Pethokoukis, Economics, U.S. Economy

So is US spending austerity working or not?

041813yardeni

From economist Ed Yardeni:

There’s no denying that the latest recovery in real GDP has been subpar (Fig. 1). Real GDP has increased only 1.8% on average over the past two years (Fig. 2).

However, this average growth rate rises to 2.9% excluding total government spending. That’s closer to the old normal. Needless to say, the profits recovery has been abnormally good relative to GDP.

041813yardeni2

I welcome a shift in the composition of US GDP more toward the private sector. Not only is productivity higher there, but we actually have a better idea of what’s happening in the economy. As Tyler Cowen notes in The Great Stagnation: “We are still valuing government expenditures at cost rather than being able to measure prices set in a competitive market. … The larger the role of government, the more the published figures for GDP growth are overstating the improvements in our standard of living.”

Update: To answer the question “What spending austerity?”, I have added a chart showing real government consumption and investment, as well as federal outlays as a share of GDP.

041813govt

12 thoughts on “So is US spending austerity working or not?

  1. Cowen is right. Sadly neither the Democrats nor the Republicans seem to care very much for the facts and are still pushing more and more government.

  2. Why should spending reductions from the height of the financial system bailout, reductions that have not even reached the pre-crisis spending increase trajectory, be judged in isolation of the recent tax increases that have accompanied it, especially in the absence of any entitlement reforms and with hefty Obamacare penalties/taxes about to kick in 2014?

    • Hellooooo. Yardeni is talking about total govt spending, including states and local jurisdictions where spending — and employment — have dropped sharply. That’s an unavoidable consequence for political subdivisions that require balanced budgets. But to answer Mr. Ps question, there is no doubt that the economy would be much stronger if those state and local workers were still on the job, a fact that is self evident in the second chart. Certainly, many of those workers will not be missed. But the timing sucks. Layering layoffs on layoffs does not improve consumer confidence.
      Consider Scott Walker. He swung the ax with particular relish in Wisconsin, promising to create 250000 new private sector jobs. From Polifact: “Factoring in the February numbers, our records say that the state added about 63,700 private sector jobs since Walker took office in January, 2011. The means he has 186,300 jobs to add in the remaining 21 months of his administration — an average of 8,871 per month — to meet his promise.” The monthly rate to date: 2,359. I wonder if Vegas is making book.
      http://www.politifact.com/wisconsin/promises/walk-o-meter/promise/526/create-250000-new-jobs/

      • Your propaganda link notwithstanding, I don’t see how your “evidence,” even if we assume its validity, supports your assertion that “total govt spending, including states and local jurisdictions where spending — and employment — have dropped sharply.”

          • OK “sharply” is wrong. (See how easy it is to admit a mistake? Try it some time.) This the bureau of economic analysis. The BEA calculates GDP so if you don’t trust it there’s not much point in discussing GDP at all.

            State and local expenditures have been essentially flat since 2008. Here are the last three years. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=88
            Those are nominal dollars, so spending is in fact down in real terms.

            And state and local employment is down in any terms, by 400k FTEs between 2009-11. (most recent data. Later census numbers show a continuing trend
            but dunno if census is on Juandos’ commie list.)

            http://www.bea.gov/iTable/iTable.cfm?ReqID=5&step=1#reqid=5&step=4&isuri=1&402=44&403=1

            That ‘s enough to push overall govt employment into the red.

            Why layoffs if expenditures are merely flat? Tax revenue shortfalls have burned through rainy day money; expenditures increase because of social welfare programs; the feds increasingly are saying you’re on your own. And the Fed’s zero interest rate policy, translated into pension funding requirements, is an icepick to the eye.

            Here is the Center for Budget and Policy Priorities talking about record budget shortfalls. As in ever. http://www.cbpp.org/cms/index.cfm?fa=view&id=711

          • Yeah todd when ever I want information on excessive government spending and the resulting short fall I always look to the progressives at CBPP for advice….

            Ha! Ha! Ha! Ha!

            The problem is spending, not shortfall…

            but dunno if census is on Juandos’ commie list“…

            Not commie list todd, list of tax leeching parasites…

            Now if we could dump about 90% of this nonsense called the Catalog of Federal Domestic Assistance maybe the balance sheet would look a bit more balanced…

    • Agreed. That was always a big problem with the “[non-]stimulus.” As suspected, it would be counted as baseline for future budgets (even by Jimmy P??). It was sold as a one time thing, not as a baseline against which claims of “austerity” could be asserted.

    • Unless you rode down a mountain path on your faithful mule, Dubya, to take care of your correspondence by carrier pigeon, while the missus is home schooling the younguns, then govt played a role in your productivity today.

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