"Here's How Austerity Torpedoed The Economic Recovery"

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Here's How Austerity Torpedoed The Economic Recovery

by Josh Bivens at Business Insider

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

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Most of the political argument has centered on the recovery phase of this cycle, simply because the actual recession began before the Obama administration took office. Further, it’s really only been since 2011 that government spending has been a truly significant drag on growth. Before then, between the Recovery Act and what we have called “ad hoc stimulus measures” (like the payroll tax cut in 2010), we didn’t have real austerity until the fallout from 2011’s Budget Control Act (passed in the wake of Republican debt ceiling brinksmanship in summer 2011) began.

But, even measuring from the previous business cycle peak—so fully accounting for the Recovery Act and the following ad hoc stimulus measures—overall government spending today remains 6.5 percent below what it would have been if it had followed its trajectory over the 2001 business cycle. This is about $350 billion (which is getting pretty close to Irwin’s number, pre-multiplier).

Finally, two last thoughts these measures don’t fully reflect the magnitude of the policy error of austerity. First, the economy was much more damaged at the trough of the Great Recession than at the trough in 2001 (or 1991—or any post-war business cycle trough except for possibly 1982). Second, there was no room at all for conventional monetary policy to aid recovery at the 2009 trough. Short-term interest rates had already been at zero for nearly a year and yet the economy free-fell.

These two considerations imply that smart policy-making shouldn’t have targeted similar increases in government spending during the 2009 recovery, but much larger increases. Instead, we ramped spending down and torpedoed a rapid recovery.


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