The Austerity Flop
A very quick thought:
The obsession with the federal deficit is misleading if you want to consider the effect of austerity here in the US. State and local government makes up a very sizable chunk of total government spending, and is, obviously, beyond the control of Washington. That means fiscal policy can be altered by decisions all across the country. This makes it difficult to assess the effects of things like the 2009 stimulus with precision.
When you look at government spending in this way, in total, you see that it has been declining for a while, and especially since around the middle of 2010. The much debated federal stimulus was offset by massive state and local government reductions. So government spending has been on a steady downward track for the past three years – in sharp contrast to the overheated invective you hear from Washington.
What does this mean?
It means that we have been pursuing austerity style policies.
And how’s that working for us? One way to look at it is to take the spending gap – the difference between where spending might have been without the cuts, and where it is in fact – and try to estimate its impact on GDP. After that you can, very roughly, figure out how many more or fewer jobs there are. In other words you can prove or disprove the claims of the austerity advocates.
If you do these calculations – as Krugman has on the back of an envelope – you arrive at the not unsurprising conclusion that austerity is a major flop. I say unsurprising because there were a number of us who said this was the likely result all along. Krugman’s numbers appear to say that the entire reason we have lingering high unemployment is due to austerity. Even if he’s off quite a bit, it’s clear austerity is a significant drag on the economy.
There are two points to make consequent to this analysis:
- Austerity advocates have been shown to be wrong. They have no credibility going forward. We should ignore them. They argued that less government spending would somehow impel a surge in private activity sufficient to offset the lost demand due to austerity. It didn’t. The private sector has recovered in many respects – consumer spending is top, so is investment – but by nowhere near enough to get the economy out of the doldrums.
- The political advocacy of austerity was not about austerity as a way of freeing up the private sector, but was about reducing government as a factor in the economy. It was not an economic policy at all, it was an expression of an ideological position. Austerity advocating economists were simply providing cover for a deeper anti-social motive, that is now exposed clearly. Most of those economists are now silent, but none are retracting their work. Why should they? Their job is done.
The battle has now shifted. We are now reading constantly about the next wave of attacks on government spending. This time in the guise of affordability. Or lack thereof. The focus is public worker pensions. Cities and states across the US are considering ways to eliminate or reduce their pension obligations to municipal workers. That these obligations are contractual is no obstacle. Compliant courts appear willing to set aside those contracts. The issue stems from years of tax cutting. So unwilling are many local governments to raise taxes that they have had to cut services to the bone in order to keep paying their pension obligations. This manifests itself as far fewer teachers, fewer police and fire fighters, and sundry other things such as less clean streets, parks and so on. The citizenry is now upset by the lost service but is unwilling to pay the taxes to restore it. Those pension obligations stand between a normal service and low tax rates. So they have become a target.
So not only has austerity hammered the national economy it has undermined local services, and in some cases, safety.
I call this the austerity flop. Its advocates call it a victory for freedom from government.
I think I am more accurate.
