Alex Tabarrok has put together his own version of an austerity vs. economic growth chart, using Paul Krugman’s preferred austerity measure, total government expenditure divided by potential GDP (see above chart): Krugman sees “very bad policy” from the decline in government spending, while Tabarrok reads the chart this way:
In the 1990s growth was strong even while “austerity” was increasing (falling red line). More recently, we have seen a big increase in austerity according to Krugman and his measure but although there has been no boom, growth has remained modest.
I see it like Tabarrok. I have done a few charts like these and have found the economy holding up pretty well. Here is a twist: I took the Krugman austerity data (red line) and compared it against private-sector GDP (blue line). Even as spending collapses, private-sector GDP bends a bit but does not break.