It Depends on What the Definition of ‘Austerity’ Is

By Veronique de Rugy

Paul Krugman says we are in a 'new era of austerity.' When will government spending be enough?

In a recent column, economist Paul Krugman explained how the United States has entered a new era of austerity as evidenced by the Senate’s failure to pass a bill that would have sent more money to the states to fill their budget gaps: "Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s. Many economists, myself included, regard this turn to austerity as a huge mistake."

Austerity, as Krugman defines here, equals Congress’s onetime refusal to spend even more money above the $4 trillion that the federal government is already spending this year (as the nation runs a $1.4 trillion deficit, with $7.5 trillion in debt held by the public and $50 trillion in unfunded entitlement spending).

When will government spending be enough? Using Bureau of Labor Statistics data, the chart below compares recent changes in government expenditures—or federal, state, and local government purchases of labor, goods, and services—and private domestic investment.

As we see, changes in the size of government and in the private sector have generally moved together over the last decade. However, with the exception of 2004 and 2005, government consumption and investment has grown more quickly than private expenditures and investment every year this decade. In the last ten years, the private sector has, on average, grown 1.2 percent annually, while the government has, on average, grown 3.5 percent annually.

What’s more, while the private sector contracted in three of the past ten years, the government has continued to grow throughout the period. The government grows, regardless of changes in the economy.

In other words, if there is austerity, it’s not in government.

Veronique de Rugy is a senior research fellow at The Mercatus Center at George Mason University.