt Crises have been quite the political spectacle, almost closing down the government in the US and toppling governments in European countries. Hitting the Debt Ceiling and Government shutdowns are nothing new for the US (here). Deficit Hawks have used the repeated crisis to impose Austerity on the US Government, threatening to dismantle Social Security, Health Care and Welfare programs while giving tax cuts to the wealthy. 

What is somewhat confusing about all this is that there is a branch of Economics called Modern Monetary Theory (MMT) that suggests that there can be no debt crises when governments control their own currency, as do the governments in the US, France, Germany and Canada. Populist  Deficit Hawks argue that everyone understands that we can accumulate too much debt and wind up in bankruptcy. MMT counters that if individuals go into too much debt they cannot simply print money to get out of debt as modern governments can. As long as there are slack resources in the US Economy, government deficit spending will not create inflation. If you are not familiar with the theoretical arguments, the controversies make interesting reading (here and here).

From the perspective of Systems Theory, Debt Crises reveal yet another Error Correcting Controller (ECC) that is being used to control outputs of the Political System. Regardless of theoretical and rational considerations, the DEBT ECC triggers an important feedback loop we need to understand. If governments have to go into debt to address the Climate Crisis or any other of the many Overlapping Crises, ideas about DEBT will assert themselves as a constraint on spending.

In the graphic above, I have displayed a history of US Debt from 1970 to the present and a forecast for the future out to 2060 by political administration. Debt has been fairly close to the (increasing) attractor path except during the Clinton Administration when it went down, during the Obama Administration when it went up and during the Trump I Administration when it went way up (above the 98% prediction interval) as a result of the COVID-19 Pandemic. The USL20 model's forecast for the future is that US Debt will be declining but with rather wide prediction intervals. Given the historical data, almost anything can happen.

Notes

Data are taken from the World Development Indicators (WDI). All variables are in standard scores. The methodology used to create forecasts is similar to the one used by the Atlanta Federal Reserves GDPNow app. Prediction intervals are generated using a Bootstrap algorithm in the R programming language. The Akaike Information Criterion (AIC) is used for model selection.

You can run the WL20W US BAU Model here. From my perspective, the future of US Debt depends on the future of the US economy, which is unknowable but about which I have a forecast (here).

 

Was the EU Economy Wrecked by Austerity?

Yesterday, Paul Krugman wrote an interesting OP-ED piece in the NY Times (here) arguing essentially that the EU economy has been "...wrecked in the name of responsibility." Evidently, the EU economy is not recovering as fast as the US economy and economists are starting to ask why. For many years now, Paul Krugman has been arguing that Austerity policies designed to balance budgets during an economic downturn (such as the 2007-2008 Financial Crisis) are wrong-headed and irresponsible (the same argument John Maynard Keynes made during the Great Depression of the 1930s). The US followed the Keynesian prescriptions with the 2009 American Recovery and Investment Act and the EU followed the path of Austerity. The poor performance of the EU economy seems to vindicate Krugman's position.

The idea of imposing Austerity policies during an economic crisis has never made any sense to me especially when governments have long lists of underfunded infrastructure projects, people are out of work and interest rates are almost zero (a great time to invest). Krugman notes that the US economy does have a better set of automatic stabilizers (Social Security, Medicare and Food Stamps) than does the EU. Finally, the EU currency union without a political union has also never made sense to me and has seemed to tie the hands of particularly the peripheral countries in the EU. 

At the same time, using economic policy to return the  economy to its potential level of output also does not make sense to me. Does anyone really expect to return to a level of output that existed at the peak of an economic bubble? The graphic above plots real GDP for the EU countries (the black line). The dotted red line is the BAU (Business-As-Usual) attractor path for EU GDP. A comparison of the attractor path with actual GDP shows that the EU had been in a growth bubble since before 2000, well before the 2007-2008 Financial Crisis. In the late 1990's or in 2007, did economists really think that the bubble growth path (solid red lines with arrows at the end) could be continued into the future? I'm going to guess that some economists and financial analysts did expect the EU economy to continue on the red take off into sustained growth paths. The BAU attractor model, on the other hand, shows that the EU economy is right about where it should be after the bubble. To say the economic policy failed to return the EU economy to prosperity is wrong. 

What economic analysis is missing right now is models that would generate attractor paths. To say that the EU is performing poorly is to beg the question "Compared to what?". It's just not enough to argue casually that the EU should be growing as quickly as the US.  The EU and the US are separate economies with different internal dynamics and different attractor paths.