Krugman’s Blog, 2/11/13

There were 3 posts yesterday.   The first was “Austere Indeed:”

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.

The next post was “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?

The last post of the day was “The Right’s Stuff:”

Many conservatives, including old-line relatively moderate conservatives, were outraged by the political thesis of my book The Conscience of a Liberal (first published before the 2008 election) — which was that extreme movement conservatives took over the GOP a long time ago, were able to win elections by exploiting white resentment, but were on the verge of losing their grip thanks to demographic change.

But that’s pretty much exactly what Sam Tanenhaus, the Times book review editor and a long-time conservative, is now saying.

In COAL I also argued that the place to begin a new liberal agenda was with health care reform, more or less along the lines of the Massachusetts reform, which I believed was finally achievable. (I hoped for a public option, but oh well).

I sometimes get people declaring that I don’t know anything about politics; I’m willing to agree, with the proviso that you also admit that *nobody* knows anything about politics. But I don’t think that I’m doing all that badly here …


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