This is Austerity???

I swear I am not on a Paul Krugman debunking campaign today (as if I could do that to begin with), but I did have another problem with something he wrote here regarding austerity:

“Spending is still elevated a bit relative to pre-crisis — reflecting higher spending on unemployment benefits and food stamps, plus the ongoing pressures of baby-boomer retirement and rising medical costs. But it’s way down from the peak. Yes, we’ve been engaged in austerity — and this is a major reason the recovery has been so weak.”

What he’s looking at is total government expenditures relative to potential GDP and concluding that the decline in recent years equates to austerity.  I guess that’s technically correct since we’re in a balance sheet recession and could definitely afford to run substantially HIGHER budget deficits, but I don’t know just how austere this pull-back in spending has been.

For a better overall picture, you might review a longer dated version of the chart Dr. Krugman used in his post:

Although we’re off the levels seen in recent years, we’re still higher than any level in the past 60 years (with the exception of a brief period during the early 80′s).  So yes, technically, this is austerity because federal spending is declining during a balance sheet recession.  And we probably can’t afford to allow spending to decline much more (which is why the sequestration cuts and CBO’s proposed cuts are extremely dangerous in the coming 12 months), but I did want to provide a bit of perspective here.  There are degrees of austerity….So far, this isn’t extreme.

UPDATE - A reader points out that this view doesn’t even include the state and local spending turnaround in recent months.  When viewed as the cumulative government spending of state, local and federal my point is even more obvious.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. But Krugman’s chart only looks at federal spending, right? Shouldn’t any discussion of degrees of austerity mention cuts and tax increases at the state level?

      • Total State spending has not declined. It went from $1.1175 trillion in 2007 to $1.525 trillion in 2011 an pretty much stayed there in 2012. Local spending went from $1.48 trillion in 2007 climbed to 1.65 trillion in 2010 and dropped to $1.575 trillion in 2012.

        Do to pensions, entitlements, & health care they have not been able to spend as they like but they have not made draconian cuts unless you think not increasing is a draconian cut.

        As per Krugman, you could cut education to $0, not fund the highways, and just fund pensions, transfer payments, & health care & all would be good as long as the aggregate government spending goes up.

  2. Cullen,

    Last year I wrote a post highlighting the different interpretations of austerity by many economists and bloggers. At that time Krugman was claiming austerity referred to declining federal employees, not necessarily spending. Anyways, I posed the question what austerity mean to you and get the following response:

    “CR: To me, austerity is an insufficient budget deficit. That depends on specifics in each nation, but in the USA for instance, austerity might involve a budget deficit that is not in excess of the current account deficit. That would result in a net drag on the country. We’re not imposing austerity in the USA though.”

    Would you alter that interpretation today at all? If so, in what way?

    • I don’t think I’d alter it. We’re running a -3% CAD with an 8% budget deficit.

      I think the thing some people are looking at is the YoY drag from spending because we came out of the gate in 2009 with huge deficits that have since peeled back some as a % of GDP.

  3. I am not one to try to get into the head of PK, and I am not one to use Potential GDP as a useful measure of anything, but I think the point he is making is that the U.S. is trimming spending relative to a few years ago. Yes, perhaps austerity is too strong a word for this decrease, and we have to remember PK has argued for a space alien invasion to save our economy, but he is correct that the government is not spending as it did.

    Let me clarify that before someone throws entitlement spending in my face; the government is not investing in jobs/infrastructure programs like it did even a few years ago. I recently read somewhere (a dubious citation, I know) that the federal government has trimmed 600,000 from its payrolls, while government spending (at least that what the BEA counts towards GDP) dropped in Q4 2012.

    So, if we use PNGDP, with 2010 (the year of the big stimulus) as the baseline, we have seen a decrease in spending and a deviation of stimulus spending (actually investments, not transfer payments) as a policy.

    • Yeah, I see the point. I guess the way I think of this is that it’s like a guy who goes on a diet at weight of 300 pounds, loses 10 pounds and calls his diet a great success. There’s degrees of austerity or weight loss in here relative to the bigger picture. And relative to the bigger picture, I just don’t see this as qualifying for the term “austerity”: any more so than the 300 pound man gets to claim he was on a “diet”.

      See what I mean?

      • I do. I think the problem is PK is trying to equate Baltic austerity with the decrease in U.S. spending, which is ridiculous. What is happening in Latvia and the like is austerity, whereas the U.S. its something else. It really boils down to semantics, and what one considers austerity. I agree with your definition of austerity vis-a-vis U.S. policy (at least, I am not inclined to call current U.S. policy austerity by any measure), but I can also understand at least some of PK’s argument regarding spending now relative to 2010.

        • Yeah, and I think the most important part is that Krugman says the deficit was never large enough to begin with so shrinking it from where it’s already inadequate is bad. That’s his point and I think he’s right about that.

          • I think the challenge here goes back to the appeal of MR and Cullen’s initial (and current) approach, the “da Vinci style” of description and analysis first. I personally lump Krugman in with the “political economists” who look first to their desired political prescription or outcome and then allow that to heavily influence their discourse and analysis.

            To me, it appears that Krugman chooses the terms of his description more based on how he wants to influence the reader, not based on his desire to educate or explain.

            That’s arguably a subtle but really important distinction that I hope Cullen holds on to and why I hope he never gets involved in politics – at least, not in our current two party system. :)

  4. The Federal government spent $1.9 trillion in 2001; last year it spent $3.8 trillion.
    In 2007, it psent $2.7 trillion
    Then it went 3, 3.5, 3.6, 3.8.
    WHere is the austerity?

    • You have to compare it relative to something. The nominal spending figure ALWAYS goes up. It’s like saying that corporate debt is higher than it was in 1900 or that the amount of current circulating is higher than it was in 1900. Of course it is. This is the same mistake people make when they claim the USD has fallen by 95% since 1913. Relative to what terms?

      • Relative to inflation, maybe?
        Relative to growth?
        Relative to median wages?
        Any of those ways, it’s much higher. Looks like it’s growing by about 7 pct per year.
        We’re not spending less, we’re spending more.

        • I think the point Krugman is trying to make is that when the economy is depressed for a period of a few years, the numbers relative to GDP will jump even though the government is not actively spending more. Throw in the automatic stabilizers, and the point is not to freak out about socialism when there is a temporary blip in the economy.

        • How about relative to the standard of living? Which would you prefer – the consumption basket for the average worker from 1913 or the consumption basket from 2013? I’ll take the current basket, thank you. That way I don’t have to muck out the stall where I keep my horse, and I have access to antibiotics so both of my sons are still alive.

      • “The nominal spending figure ALWAYS goes up”

        This is especially true for shrinking economies. Ask the Greeks.

        Translated, this means: of course, absolute debt DOES matter. Quite unlike the economists of all colours are preaching. None of them seems to accept the fact that there is no natural law which guarantees permanent growth. But all their theories are build around permanent growth, no?

      • “This is the same mistake people make when they claim the USD has fallen by 95% since 1913. Relative to what terms?”

        Relative to a stable dollar value.

        • Who cares about the dollar value across time as long as low-risk investments match inflation? I care about what I can afford to buy today with he dollars that I have today.

  5. Yes it is austerity.. From Krugman’s point of view.
    Remember, he has been calling for even larger govt spending the last x amount of years. So his reality views austerity different from others, that’s’ all.

  6. All well and good.

    But go back and read PK’s blog posts from 5-6 months ago. Many of them were rants about how the Romney/Ryan budget plans would lead to ruinous deficits.

    Something does not compute.

    • It’s unfortunate that often economic discourse is tainted by trying to bend the facts to ones political affiliation.

      Although I think the question what kind of deficit spending is more beneficial is worth exploring, albeit a bit pointless in a country where there is only ever 2 solutions to a given problem.