Monday, 18 February 2013

U.S Austerity: The Facts

It has been observed that there haven’t been any cuts in the federal spending. Many of the economists had warned that premature austerity would be a hindrance to recovery for the U.S economy. Indeed, it was found to shackle the economy and being dragged behind rather than assisting in any recovery. What is happening with the economy was something like suspense. Let’s take a look at the ratio between the spending and the potential GDP. Taking the values from the CBO, it showed that normal growth would have been a better criterion than the raw numbers. The chart below shows the relation between federal spending and GDP.

Even now, spending is slightly higher than the pre-crisis state. More of the spending was on unemployment benefits, food samples, pressures of baby-boomer retirement and medical costs increment. However, it is lower than the peak. Being engaged in austerity has become the primary cause of slow recovery. Let’s now include the state and local government spending. Austerity in state and local government could also have been a good policy choice. The graph below shows you total government spending as a share of potential GDP. 

The graph clearly shows that total government spending as a share GDP is not even a percent point higher than what it was before the onset of recession.
In context to the big hit that the private spending experienced with the housing investments, here is the graph showing you the residential investment as a share of potential GDP.
The housing recovery however showed a slight rise after 2012 (as visible in the graph). Here at this point, the private demand is depressed by the housing-debt-bubble and the government spending is even higher than what it was at the highest peak of the bubble. The economy is not at a very good state even today.