Thursday, June 7, 2012

Graph from Paul Krugman Illustrates Why Fiscal Policy is Not Driving the U. S. Recovery

If You Take Your Foot Off the Gas – The Car Slows Down – Duh!

Over 70 years ago the economic professions documented how fiscal policy could either prevent a recession, or if a recession occurred move the economy out of recession.  As a result following World War II fiscal policy was used effectively to keep U. S. recessions short and relatively mild.  The most recent use of fiscal policy in the form of increased government spending occurred in 2009-10, and the result was the U. S. stopped losing jobs at a rate of several hundred thousand a month, and started to add jobs.

This success infuriated Republicans and Conservatives, and after the 2010 election they have effectively moved to reverse fiscal policy.  This may sound difficult to believe given the high level of the federal government deficit, but numbers unlike politicians do not lie, and thanks to Paul Krugman here is a chart which shows exactly what has happened.

Remember all the talk a few years back about how we wouldn’t repeat the mistakes of 1937, when FDR pulled back too soon on support for the economy? Here, from FRED, is the rate of change of real government spending per capita (federal, state, and local):
Gosh, I wonder why the economy is underperforming?

The chart shows government spending per capital in real terms, that is, after removing inflation.  As can be seen the rate of growth is negative, government in the fall of 2010 started to reduce spending.  Conventional economic theory says this will slow down economic growth and slow job creation.  What has happened?  Economic growth is slowing and job creation is slowing.

All of this is working in favor of Republicans and Conservatives who want to hobble the economy, blame President Obama and then sweep into office in November.  At this time it looks like that strategy is succeeding.  If one had to predict results for November today, it would be an election of Mitt Romney as President, an increase in Republican control of the House of Representatives and an increase of six Republican Senators giving them control of that body.

What would happen next is the continuation of that chart in the downward direction as Republicans implement European style austerity with huge reductions in government spending along with huge tax cuts for wealthy Americans.  The tax cuts will do little to stimulate the economy and the spending cuts will devastate social programs, reducing national income and create more rather than less unemployment. 

But American voters won’t believe this until it happens.  Mr. Krugman titles his piece '1937', the year in which the Roosevelt administration move away from fiscal stimulus, which resulted in a renewed depression of the economy.  Historians will ultimately write how a first Romney term was a replay of 1937, and lament the fact that while intelligent and insightful people were able to forecast what would happen, unintelligent people with no insight were in control of the government.  After all, none of the current economic gloom has reduced the income of Mr. Romney, his fellow multi-millionaires and the billionaires who are engaged in unlimited spending to defeat Mr. Obama.

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