Here's How Austerity Torpedoed The Economic Recovery

[xchrom]

http://www.businessinsider.com/austerity-economic-recovery-2014-8


People wait in line to enter a job fair in New York April 18, 2012

Neil Irwin has a good piece up on the NYT Upshot blog aiming to demonstrate why the recovery from the Great Recession has been so weak. He rightly highlights the drag of government spending, but I’d argue that if one narrows down on the question of how big a role has austerity played in slowing recovery, even Irwin’s numbers don’t quite capture it.

Irwin’s method is to look at the various components of gross domestic product and calculates the average share of total GDP that they accounted for between 1993 and 2013. Then, he multiplies this average share by the Congressional Budget Office’s estimate of 2014 potential GDP to get the level that each of these components “should be” today. The difference between today’s actuallevel and what that level “should be” is then the contribution of the sector to today’s economic weakness. Using this method, he comes up with government spending accounting for 40 percent of the gap between today’s actual versus potential GDP.

This is definitely a useful exercise, but I have three quick thoughts on why this might understate the actual effect of policy-induced austerity. Irwin is not trying to estimate an austerity effect, but I just want to be clear that if one wanted to isolate the effect of policy-induced austerity, his numbers might be too low.

First, there are multiplier effects, so if actual federal government spending was $118 billion higher today (that’s the gap between actual and “should be” spending identified by Irwin), then overall GDP would be roughly $180 billion higher. So, the policy decision to pursue austerity is costlier (in GDP terms) than just the difference between government spending levels.



Read more: http://www.epi.org/blog/reminder-stupidity-austerity/#ixzz39hwS4vH9

[Sherman A1]

1. Our local city government

Is just now figuring out that their austerity approach had basically screwed themselves as we see a high turnover rate on our police force. No raises for years had turned us into a training department for other local forces as officers leave for better pay.