Paul Krugman: More About US Austerity


Following up on this post, you get an even better picture if you include state and local government spending. Yes, states and localities generally have to more or less balance their budgets — but the feds could and should have provided much more aid, so s&l austerity was also a policy choice. If we look at total government spending as a share of potential GDP, we get this:

So overall government spending as a share of potential GDP is less than one percentage point higher than it was before the recession.

Now, you want to consider that in the context of the huge negative hit to private spending that took place when the housing bubble burst. Here’s residential investment as a share of potential GDP:

By the way, the much-talked-about housing recovery is that little uptick at the end.

And on top of that you want to consider a substantial rise in personal saving, plus corporations making a lot more profits and just adding those profits to their cash hoards.

At this point, then, we have private demand still severely depressed by the aftermath of the housing-and-debt bubble, while government spending is barely higher than it was at the height of that bubble. Of course the economy is still weak!

And for those who still think that even more austerity is somehow the road to recovery, the question has to be, what category of spending, exactly, do you expect to rise? Business investment in the face of slack demand? Consumer spending when debt levels are still high and wealth has been savaged by the housing bust? What?

More About US Austerity –

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