May 06, 2012 at 8:03 pm
In response to my reaction to Friday’s weaker-then-expected jobs numbers, some commenters have asked “what do you mean ‘austerity doesn’t work’!? That might describe Europe, but aren’t we already running humongous budget deficits?”
Which raises the extremely important yet poorly understood issue of “fiscal impulse.” It’s a simple concept: for fiscal policy to boost growth at a time like this, what matters is not the size of the deficit; it’s the change in the deficit. If this year’s budget deficit is smaller than last year’s, it doesn’t matter if they’re both “large.” That’s contractionary and that’s what’s going on here.
For example, so far this fiscal year (Oct11-Mar12), federal outlays over receipts have run at about $780bn. Last year, the deficit over those months was about $830bn. Now, $50 of negative fiscal impulse—that’s how much the deficit has shrunk over these two periods, or 780-830—is not huge, but it’s very clearly going in the wrong direction.
Add in the drag from state and local governments—and here we’re talking an actual contraction as their real spending has gone down consistently (see figure, yr/yr percent change in real state/local spending), and the fact is that while we may not be quite European in our austerity experimentation, that is the clearly direction in which fiscal policy has been pushing.
Let me be very clear to preempt any misunderstanding. As a card-carrying employee of the Center on Budget and Policy Priorities, I’m four-square against structural budget deficits. Those are the ones that increase when we’re actually into a bona-fide expansion, as occurred under Reagan and GW Bush. That’s when you should be making progress against your deficits.
Conversely, it’s times like now when we should be expanding budget deficits in order to finally help the damn economy escape the residual grasp of the Great Recession. FTR, I’d implement state and local fiscal help, and do it FAST!
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