Thursday, January 31, 2013

Unconventional Wisdom About Austerity

Recently, I challenged the conventional wisdom that when families and businesses are tightening their belts because times are tough, that government should, too. (See "Enough with the Belt-Tightening Already" and "Spendthrift Sam and Judicious Janet.")

To argue the point I used words, mostly paraphrasing an argument made more compellingly by Nobel Prize winning economist Paul Krugman. After the jump, another tack: a picture that's worth a thousand words.


During the 2008-2009 recession (roughly the area marked in grey in the graph above), it was government consumption that picked up the slack caused by the precipitous drop in the private sector's share of the GDP. Once the private sector began recovery, there was a significant drop in government's share of the GDP. Combined, the total American GDP has been plodding along at a slow but steady pace.

If you think the economy would have been better off if the government had tightened its belt in 2009, just as the private sector was doing, then you are an Austerian (and if you know that Austerian is a play on Austrian, then you just might be both). But if you think government shouldn't slack off until the private economy is growing at a self-sustaining pace, then you just might be a Keynesian.

Wonkblog's Neil Irwin has a more complete analysis of the graph above.

So, what should the government do going forward from here? Spoiler alert: Those scary headlines like "Yikes! Economy shrank in fourth quarter for the first time since 2009" should suggest the answer.


Mark Steger said...

Paul Krugman offers another picture worth a thousand words that shows the damage fiscal austerity is already doing to the American economy: "Our Incredible Shrinking Government."

glbeach said...

Hi Mark,
Nice post . . . except for the Austerian pun, give that a C-.