An annoyed Ryan Avent combats claims that we aren’t seeing any real federal spending cuts. Indeed — for those of us who warned that premature austerity would undermine recovery, it’s frustrating to see the other side shift from “Austerity is expansionary!” to “Austerity? What austerity?” when it turned out that austerity did, indeed, undermine recovery.
What’s the clearest way to see what’s happening? I have taken to looking at the ratio of spending to (the CBO’s estimate of) potential GDP. You don’t have to believe CBO has it exactly right to believe that a measure including normal growth and inflation is a better baseline than the raw numbers. Here’s federal spending relative to potential GDP:
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.