This is (Still) Not Austerity

I’ve seen some economists (like the Market Monetarists) trying to claim that we’re undergoing a harsh fiscal austerity.  In doing so they can try to claim there’s harsh austerity going on and that QE and monetary policy has kept the economy afloat.

First of all, aggregate government spending has not declined.  In fact, it is rising.  We can rearrange the definitions of “austerity” depending on how we want to frame the debate, but I wouldn’t call a continued rise in current expenditures “austerity” like I would claim that what’s going on in Greece has been austerity (where government spending has actually declined 25%+ since its highs).  Anyhow, here’s the current expenditures in the USA at the State, Local and Federal level:



Second, if we look at why the budget deficit is declining you’ll notice that it’s not the result of government imposed austerity and reductions in spending, but increased tax revenues due to higher incomes and capital gains.  In other words, the deficit is declining because the private sector is healing and the Balance Sheet Recession is ending (which is precisely what I predicted would happen several years ago).  The hand off isn’t complete, but the government hasn’t dropped the baton by any means and it certainly hasn’t imposed harsh austerity.

Addendum – Reader “Circuit” points to the “right” way to calculate austerity according to Dr. Krugman.  He says we should use total govt spending divided by potential GDP.  I disagree.  Potential GDP is largely a construct of NAIRU based models and estimates of some sort of “optimal” form of GDP.  It represents little more than guesses about what an economy has the potential to produce rather than what is has actually produced.

If we show total government spending relative to actual nominal GDP then the story looks totally different.  Yes, as a percentage of GDP we’ve seen some decline, but we’re still at levels never seen before the crisis.  Is that austerity in historical terms?  Sure, but only if down is up.



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Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Nathan

    “increased tax revenues due to higher incomes” <<– So ending the Payroll Tax Holiday had no role in increased tax revenues? You are saying It is all due to higher incomes?

  • JK

    I wonder if Austerity is not a very useful concept. My thinking is along the lines of the idea that the government’s budget only has meaning within a context. Sure, government spending has not gone down and therefore there hasn’t technically been Austerity. But so what? What does that even tell us?

    What we should be concerned about, from a macroeconomic perspective, is real outcomes like price stability/inflation and employment/unemployment and general economic growth. Said another way, maybe what *should* be considered Austerity is the extent to which the government does not fill in the output gap. If government spending is increasing but there is high unemployment and a large output gap, then maybe that should be considered Austerity. Then we could quantify the degree of Austerity in such a way that is meaningful.

    To think of it another way…. technically government spending could be going down with a very large trade surplus. Would that be Austerity? Tehcnically, yes it would be. But that kind Austerity isn’t really a bad thing if the trade surplus is sustaining low unemployment, low inflation and economic growth.

    In sum: just discussing whether govenrment spending is going up or down, outside the context of the real outcomes, seems meaningless.

  • Stephen
  • Cullen Roche

    Payroll tax increases were about 25% of the overall change in revenues. The other 75% (the overwhelming majority) was due to higher corporate taxes and individual taxes.

    If we want to call $75B in payroll taxes “austerity” then have at it. :-)

  • Cullen Roche

    Firing employees only to pay them for unemployment benefits isn’t “austerity”. That’s why we look at nominal current expenditures. They tell the more complete story.

  • Cullen Roche

    1) I don’t see how the output gap is a terribly useful measure.

    2) I am trying to provide the context by getting people to stop obsessing over govt spending so much when it’s the pvt sector that steers the economic ship….

  • Kevin

    This premise of this post is that “government imposed austerity” is synonymous with “reductions in spending”… so, presumably, we could increase tax rates to 90% and the tax increase would not qualify as “government imposed austerity”???

  • Cullen Roche

    No. Govt imposed means govt imposed. Most of the tax increases have been the result of higher incomes and higher corporate profits due to pvt sector improvement. It’s the reverse of automatic stabilizers at work. The govt isn’t really “imposing” anything. The pvt sector is simply improving which is leading to higher govt revenues.

  • Stephen

    I think you want to look at rate of change here, not levels. You can see from your chart that we clearly had a lot of spending out of the recession, then it’s flattened since, obviously with the winding down of the ARRA.

    If your point is that we haven’t drastically cut the way Greece has, that’s a given. But we have slowed the rate at which we’ve been spending, which has undoubtedly been detrimental given the circumstances (unemployment, etc.)

    Whether we should call a slower rate of spending “austerity” is semantics and a distraction.

  • Cullen Roche

    Sure, but my big picture point is that the govt’s gradual declines have been offset by pvt sector improvement. If you just look at that one sector of the economy then you can come to very misleading conclusions about the overall health of things. I know LOTS of people who looked at the govt prior to 2013 and said the 2013 economy would be a wreck because of the payroll taxes. That has turned out to be wrong because it didn’t look at the full picture.

  • JK

    1) Can you elaborate on why you think the output gap isn’t a useful measure?

    2) I hear ya.

  • Cullen Roche

    Well, the problem with the output gap is that it’s a pretty unreliable guess of where GDP should really be. It’s just a trend analysis in essence. Kind of like looking at a corporate balance sheet with 10% revenue growth, drawing a trend line and then saying there’s an “output gap” when revenue growth slows to 7.5%. There could be more going on there than that, you know? Economies grow and change over time for various reasons. Personally, I find it somewhat useful, but I wouldn’t emphasize the output gap TOO much. It just doesn’t provide a clear enough picture.

    Does that even make sense?

  • John Daschbach

    I find the use of nominal government expenditures to be questionable. If we use real expenditures current spending is 2.1% lower than peak spending. If we use real spending vs real GDP then is 7.6% lower. Real spending vs real GDP is 3% lower than 1983. This is using the data series GDPC1, PCEPILFE, FGEXPND ASLEXPND (SLEXPND is the better data series because it’s updated quarterly and not seasonally adjusted it’s a small difference)

    Look at the data in real terms and you reach a different conclusion. Real spending is lower. Now look at a couple subsets.

    Real state and local expenditures and investment is down 8% Real State & Local Consumption Expenditures & Gross Investment, 3 Decimal (SLCEC96)

    Real Federal consumption and investment is down about 9%
    Real Federal Consumption Expenditures & Gross Investment (FGCEC96)

    Real government spending (Fed, state, local) vs GDP has been between 30% and 40% of real GDP since 1971. Like people who think that the 12.5% of Tsy held by the Fed sets the interest rate, I think arguing that the private sector steers the ship is a bit of a stretch. Both sectors have an impact.

    In nominal dollars the deficit is contracting due to almost flat nominal government spending and increasing nominal tax receipts. True. But it’s a long stretch to argue that the private sector is healing because the deficit is going down. The private sector has increasing real income/wealth disparity, decreasing economic mobility, …. and you argue the private sector is healing?

  • Greg

    “Firing employees only to pay them for unemployment benefits isn’t “austerity”

    It is for the employees who now have at least 40% less salary.

    The number of people who have income loss foisted upon them by a govt decision is not an inconsequential amount. This whole “we’re out of money” hysteria that is gripping so many entities is causing real losses to real people….. but yes there are ways to look at the data and say “we havent cut anything”

  • circuit

    Hi Cullen,

    Wouldn’t it better to rely on real govt expenditures in this case:

  • circuit

    Sorry, I hadn’t read John’s comment right above. My bad…

  • Cullen Roche

    These aren’t fabricated figures. We haven’t cut anything. That’s the reality. The CBO budget review for July showed 2.893B in outlayes for the first 9 months of the 2013 fiscal year vs 2.983B in 2012. That’s not nothing, but it’s not harsh austerity. And when you add in the state and local governments the figure actually increases year over year. Government spending is not declining. This is a fact.

  • Cullen Roche

    If that’s your argument then govt spending has been on the decline since 2009. Which means the recovery has occurred entirely in the face of govt “austerity”. Are you sure you’re willing to make that argument because I think that totally misrepresents the 1.2T deficits we saw during 2009-2012.

    Back govt spending up as a % of GDP and we get a very different story here. This is the Krugman model of austerity using NGDP. It shows govt spending at very high historical levels. So yes, it’s come down, but if this is austerity then down means up.

  • Cullen Roche
  • Charles Fasola

    You continue to live within your Wall Street bubble, Cullen. Austerity does not consist solely of the level of government spending. It also consists of cutting and lowering spending on programs that benefit those less fortunate and those who labor for productive enterprise. For you to equate firing employees, who earn salaries and other forms of compensation, with paying unemployment benefits is awfully closed minded thinking. The amounts paid for unemployment benefits is for the most part less 40% of what a working person receives. Only a very small group in the private sector are reaping the improvement you imagine. I really like your description of money creation. But your perceptions of reality make me cry out “I can’t take any more”! I’m finished.

  • Cullen Roche

    All I did was provide raw data. You’re the one who came here claiming that certain types of govt spending are better than others….The fact is, nominal govt spending hasn’t declined. And if you want to use real terms then the Keynesian argument about austerity looks infinitely worse. It would show that the economy has actually grown in the face of pretty severe austerity. So either way, your argument looks really bad for what you’re trying to achieve.

  • circuit

    John’s point about cuts at the state and local, which offset the federal stimulus is valid.
    Here’s a better chart that includes real federal military spending.

    Regardless, the most effective way to judge whether austerity is occurring is to look at the ratio of total govt spending to potential GDP. Krugman had a good piece on this a while ago:

  • Cullen Roche

    1) “Potential GDP” is a totally fictitious figure that doesn’t really represent anything other than a trend line based on rear view mirror growth. It’s actually a fairly useless figure.

    2) This “austerity” view actually debunks the idea that the pvt sector has been weak for the last 5 years since the economy just posted its highest RGDP in 4 quarters despite this “austerity”. In other words, it would totally validate the Austerian view of the economy….

    3) Professor K’s nominal figure is exactly what I described here in the post. If he hadn’t adjusted it for the fake potential GDP then there is no austerity.

    4) Adjusting for GDP (not potential GDP) shows more spending per GDP than at any time prior to the crisis. Is that really austerity? No, it’s off record high levels, but it’s still very very high by historical standards. I have a feeling Dr. K probably looked both charts and saw the high historical reading at present and decided not to post that because it is obviously not austerity.

    The govt spending advocates should be happy. The US govt isn’t cutting back remotely close to as much as some people imply….That’s a GOOD thing.

  • SS

    What would we do without your independent and critical thinking?

  • Cullen Roche

    I think you’d get by.

  • John Daschbach

    No, I don’t think I was making the argument you think I was. I think the real spending to real GDP measure has value for how it impacts different parts of the economy in different ways. Yes, vs GDP Govt spending has been decreasing since 2009. It has before a number of times, always associated with an expansion of GDP.

    My point was that when you look at the rate of increase in income/wealth disparity in the US it is correlated with sharp decreases in real govt spending/GDP. The private sector healing has been increasingly concentrated in a smaller fraction of the private sector with each of the large decreases in spending/GDP, and the size of the decrease in spending ranks in order with the increase of disparity, with the 1992-2000 period the largest.

    The “private sector healing” is confined to a smaller segment of the populace than at any time since we have decent data. It has been good to great for myself and all of my friends and family, but it has been weak to poor for many people I know and interact with. The data support this. Real median household income is down 6.5% from it’s 2007 peak, and down 4.5% from 2009. Thus the point at which households are just holding water with 2007 is well above the median, probably around the 80th percentile. I do not consider that “private sector healing”.

  • Cullen Roche

    Where are you getting your data from? The Social Security Administration shows median wages up 2.7% since 2009 (using 2011 data as there is no 2012 update yet).

    The longer-term picture shows an even better story. Median wages have outpaced inflation since 1990 contrary to popular mythology.

    This whole story about the collapse of median wages in the USA is vastly overstated by the left. It’s their version of fear mongering and exaggerating something that shouldn’t be exaggerated. The right does it by saying the govt is bankrupt. The left does it by saying the middle class is bankrupt. In the end, both stories are mostly wrong.

  • tw

    So Cullen, as a long-time reader I’ll try to help the cause here. I think a lot of the negative reaction is a result of the headline, which seems to imply that we haven’t really cut back on government spending, while many commenters are trying to argue that we have from a “real” or “potential” perspective. I think we can all agree that govt spending has stagnated, and combined with the higher top-level marginal tax rate, increased realization of capital gains, and expiration of the payroll tax holiday, is leading to a rapid decline in the deficit.

    Now you and the monetary realism brain trust would probably argue that a rapid decline in the deficit would actually be counter-productive at this point as the private sector is still not quite out of the woods. Krugman and some others commenting above would probably argue that the real insight that needs to be learned by most of the country is that we shouldn’t fear govt spending in this type of environment. While I agree with your point that it’s a stretch to call this austerity, maybe there’s a larger battle to be won, in not shooting ourselves in the foot by trying to balance the budget in the next year or two.

    Hope that helps. My concern is that there are a lot of teachers, govt and DoD employees who will get hurt next year due to flawed economic thinking…

  • Cullen Roche


    Thanks. I totally agree with you there. I wrote this piece about how much larger the deficit could be in December of last year because I really believe the deficit should be bigger and I think the govt could be doing a lot more than it is.

    So I totally agree that things are worse than they should be. But my point here is that I don’t think it’s fair to categorize this as austerity. Yes, things aren’t nearly as good as they SHOULD be, but I still think it’s misguided to start claiming that this is a European style austerity. It’s really nothing remotely close to what’s going on in countries like Greece and I think we should be accurate in describing what’s really going on. That’s all I am trying to do here….

  • Greg

    I wasnt trying to say they were fabricated Cullen I just think distribution matters and while much of the cut in spending has simply been offset by increases elsewhere the cuts have not been miniscule for the many who have experienced them.

    You cant be arguing that no one has had their incomes reduced, deliberately, out of calls for having to save money. I see it in every state budget. Much of this has likely just been a way to increase to somewhere else I grant you but millions of people who might have confidently spent on a new car or any number of larger purchases have not done so. Many others are one or two furlough days away form missing house payments……. all in the name of austerity.

    Granted this is mostly a ruse to funnel the savings from education or whatever to elsewhere but this has all been done in name of austerity and the calls are STILL coming for more and continued cuts.

  • Kevin

    This is true, but I still don’t like the way you are framing the data… there certainly have been tax increases (some would argue significant tax increases) during this “recovery” combined with an overall decrease in the rate of growth in spending (some would argue a significant decrease). This decrease in the rate of growth in spending is clearly evident in the flattening in the first graph that you posted during the period after the recession, which shows average annual increases in government spending of ~6% before the recession vs increases of less than 2% after the recession (and the most recent quarterly data suggests that govt spending increased at a 0.8% annual rate… you can change the units on your graph to “% change from a year ago”). And when we hear arguments about how the economy needs to grow at X% annually in order to bring down unemployment and the government’s contribution to growth is less than X%, then I don’t think it is unreasonable to suggest that the government is imposing austerity… definitely not Greek or Spanish style austerity, but still austerity.

    I’m pretty sure you have suggested this in previous posts when you discuss the balance sheet recession (as have Jan Hatzius, Krugman and others), so I’m not exactly sure why you are taking this tact now?

  • Johnny Evers

    This story shows the median household is up since Aug. 2011, but still down overall since 2009.
    Still 6.1 pct below where it was when the recession began.
    This story is a sneak preview on the Census Bureau’s next data dump coming in a few weeks.

  • Hans

    Mr or Dr Roche, I agree with the general theme of this thread.

    The tax burden has been increasing in more way than just higher income.

    Please, click chart one.

  • Hans

    The problem with the word Austerity, is that everyone uses it but no one defines it.

    Example: a poster defines austerity as being cashiered, which is not factual…

    The Greeks are not suffering austerity either, because once you live beyond your
    means, you will in time simply revert to the mean…

    My 1978 dictionary states: harsh, severe. I would add conditions beyond one’s control.
    Furthermore, 47% or more of Americans do not understand the meaning of the word.

    As Mr Roche indicated, there is no austerity in America, unless one is engaging in

  • Cullen Roche

    I wonder why the SSA data is higher. It would seem that the SSA is a more accurate source than the Census because the data they’re getting is straight off of W-2’s….but maybe I am wrong?

  • Johnny Evers

    Probably there is a difference between ‘median wages’ and ‘median household wages’.
    As in: Dad is making slightly more money, but mom lost her part-time job so the household is down.

  • Art

    Cullen, think you may be overstating your view too. Looking at flows instead of levels, YOY change in annual federal govt spending is at levels last seen in the 1950s. (Levels still count, obviously, but GDP is usually expressed in percentage change terms, right?)

    YOY change in private-sector expenditures has shown a similar secular decline, and has started to roll over after a sharp post-crisis rebound:

    It would take a lot more digging to make much sense of this data, and “austerity” is a semantically loaded term. But there do appear to be trends at work here — e.g., a reacceleration of secular trends? — that we probably shouldn’t wave away.

  • jk

    Yes, makes sense. My shorthand belief is this: Enough AggDemand + ‘Economic Freedom’ + Intelligence (solid education through country) should = a robust economy. Of course there are other important things like proper legal system etc.

    I’m still skeptical of the term Austery. Not sure how useful of a concept it is. Again, just looking at whether government spending is increasing or decreasing, without putting it in a context, seems meaningless.

  • John Daschbach

    There is a difference between median wages and median household income. The SS report includes only those who are getting W-2’s, i.e. people who are working. The Census household survey estimates household income via sampling. So it includes a large amount of households without W-2’s (like mine)

    I got the data from US Census reports (which don’t cover the whole range in any one report). The NY Times has a link to this.

    Of course the definition of household complicates the issue.

    Another way to look at this is real disposable income per capita. This is unchanged since 2009 within the error bars. Looked at on a log scale (compound growth) the current situation stands out distinctly as the only long term suppression of this metric.

    When you introduce the impact of health care increases and cost shifting the picture near and below the median (which doesn’t show up in disposable income) the real impact is probably far greater than the Census data indicates.

    Another data set to consider in your analysis of this is Civilian Employment-Population Ratio. This again supports the view that using the SS data is problematic with regards to the private sector recovery view. Sure, it doesn’t have any way to assess voluntary vs involuntary employment, but it seems reasonable that voluntary unemployment is concentrated in people who don’t have need for W-2 wage income.

  • Hans

    Nice wage link; thank you, Sir!

  • M

    Cullen, this was just a disaster of a blogpost.

    Austerity is not just the absolute level but also the relative decline.

    In other words, the speed of the decline matters and it impacts GDP growth significantly. If you come down from a record-high level to a level that is still very high, but do so at a very brisk clip, that is austerity.
    In fact, the deficit has fallen faster than at any time since WWII, and this has severely constrained growth(together with the BSR).

    This is like conservatives who used to argue about OVER ONE TRILLION DOLLARS as a deficit a year ago even as that as a percentage of GDP got lower and lower all the time.

    It’s quite amazing that you’d fall for this sloppy kind of thinking.
    Not like you, typically.

  • Cullen Roche

    The point you missed is that there’s been no decline.

  • John Daschbach

    “If we show total government spending relative to actual nominal GDP then the story looks totally different. Yes, as a percentage of GDP we’ve seen some decline, but we’re still at levels never seen before the crisis. Is that austerity in historical terms? Sure, but only if down is up.”

    How can any rational person look at the graph you presented vs GDP and say there has been no decline? From the high in your chart it has come down 10%. “Some Decline?” I’d say 10% is a significant decline.

    “At levels never seen before the crisis?” Actually, within the noise we are at levels seen in 1983 and 1992. “Never Seen?”

    Using this “logic” when will it be austerity? Pick a date an some reasoning. 1960?, 1970?, 1980?, 1990? 2000?

    It is a decline to anyone who can think critically. It’s a decline to anyone who has passed Calculus 1.

  • Cullen Roche

    Nominal aggregate spending hasn’t declined. If you move the goal posts as a % of GDP then it’s “declined” to one of the highest ever historical levels….

  • John Daschbach

    Real spending has decreased from it’s peak. The last short term data is a slight uptick.

    But using real numbers is viewing things in the real world. Using nominal dollars is the gaming world. I like real world football more than gaming football.

    It’s just like using Centigrade or Fahrenheit for temperature. It’s related to quantities that have value but without conversion to Kelvein it’s scientifically meaningless.

  • Greg

    “without conversion to Kelvein it’s scientifically meaningless”

    How so? Maybe if you are doing atomic physics or P Chem but plenty of “science” is done with the Centigrade or Fahrenheit scale

  • Suvy

    From a AD perspective, what matters is the shift in spending on the margin. There’s a difference between cutting the government balance 10% of GDP all at once and cutting it by 1-2% over the course of 5-7 years while having a massive central balance sheet expansion. The key factor is that the amount of spending that’s cut doesn’t affect growth linearly. I actually think it’s extremely nonlinear.

  • Cullen Roche


    You’re moving the goal posts by using govt consumption and investment. This is a much more narrow view of govt spending and doesn’t include current transfer payments, interest payments, and subsidies which explains why your data is about 1.2 TRILLION dollars smaller in your data set. That’s 33% of the entire data set you’re using!!! You can use this if you want, but it’s a pretty narrow view and really misrepresents what you’re trying to explain.

    Second, adjusting for inflation doesn’t account for the fact that I am discussing year over year changes in the deficit and the fact that “austerity” implies a self imposed deficit change. As in, politicians CHOSE to reduce the deficit. My whole point is that they did not. Adjusting for inflation using chained 2009 data is just another way of moving the goal posts on this.

    I know this upsets a lot of the liberal readers here, but the facts are the facts. Despite a declining deficit, there really hasn’t been any “austerity”. I am not saying I support the smaller deficit or that it’s a good thing, but your version of what’s going on is highly misleading.

  • Cullen Roche

    I think everyone is missing the point of the post. I am not saying that the reduced deficit is necessarily a good thing. I am simply pointing out that there hasn’t been a concerted and govt imposed decline in the deficit. It’s been the result of automatic stabilizers (or in this case automatic destabilizers).

  • Suvy

    Fair enough. By the way, do you think it’s possible that we could still find a way to reduce spending and cut the deficit at the same time? Capital spending has a much higher multiplier than consumption spending, so if we cut consumption spending as much as and possibly even a little more than we increase capital spending, we may actually be stimulating the economy while cutting the deficit.

    People always compare the US to Japan in the past two decades or the US in the Great Depression, but those are two completely different situations. Japan in the past two decades and the US in the 30s had overcapacity issues stemming from investment-led growth models. Now, we have an overconsumption problem. The structural situations are completely different.

  • Finn0123

    Hi Cullen,

    I’m a bit confused on the data you chose to use for this analysis and was hoping you could take the time to respond.

    Most of my confusion lies in the data you chose to use. For example, you use current expenditure which includes transfer payments, most notably social security. Given the demographic shift we are, and will, experience, transfer payments are expected to increase, so it isn’t necessarily surprising we haven’t seen a huge shift. If the point is to say US austerity isn’t like Greece’s, which has seen cuts to transfer payments, then I would agree, but at the same time I don’t know if that is the correct comparison.

    Perhaps more to the point, transfer payments aren’t really part of the austerity debate in the US, whereas cuts to government spending on national defense, goods, and services are the focus of the discussion. This distinction is important and is why government consumption is part of GDP but transfer payments are not (

    Also, a minor point to add is the series you use don’t necessarily tell us what is occurring today as the state and local government series you use is updated annually and hasn’t been updated for 2013. Thus, it would seem premature to draw conclusions from this series.

    If we correct for these issues, we sees a slightly different picture:
    Again, what the US is experiencing is no where near what is seen in Greece, but the process in the US is only starting and is down 2.3% since the series peaked in 3Q 12, with more spending cuts to come. Consequently, it would seem that, at the very least, government consumption has decreased, bringing with it mild austerity.

    Finally, if we plot this series against nominal GDP, then we see something like this:
    which shows total government consumption as a share of the economy is above what was seen in the late 90s, but otherwise is below what we’ve seen since 1950.

    Thank you for taking the time to consider my thoughts; it is much appreicated.