Our Incredible Shrinking Government

Source: Paul Krugman

Most analysts are, rightly, shrugging off the surprise report of an actual decline in 4th quarter GDP. It will probably be revised away, and in any case it’s the result of one-off factors: a drop in inventories and a quirky sharp decline in defense spending.

Still, the report does highlight the role that shrinking government purchases of goods and services are playing in holding the economy back. And yes, I mean shrinking, not just growing more slowly than I’d like. Transfer payments like Medicare and Social Security are rising (although unemployment benefits are falling), but government purchases of stuff — mostly at the state and local level, where the stuff in question includes hiring schoolteachers — has been in fairly rapid decline.

Here’s a comparison, using the BEA numbers, of the relevant numbers in the current business cycle and during the Bush-era recession and aftermath:

By this measure, the era since the Great Recession began has been marked by unprecedented fiscal austerity.

How big a deal is this? Government consumption and investment is about $3 trillion; if it had grown as fast this time as it did in the Bush years, it would be 12 percent, or $360 billion, higher. Given a multiplier of more than one, which is what the IMF among others now thinks reasonable under current conditions, that ends up meaning GDP something like $450 billion higher, which is 3 percent — and an unemployment rate 1.5 points lower.

So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent. It’s a policy disaster.

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About James Crist

How do we stop America's decline? The country is in trouble and we can all feel it. Where did we go wrong? How do we fix it? We now have an auction-based government, for sale to the highest bidder. Politicians have become nothing more than corporate whores and pawns for the rich. If we want our representatives to represent us, let them get their campaign money from us, their constituents. We have to amend the constitution to get the big money out of politics.
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