The Radicalism of Today’s Austerity in One Chart
Earlier this week I wrote a post with a graph showing just how austere public spending has been in the last 5 years relative to historical episodes of recession and recovery. Paul Krugman coincidentally posted a piece making the same point a couple hours later (which just might have given it a bit more reach).1
This was the graph I posted (which is also in a paper I co-authored with Hilary Wething):
Note that the difference between today’s level of public spending and what would have prevailed had just the normal historical experience following recessions held is absolutely enormous. Had we tracked this normal historical experience we would have about $800 billion more public spending and the economy would be essentially back to pre-recession health.*
I’ve been trying to emphasize what a big deal this should be politically.
Here’s one more try. Earlier this year, the Congressional Progressive Caucus released a courageous document—their Back to Work budget. We provided technical assistance and consulting to them. What was courageous about was that they asked the straightforward question of ‘forget short-term constraints of politics, what does the arithmetic and economics say would be needed to push the economy back to full-employment?’ And we gave them an answer that was very close to what’s implied above—you’d need something well north of $600 billion to get close (assuming a high multiplier—about the full $800 billion with a low multiplier).
This is a startling number of course. The original American Recovery and Reinvestment Act (ARRA), rightly labeled the single-largest discretionary fiscal policy stabilization effort in U.S. history, was smaller than this—boosting demand by about $300-400 billion each year for two years (through both tax cuts and spending increases). Could it possibly be right that the economy could really need an even bigger boost five years after the Great Recession started, and even after all that demand generated by the ARRA?
Well, yes: numbers are numbers. The output gap (the difference between actual GDP and what could be produced if deficient aggregate demand was not suppressing GDP) remained at just under $900 billion even at the end of 2012, and had essentially been stuck there for two years.
Ok, numbers aside, we all know that the CPC’s call for the equivalent of another Recovery Act over the next year or two was just on another planet in terms of political precedent and reality, right?
Well, no. Look at the graph again. The difference between today’s level of public spending and what it would be if we just followed the normal trajectory following recessions is the equivalent of another Recovery Act spent in a single year.
Another way to say this is that it isn’t the CPC’s call for fiscal support that is radical—it’s the actual course we have taken over the past five years that’s radical. The CPC’s budget would’ve pushed the level of public spending to where it should be if it followed historic norms. The actual path of public spending we’ve taken has pushed it to complete outlier status.
So there have been radicals in fiscal policy debates in U.S. politics over the past 5 years, and they’ve won. And the country is much worse off for it.
1. Krugman comes up with a number about half as large for what public spending would be today if it had followed earlier precedent. There are two reasons for this. First, and less importantly, he looks only at the 2001 recession and recovery. Averaging in others slightly boosts the number.
Second, he measures the change in public spending from the previous business cycle peak, and not from the trough of the recession. There is a lot of merit to this approach (most long-run comparisons should indeed be done from peak to peak), but I’m going to argue that this is one of those rare times that measuring from the recession’s trough helps reveal some things.
If you look at how deeply damaged the economy was at the Great Recession’s trough in 2009 and compare it to how damaged it was at the trough following the early 1980s recession (1982 Q4), they’re quite comparable—the output gap was 7.4 percent in the middle of 2009 and 8.1 percent at the end of 1982.
Further (and crucially) the scope for monetary policy aiding recovery was much larger at the trough of the early 1980s recession—that recession had actually been largely caused by too-tight monetary policy, so loosening would be straightforward to do and promised to have significant effects. But the 2009 recession happened even as monetary policy furiously tried to reflate the economy, and short-term interest rates had been buried at zero with no real effect since the latter half of 2008.
For policymakers surveying the economy in late 2009 or 2010, they should have seen large output gaps and little scope for monetary policy aiding recovery even after the Recovery Act was passed, which should have argued for a more expansionary-than-usual fiscal policy stance. And yet we have seen the exact opposite—austerity has been more extreme than in any previous recovery.