An annoyed Ryan Avent combats claims that we aren’t seeing any real federal spending cuts. Indeed — for those of us who warned that premature austerity would undermine recovery, it’s frustrating to see the other side shift from “Austerity is expansionary!” to “Austerity? What austerity?” when it turned out that austerity did, indeed, undermine recovery.
Sitting agog, I couldn’t figure out how Krugman could come to such a backward conclusion. Unemployment is certainly still elevated, of course, regardless of how you try and slice the data…but looking at the chart below you can see not only that the “recovery” is right on pace, but that the story is quite clear.
Far from the story of fiscal austerity undermining recovery that Krugman wants to tell, we see a “recovery” that is perfectly apace, at a lower trend level. Indeed, the new trend is roughly 5% below the old. Almost as remarkable as Krugman’s above claim is the fact that NGDP growth following the dramatic fall in 2008 has been so robust regardless of fluctuations in fiscal policy, and the global economic climate. And remember, fiscal multipliers are supposed to be large, and monetary policy is supposed to be impotent. This is a “liquidity trap”, after all.
The real issue with the “recovery” is the ~$1 trillion in nominal spending that goes missing each year due to the Fed not pursuing a policy that would have allowed the catch up growth to the previous trend.
Now, I’m not one of those people that think Krugman lies to make his point, so in my estimation he’s just wrong.