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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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