Friday, January 7, 2011

What caused the deficit?

Just a bit of comparative data to back up the points made by Miliband in his Times article. I ran a few scatterplots of 2010 deficit levels against likely explanatory variables in advanced industrial democracies. The graph below shows government deficits on the y axis, and levels of govenrment spending just before the crisis on the x axis. This rough and ready test shows there is no relationship between deficits (here expressed as negative values) and past levels of spending:

Some countries with very high spending - eg Sweden - have very small deficits, whilst countries with low spending - Ireland, the US - have very big deficits. (Norway is excluded because of its oil resources which make it a huge outlier). There is no real relationship, and certainly nothing that would support the notion that today's government fiscal problems are anything to do with too much public spending. Britain, interestingly, has higher spending than other countries with similar deficit problems, but that doesn't seem grounds for believing that the deficit was caused by its having very average levels of public spending.

However, in the spirit of The Spirit Level (excuse me), inequality levels do prove a reasonable predictor of deficits:

There are a lot of other things going on here, and the causal effect is probably indirect or maybe even entirely spurious. But it seems that societies that sort out the income distribution problem are pretty good at sorting out their macroeconomy too.

Just saying.