The Austerity Myth

by Douglas Holtz-Eakin

The specter of austerity lies heavy on America. Hardly a day passes without another warning from New York Times whiner and erstwhile economist Paul Krugman, his colleague Nicholas Kristof, and the legion of other progressive apologists that “austerity” is threatening the U.S. recovery and destroying Europe.

Where is this austerity? It is certainly not anywhere to be found in the federal budget. Total spending in 2011 was $3.598 billion in 2011, higher than the stimulus-bloated total in 2009, and 21 percent higher than the year of the Bush administration.  Austerity?

Maybe the austerity is found in discretionary spending — the annual decisions of Congress. Mandatory spending — entitlements — continues its relentless march to the (red) sea, up to $2.215 billion in 2011 or 24 percent above 2008 levels. But discretionary spending in 2011 was $1.346 billion, an entire $1 billion lower than in 2010. One billion dollars. To be sure, the new Congress put the brakes on the discretionary-spending binge, but austerity it is not.

Or, perhaps the austerity stems from the draconian Budget Control Act of 2011 — the so-called debt limit deal. The BCA “cut” $917 billion from discretionary spending over the next 10 years. Sort of. Actually those “cuts” are promises that a future administration and Congress in, say, 2018 will spend less that it would otherwise (honest, really and truly, cross our hearts). Hopeful thinking, yes. But austerity?

Maybe the austerity is sneaking in at the sub-federal level. Mr. Krugman is fond of making this claim. But the data don’t really bear that out. In the National Income and Product Accounts state and local spending has risen the last three straight years and is back to 2008 levels. And recall that 2008 spending was bloated by bubble-driven revenues, to the point that it was over 50 percent above 2000 levels. Austerity?

Occasionally the argument is shifted from spending to whether the deficit is “big enough” — too rapid deficit reduction being portrayed as a danger to the recovery. Viewed from this perspective, the gold-standard measure of Keynesian stimulus is the change in the full-employment budget deficit — the amount of discretionary tax cuts and spending increases. The Congressional Budget Office conveniently publishes this each January. The data show that the full-employment deficit did diminish from $1.079 billion in 2009 to $904 billion in 2010, but turned around and widened in 2011 to $928 billion.  That pattern hardly tracks the lackluster recovery that has been underway since June 2009.

In short, austerity is a myth. But the myth does a disservice by blocking efforts for the real changes the economy needs: fundamental entitlement fixes and tax reforms. These reforms are not near-term in nature, are a step to rationality and not to austerity, and will happen either of our own accord or when international lenders force them upon the U.S. The latter should be unthinkable. It is time to put aside the austerity myth.