Is Portugal an anti-austerity story?

A recent NYT story by Liz Alderman says yes, but I find the argument hard to swallow.  Here’s from the OECD:

The cyclically adjusted deficit has decreased considerably, moving from 8.7% of potential GDP to 1.9% in 2013 and to 0.9% in 2014. This is better (lower) than the OECD average in 2014 (3.1%), reflecting some improvement in the underlying fiscal position of Portugal.

Or see p.20 here (pdf), which shows a rapidly diminishing Portuguese cyclically adjusted deficit since 2010.  Now I am myself skeptical of cyclically adjusted deficit measures, because they beg the question as to which changes are cyclical vs. structural.  You might instead try the EC:

…the lower-than-expected headline deficit in 2016 was mainly due to containment of current expenditure (0.8 % of GDP), particularly for intermediate consumption, and underexecution of capital expenditure (0.4% of GDP) which more than compensated a revenue shortfall of 1.0% of GDP (0.3% of GDP in tax revenue and 0.7% of GDP in non-tax revenue)

Does that sound like spending your way out of a recession?  Too right wing a source for you?  Catarina Principle in Jacobin wrote:

…while Portugal is known for having a left-wing government, it is not meaningfully an “anti-austerity” administration. A rhetoric of limiting poverty has come to replace any call to resist the austerity policies being imposed at the European level. Portugal is thus less a test case for a new left politics than a demonstration of the limits of government action in breaking through the austerity consensus.

Or consider the NYT article itself:

The government raised public sector salaries, the minimum wage and pensions and even restored the amount of vacation days to prebailout levels over objections from creditors like Germany and the International Monetary Fund. Incentives to stimulate business included development subsidies, tax credits and funding for small and midsize companies. Mr. Costa made up for the givebacks with cuts in infrastructure and other spending, whittling the annual budget deficit to less than 1 percent of its gross domestic product, compared with 4.4 percent when he took office. The government is on track to achieve a surplus by 2020, a year ahead of schedule, ending a quarter-century of deficits.

This passage also did not completely sway me:

“The actual stimulus spending was very small,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. “But the country’s mind-set became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”

Does that merit the headline “Portugal Dared to Cast Aside Austerity”?  Or the tweets I have been seeing in my feed, none of which by the way are calling for better numbers in this article?

I would say that further argumentation needs to be made.  Do note that much of the article is very good, claiming that positive real shocks help bring recessions to an end.  For instance, Portuguese exports and tourism have boomed, as noted, and they use drones to spray their crops, boosting yields.  That said, it is not just the headline that is at fault, as the article a few times picks up on the anti-austerity framing.

I’m going to call “mood affiliation” on this one, at least as much from the headline and commentary surrounding the article as the author herself.


"Desfralda a invicta Bandeira,/À luz viva do teu céu!/Brade a Europa à terra inteira: Portugal não pereceu/Beija o solo teu jucundo/O Oceano, a rugir d'amor,/E teu braço vencedor/Deu mundos novos ao Mundo!"

"Hoist the undefeated flag,/In the lively light of your sky!/May Europe cry out to the whole Earth:Portugal has not perished/Kiss your merry ground/The ocean, roaring with love,/And your victorious arm
Gave new worlds to the world!"

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'Or the tweets I have been seeing in my feed, none of which by the way are calling for better numbers in this article?'

Clearly, you need to follow the advice of a GMU econ dept prof, and improve your Twitter feed selection - apparently, it will improve your life significantly.

Or stop wasting any time with Twitter, of course.

Wasn't it the wages and pensions and unproductive vacation days that austarians insisted were had to be cut? and the infrastructure investments that were supposed to insure better long term prospects that needed to be maintained? They did the opposite, against advice, so what is mood affiliation about that? As they ushered in the a new government and acted against German and IMF advice predictions were made and they were wrong so where is the mood affiliation? Was it the people who insisted pensioners had to be thrown overboard that had the wrong numbers?

Wasn't the mechanism for tourism and exports going up supposed to be a real wage adjustment from an internal devaluation? If wages pensions and vacations were all restored then how did they achieve this?

"If wages pensions and vacations were all restored then how did they achieve this?"

They were not restored all the way, and government workers are only 10% of the economy. It was a vote-buying scheme more than anything.

If huge tax increases and spending decreases is not austerity then I guess I throw up my hands. I never heard austerity described as cutting government wages and maintaining government infrastructure spending. By the way it's very early returns on that strategy and if you read the comments many Portuguese people complain about the state of the infrastructure.

As a Portuguese observer I can safely say that Liz Alderman has been fooled by the rhetoric of the Portuguese government and the numbers, as you point out, demonstrate that. This change in rhetoric was important, though, because for more political stability.
I'd like to point out that the Jacobin article (with which I mostly agree) was written by a member of Bloco de Esquerda, one of the parties that is supporting the government and the most likely partner of the government's party after the next elections.

*because it allowed for more political stability.

I don't like the word "austerity." In the immediate run there are only so many resources, and governments don't create them but move existing ones around. So austerity for Peter is prosperity for Paul and conversely. But there's no question that, again in the short run, governments can stimulate a depressed economy through constructive spending; what happens in the longer run when the stimulus is paid for is anybody's guess.

"there's no question that, again in the short run, governments can stimulate a depressed economy through constructive spending"

Monetary offset?

I don't like the word "austerity." In the immediate run there are only so many resources, and governments don't create them but move existing ones around.

By resources I think you mean 'stuff that makes GDP' rather than GDP itself. If you are talking about GDP then the Peter.v.Paul analogy holds. If the economy makes 10,000 new cars and Peter gets all of them, then Paul by definition gets none of them.

However this doesn't hold for 'resources'. If the economy has two car making factories and one is closed then the economy can open the closed factory and make 20,000 new cars (or make 10K new cars and use the other factory to make tanks, or spaceships or whatnot). Only if the economy is at full employment do you then get the trade off where you can't, say, produce 10,000 tanks without decreasing production somewhere else (see, for example, WWII when new car production stopped in the US and car factories were retooled to make weapons).

What sort of cruel bastard has taught a Portuguese economist to imagine that "impactful" is English?

I thought the article was also misleading because it didn’t mention Portugal’s neighbor, Spain, which is widely acknowledged to have enacted deep austerity measures and is also now having a robust economic recovery.

I don't think you have your facts right.

Portugal in 2017 had an unemployment rate of 9.7% and Spain an unemployment rate of 17.1%

Here is source which constantly compares the economic both economies:

"economic performance of"

Zaua is absolutely right. The recovery in Spain has been considerably more vigorous than in Portugal by any standard measure, including the most relevant of all, growth of GDP per capita.

Unemployment peaked in Portugal at 16.2% in 2013 and will close by the end of 2018 at roughly 7.3%, a reduction of 8.9%.

Unemployment peaked in Spain at 26.1%, also in 2013, and will close by the end of 2018 at 15.5%, a reduction of 10.6%.

Unemployment rates have been higher in Spain than in Portugal since at least the mid-1970s because of a number of structural factors that have next to nothing to do with the current crisis. The classic paper by Bentolila and Blanchard AERP&P 1990:

discussed this issue nearly 20 years ago.

The article in the NYT was truly awful. A typical American journalist that feels that she can pontificate about stuff she obviously knows next-to-nothing about. Pure American arrogance hidden behind a veneer of "progressivism".

Just to be clear if Spain had an unemployment rate of 40% and it went down to 30% compared to Portugal going from 16.9 to 7.3 you would consider that as a metric showing Spain’s policies were better? Is this what economists actually believe? Is it really necessary to point out to an alleged economist how absurd that is?

Peter: you seem to completely miss the point. Spain's unemployment rate has been around 10 points higher than Portugal's since the early 1980s for reasons that are absolutely independent of how the financial crisis was handled and/or fiscal policy (it has to do with things such as as how collective bargaining or unemployment insurance are organized in Spain vs. Portugal). Those 10 points unemployment difference are "structural" (not a word I like a lot, but a word commonly used in the literature).

Thus, it is completely sensible to compare the reductions in unemployment rates between 2014 and 2018 in both countries and argue that, if anything, Spain's record at tacking the cyclical unemployment generated by the crisis has been better. Far from being absurd, it shows sensitivity to institutional details and a knowledge economic history of Spain and Portugal that you seem to sorely lack.

Correct me if I am wrong, but it looks like you are claiming that the difference is greater in the change, notwithstanding the end point.

You could turn it the other way as well: that the percentage change in improvement was greater for Portugal than Spain. Portugal a 55% improvement to Spain's 40% improvement.

While we can all lie with statistics, it is not wise to compare absolute differences as a measure when the bases are different.

And, then there is the question: why the different starting point between two economies that are similar.

From a chamber of commerce perspective, I can understand the argument from the perspective of a Spanish economist, even citing an article written in 23 years ago, my god.

But, looking as an outsider I am not convinced as to the impact of recent events (2008 crash) having visited both countries. My critical assessment is that the Spanish banking and over realiance on real estate industries account for a lot of the problem. That is the structural problem of Spain, in my opinion, but I respect yours as well.


No, I do not argue that changes in absolute rates are always more informative. As I replied to Peter above, Spain has had an unemployment rate that is around 10% higher than Portugal since the early 1980s (the cite to Bentolila and Blanchard is just to illustrate that this was something ALREADY known for decades; if you want I can cite several dozen papers about the Spanish and Portuguese labor markets written over the last 24 months; believe me, I know what I am talking about).

Thus, a basic knowledge of Spanish and Portuguese recent economic history suggests it makes much more sense to compare changes in both countries unemployment rates only once you have understood the role of this 10% unemployment rate difference. And that is why comparing the reduction in unemployment in Spain with the reduction of unemployment in Portugal makes sense and proves that recovery in Spain has been faster (as show, much more clearly, by GDP per capita growth).

Nice try. I'm not buying it. Numbers is numbers.

OK, read your comment to Peter, but still not convinced because you should then compare the period prior to 2008 unemployment to today for both Spain and Portugal, ie, what was the percentage change from the period prior to 2008 for both parties today. Do not have the stats, but maybe you do. I would not offer a handicap under that metric.

I get what you are saying: It's like golf, I get a handicap. But, what we are looking at is choice outcomes to the 2008 debacle.

Yes, you are right. Recovery is a more vigorous in Spain than in Portugal

The fascination with Portugal has more to do with the fact that the recovery was made with the support (or rather, without their opposition) of two parties of the hard left. And that is indeed and amazing feat of political juggling, :-) :-)

So Portugal is a political case study but I am not really sure that it's economic story is that extraordinary.

PS. I'm a Portuguese citizen living in Portugal and I support the current government

And, how do you support that claim with evidence??? See above re percentage changes in unemployment and current unemployment rates. What metric are you using?

Does saying so make it so?

Growth rate in Portugal is 20th out of 27 EU countries

What's the unemployment rate: does growth rate mean anything off a low base and you have higher unemployment than your neighbor who is operating at a higher level of economic activity. Growth rate of full employment economy, for example, is always lower than one coming out of a recession.

Yes, Rucas_1972, Bill's comment is a textbook example of how to read a statistic and not understanding how to frame it in any meaningful historical context. Funny thing is that he might be one of those critics of economics who claim economists do not rely enough on economic history.

Or, maybe you are the one doing the framing, but its not by a traditional textbook. Spanish economist, maybe you should think about whether you need to make the argument by "putting it in the historical context" and just putting it in the excel spreadsheet and seeing what it shows. How would it be if every economic report put economic statistics "in the historical context" with publication.

Wait, Don't give Donald any ideas. He might do this. And, then change the historical context month by month.

Sorry, but I am not buying your argument. I cited Bentolila and Blanchard PRECISELY to provide the historical context. It is obvious you did not even read the paper.

In any case, my statements are rather conventional in the historiography and I do not really want to waste much time with someone who, clearly, is rather clueless both about economics and about economic history.


You may also be getting angry because you cannot respond with statistics and only respond with "I know the historical context and you don't"

Well, that historical context should be data based, and your inability to respond with only "I have the historical context" is not sufficient.

Are economists and others required to give you a 1-800 call to find out what the correct historical context is when you do not give any data for a response, even when given the opportunity to do so.

I cited logic. And, asked you for data to support your position to put that in the historical context of this discussion.

Cowen is right: the article belies the headline. Ms. Alderman is the European economics correspondent for the NYT, and has received many awards for her reporting. The contrast between the headline and the article is so great that it must have been intentional. As for Portugal, it has become the retirement destination for many, including many Americans, which has helped the recovery, long with tourism. I'd compare it to Florida, which suffers greatly during recessions but recovers in large part due to all those retirees and tourists. Indeed, Florida has a forced austerity during recessions, as deficit spending by the state is prohibited by the Florida constitution.

Writers write.

Sub-editors 'craft' headlines.

"and they use drones to spray their crops, boosting yields"

Something, something, 3-D Printing.. ;)

It is neither an anti-austerity story nor a pro-austerity story.

It is a story of austerity badly used. Austeruty should not be applied in recessions. This proved counter productive in all Europe (Portugal included!). And that is the bad part of the story... austerity effectively damaged the Portuguese economy more than necessary during the years 2011-2014.

But you are right if you apply austerity in booming times to keep animal spirits in check (people tend to go nuts in booms). Which is what is happening now .

Also, the real feat in Portugal was to get a "coalition" of a center-left party with two hard left parties to pursue an "austerian" economic agenda without much social unrest. But that, my friends, is due to the insanely great political skills of the current PM*

*Yes, I am partial.

Yes, we all support austerity during good times,

But some support tax cuts (without offsetting budget cuts) that increase the deficit during those times as well.

*Yes, I'm partial.

When the facts don't fit the argument, economists change the facts. Just ask your boy Rogoff.

To "beg the question" does not mean what you think it does:

Betterridge's Law strikes again.

If anti-austerity means small fiscal stimulus combined with reducing the budget deficit, then I'm all for it!

Baby steps.

It's clearly a story of cutting way back on planned investment spending. Portugal can do it because its population is collapsing, but if it begins to rise again after this success, expect clean water, transport and housing to rapidly act as limiting factors.

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