Return to Trend = Austerity

While I’m soliciting reactions, I’d like to see your reactions to this post by Kevin Drum. Take a look at his graph of real per capita government spending. My interpretation, as suggested by my title, is that it indicates a return to trend.

If that’s austerity and he’s against it, what does he have in mind? A Keynesian response to the recession would have been exactly what we’ve done: increased counter-cyclical spending while reducing pro-cyclic spending. It can be reasonably argued that our counter-cyclical spending was insufficient but the recession has been over for six years. If you maintain high levels of spending counter-cyclically and pro-cyclically when do you cut it? Never? That is certainly not Keynesian.

I should repeat that my view is that we’ve had structural problems with our economy for decades and we certainly have them now. Keynesian pump-priming isn’t what we need now.

6 comments… add one
  • Ben Wolf Link

    Neither Drum nor Cowen appear to understand decomposing the fiscal balance to determine budgetary stance. Instead they draw a trend line and declare that upward expenditure trend means stimulus and downward means austerity.

    Budgetary stance isn’t a trend, it’s what’s going on with total expenditure – cyclical expenditure. It’s quite possible for the government to take an austere stance (reducing discretionary spending) while government expenditures increase due to automatic stabilizers. It’s possible for a stimulatory stance whilst total spending falls.

    The budget stance can’t be determined from the outcomes; for what it’s worth I’d call the U.S. stance neutral for the last six years with the sequester and ARRA largely cancelling out.

  • Guarneri Link

    I wonder if Drum gets the irony of attributing recovery to the return to trend, after previously saying that going back 50 years you only see up, up and away? Why is there ever a recession.

    It’s crap eyeballing analysis.

  • I don’t think that’s what he’s saying. I think he’s blaming the lacklustre recovery on the return to trend.

  • Guarneri Link

    Maybe, but when I saw “option three” and this:

    “Finally, in 2014, the spending decline stopped. Austerity was over, and now we’re even starting to see a small uptick in government spending. At the same time, the economy started to pick up.”

    I presumed he was tying the current uptick to the end of “austerity” and disregarding the historical uptrend.

  • I think he sees even very small changes as causative. He was tying the uptick in government spending to the improvement in the economy.

  • Guarneri Link

    I know I’m going to have a bad day, for that’s exactly my point. I guess I’m not making it well.

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