Austerity? Not so much.

October 19th, 2011 by Lee Eldridge

Greek Debt

In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt. “Austerity” was named the word of the year by Merriam-Webster in 2010. — from Wikipedia

Countries across Europe have been facing harsh austerity measures. After years of big government spending, Greece, Portugal and others have found themselves in such an economic crisis, and with so much debt, that they’re having to make huge cuts in spending and reductions in services to get their fiscal houses in order.

In the U.S., we’re facing many of the same problems. Our debt to GDP ratio has reached 100%, a very bad number to reach. Tax revenues are down. The economy is possibly headed towards another recession. We’ve now run three consecutive deficits of more than $1 trillion per year. Austerity has been the talk of Washington and in the press. The Republicans in 2010 ran on a platform of reduced spending, and were swept into office in historic numbers. The left pines to spend more money to “fix” the economy, and whines about the austerity measures imposed by the Republicans.

Here are just a few examples (borrowed from IBD):

A July article in USA Today, for example, claimed that “Already in 2011, softer government spending has sapped growth.”

Jared Bernstein, former chief economic adviser to Vice President Biden, wrote over the summer that “government spending cutbacks have been a large drag on growth in recent quarters and have led to sharp losses in state and local employment.”

Economist and New York Times columnist Paul Krugman argued in September that “the turn toward austerity (is) a major factor in our growth slowdown.”

So how much spending has been cut to make these people react in such a way? Also from IBD:

In fact, in the first nine months of this year, federal spending was $120 billion higher than in the same period in 2010, the data show. That’s an increase of almost 5%. And deficits during this time were $23.5 billion higher.

If government spending is related to growth, as these and others claim, then the economy presumably should be growing faster, not slower, given the current higher rates of federal outlays.

But what about at the state level?

Meanwhile, the claim that state and local government jobs have been severely cut is, at the very least, open to some debate.

“We know that the biggest problem that we’ve had in terms of unemployment over the last several months has not been in the private sector,” President Obama said at a recent press briefing. “It’s actually been layoffs of teachers and cops and firefighters.”

Monthly data from the Bureau of Labor Statistics do show that from December 2007 — when the recession officially started — until the end of 2010, state and local governments shed 221,000 jobs. And they’ve cut another 234,000 jobs so far this year.

But a separate annual survey from the Census Bureau shows that “full-time-equivalent” state and local employment climbed 200,000 between 2007 and 2010 (the latest year for which these census data are available.) The differences come from the methodologies used.

In any case, even using BLS data, the number of state and local government jobs has fallen just 2.3% since December 2007. That compares with a decline of 5.4% for private-sector jobs.

Austerity in the U.S.? Not so much.


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