Krugman: The Austerity Economy

[amborin]

The Austerity Economy

Do the dismal economic numbers really reflect the turn to fiscal austerity? I keep hearing people say no,
because austerity hasn’t actually happened yet in America. But they’re wrong.

The fact is that the fading out of the stimulus, and in particular of aid to state and local governments,
is already and noticeably leading to substantial withdrawal of government demand. Look, in particular,
at actual government purchases of goods and services — governments at all levels buying stuff — which
is what standard macroeconomics says should have the highest multiplier, since unlike transfers and tax
cuts it is by definition spent rather than saved. Here’s the picture, showing changes in real spending
over the previous year:



When the recession officially ended, spending was rising at an annual rate of around $60 billion; now
it’s declining at an annual rate of $60 billion. That difference is around 1 percent of GDP, and maybe
1.5 percent once you take the multiplier into account. That makes the turn toward austerity a major factor
in our growth slowdown.

Still, I guess the beatings will continue until morale improves.

http://krugman.blogs.nytimes.com/2011/09/03/the-austerity-economy/