Government Austerity Hurting Economy

Ezra KleinThere is a blogging problem that I’ve only really noticed the last few months. There is a constant feeling that you’ve written about “this” (whatever it is) before. Because you have. Because the same old bullshit comes up time and time again. Case in point: the size of the economy shrunk last quarter. Now, this hasn’t happened since I started writing about politics. But I seem to write every day about the story behind this fact.

Our GDP decreased by 0.1% this last quarter. But if it weren’t for the shrinking of government purchases, our GDP would have increased by 1.2%. That’s right: the government is hurting our economy by not spending enough. And this has always been true for the last couple of years. It isn’t just conservatives who are blithely unaware that the federal budget deficit has come down each of the last three years.[1] That in itself would not be so bad, given that it hasn’t come down that fast. The problem is that at the same time, state and local budgets have plummeted.

Ezra Klein presents the following graph which shows the share of public and private spending as it relates to GDP. And what it shows is that despite the claims of conservatives—Government spending is out of control!—government is spending less and less, quarter after quarter.

Public and Private Spending Effect on GDP

So there we have it again: the government needs to spend more, not less. Government austerity is hurting our economy. It isn’t a lack of “confidence” or a balanced budget. There is not enough demand and it ripples all through the economy. The government needs to spend more, not less.

[1] In looking for a reference, I was again reminded of just how deceptive conservatives are when they present the budget deficit. They invariably present the fiscal year 2009 budget as Obama’s, even though it was Bush’s budget. The more intellectually honest writers note this but then pass it off as though Obama could just step into office and change Bush’s budget. Of course, I’m not blaming Bush for the budget deficit. It came about because of the financial crisis and the bursting of the housing bubble. It isn’t particularly Bush’s “fault,” but it most definitely isn’t Obama’s.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

0 thoughts on “Government Austerity Hurting Economy

  1. I think just as important as how much the government spends is how it spends it. The government spends money on some spectacularly counterproductive projects, see the war on drugs. Every dollar spent on the DEA is a waste of money, better spent on just about anything else. Hell even burning the money for heat would be a better use than what it currently buys. Shifting some of the budget from our massive military to social programs could also do some good. I tend to think that if our funding priorities changed we wouldn’t need to raise spending to stimulate the economy, though I am not opposed to the idea. Obama’s stimulus package failed (sort of, it helped) because it was much too small.

    Even some of our smaller programs that seems like a good idea can turn out to be counterproductive. I remember a lecture I attended by a local economics professor blasting the "cash for clunkers" program. Poor people don’t have the cash for a new car, so the program mostly benefited those in the middle to upper income range. Then the old cars were destroyed, this is a waste of good equipment that someone without a vehicle could really use. The professor said the money would have been better spent if the government put in an order for a fleet of fuel efficient cars from GM (thereby negating the need for a bailout) which would be given free to poor people. Of course that would be socialism, we only help the rich in the US.

  2. This is a bet, I imagine, that "a lie repeated often enough becomes the truth." The smart people are all in consensus that deficit reduction (and we know what that entails and what expenditures are untouchable) is the only possibility preserving us all from some sort of "Mad Max"-style hellworld where total chaos reigns (load up on guns, and bring your friends, as the song says.)

    Now, the smart people have been wrong about virtually everything they stuck their slimy fingers into over the last (many, many) few years, but I guess they’re betting that this manufactured pseudo-consensus will stick in people’s heads as rational and nonpartisan.

    (AKA, they’re betting that people forget how they nominated Romney/Ryan to be their standard-bearers; even the majority of Americans with little free time to assess political standpoints took one look at those smug faces and vomited uncontrollably.)

    Will this approach work? Probably not in the Total Domination dream these people had when Romney appeared in Gallup polls to be even with Obama. But they’ll presumably get some Obama/Dem concession that weakens the social contract ever so slightly (ever so significantly for, like, you know, us real people) yet again. Which they will consider a victory. And damn me if I don’t think Obama’s brain trust will consider it a victory, too.

  3. @Andy – You are right that some ways of spending money are better than others. But from an economic standpoint, there is is no counterproductive spending (at least not in the short term). War on Drugs money gets spent hiring agents and COs. Cars for clunkers did create demand for cars.

    Having said that, the War on Drugs takes productive people out of the economy and puts them in cages. Destroying cars lowers our resources. We would be far better off if we would just embrace socialism. One big problem I have is the private methadone industry. It is something the government should run. And certainly, methadone and other programs would be a much better use of money than the War on Drugs.

    The stimulus was not that good in part because it wasn’t big enough. It was also too heavy in tax cuts (but the payroll tax cut seems to have been very effective). Again, supposed free market ideology hurts us in fixing the economy.

  4. @JMF – I could deal with this if it were all Republicans. Unfortunately, a large part of the Democratic Party is just itching to cut entitlements. Obama, of course, but also Howard Dean.

    I’m glad you brought up Gallup. I have great admiration for people who do polls. It is very hard. But Gallup has a bit of a history underestimating how many minorities are going to vote. I would have thought they would fix this by now. They missed the presidential election by over 6 million votes. That’s almost 5%!

  5. Andy — I think your professor was right regarding the "cash for clunkers" program, and you’re right regarding how anything helping actual poor people (or even perceived as doing so!) is tarred with the label "socialism."

    It seems to me that the label only sticks if the idea/program/law/whatever actually DOES help poor people. Then it’s "socialism" and an abomination. If the i/p/l/w helps the middle-class, it may be derided as "socialist" but often ends up being semi-popular and the criticism skulks away to hide. (Of course the the i/p/l/w helps rich people, it’s not "socialism" but given some other label like "encouraging growth" or "job creation" or some such, and nobody complains about it.)

    This little rule of thumb doesn’t apply to all programs which help the middle classes, of course — some are ignored or ineffective. But it certainly applies to anything which benefits the richest or poorest.

    When you look at the history of the New Deal, it was also full of "cash for clunkers" type programs which were half-baked. Some of the best New Deal programs, though, were the ones directly affecting poor people, and while the "socialism" attack was thrown at them, too, the programs were insanely popular (and some are still in place today.)

    There are many reasons for the difference between then and now, but a big one is that poor people then had better opportunities to be politically informed and active through labor movements. Today a lot of poor people don’t vote, or vote every four years and don’t/can’t pay attention in the meantime, or pay attention to rabid nutjob sources like AM radio or Fox.

  6. @FM
    If the DEA funding was the functional equivalent of paying people to dig a hole and then fill it in that would be fine, not money well spent but still adding to the economy. But you have to add in the cost of incarcerating people for victimless, consensual "crimes." Then they have a criminal record that impedes future employment opportunities. The DEA has created a climate of fear around the prescription of opioids, leading to millions of people being disabled because of untreated chronic pain. Some of these people, and persecuted drug users, commit suicide. Any medical research of schedule 1 drugs, outside of "abuse" studies, is suppressed, research that could improve quality of life. intransigence on the issue of harm reduction means scores of overdoses, Hep C and HIV that could be prevented cost resources for treatment and large opportunity costs. Drug prohibition gives rise to narco-states. The list could go on and on. It is difficult to quantify all these externalities, but suffice to say they are massive.

  7. @JMF
    Political apathy among the poor is a big problem, though I am often surprised to see poor people vote against their own best interests. Sometimes they are uninformed and fall for the rhetoric, but I see many people vote against their own economic interest in order to make a symbolic statement on some social issue. for example I have seen poor people vote republican for this reason.
    Vote against gay marriage
    Get tax cuts for the rich
    Vote to prohibit abortion
    Get more corporate welfare

  8. @Andy – I agree. In fact, I discussed that kind of harm. You did a good job of filling out the list. When you include the feedbacks, you are left with the drug laws doing almost unimaginable harm to the economy. However, stimulus is short term, and if you hired an extra 500 agents, it would stimulate the economy in the short term even as it would hurt the economy in the long term.

  9. @Andy – Many poor people vote against their own best interests. But so too to many rich people. Statistically, the richer you are, the more conservative you are. If poor people all voted as much as rich people, the Republican Party in its current form could not exist. This should make us all happy. All we need to do is get everyone to vote and we win. We wouldn’t get Democrats, we would get [i]good[/i] Democrats.

    And that is the least cynical thing you will ever see me write.

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