What Austerity?

Debunking the Liberal Narrative

By J.T. Young

The emperor’s new clothes were invisible; in Washington’s fiscal fairy tale, austerity is too. Although an increasing number of people are expressing concern that federal spending cuts are endangering the economy, it begs a fundamental question: What austerity?

It is understandable why last week’s 2.5 percent real GDP growth figure troubled many. First, it was below the consensus 3 percent expectation. More importantly, the economy has been dismal for so long that America’s conditioned reflex is despondency.

Even though America’s last negative growth quarter was 2009’s Q2, the economy’s annual real growth rate has underperformed thusly: 2009, minus-3.1 percent; 2010, 2.4 percent; 2011, 1.8 percent; and 2012, 2.2 percent. If the Blue Chip consensus forecast is correct, this year growth will also be just 2.2 percent -- something last week’s figure made much more likely.

After four-years-going-on-five of such economic anemia, liberals sorely need a new culprit -- especially with their favorite whipping boy, George W. Bush, now far removed from office. Enter Europe, stage left. Or rather, Europe’s “austerity,” to be more precise.

That a continent of countries, spinning like a roulette wheel of fiscal failure, now could be suddenly afflicted by austerity -- after over-spending for decades -- is a puzzler in its own right. This is to misdiagnose cure for problem -- not unlike an addict blaming detox for the shakes.

Of course, such a move by America’s liberals serves two purposes. It shifts focus away from the $620 billion tax hike slapped on the nation at year’s beginning. And even more, it protects the sizable and sudden spending surge to which they have become quite accustomed.

How sizable and sudden has it been? From 2007 to 2008, when the economy first felt the recession’s effects, federal outlays jumped 9.3 percent, from $2.729 trillion to $2.983 trillion. In 2009, they jumped another 18 percent, to $3.518 trillion -- a 29 percent leap in two years.

And there, despite the fact that the economy has not had a negative growth quarter in almost four years, they have stayed -- estimated by the Congressional Budget Office at $3.553 trillion this year.

Juxtaposed with this profligacy, we find the following spending “austerity”: an $85 billion sequester that took effect just two months ago. That spending cut represents a 2.3 percent reduction from where spending otherwise would have been. In our $16 trillion economy, it is only a 0.5 percent slice.

So where is the “austerity” part of this austerity?

Using CBO’s assumption that this year’s federal outlays will equal 22.2 percent of GDP (which will be the lowest in five years), federal spending as a percentage of GDP has averaged 23.7 percent after 2008. That compares with a 40-year average of 21 percent.

Only one other post-WWII period, 1982-1986’s 22.8 percent federal spending average, even comes close. While still a full percentage point lower, the earlier five-year period’s economic results are far stronger. Despite the economy falling 1.9 percent in 1982, it averaged 3.5 percent annual growth from 1982-1986. In comparison, if Blue Chip’s 2.2 percent projection for 2013 is correct, today’s economy will have averaged 1.1 percent growth over the last five years. Even dropping the negative growth years (1982 and 2009) from both, the discrepancy is dramatic: 1983-1986, 4.8 percent; 2010-2013, 2.2 percent.

As bad as that looks, the comparison really is even worse. During 1982-1986, America had to painfully wring out inflation, interest rates were sky-high, and the U.S. faced down the USSR in its death throes. Today, instead of taking money out of the economy, the Fed is pumping it in with a fire hose and interest rates are historically low.

So despite these comparative advantages, currently America’s federal budget is overspending, while its economy is underperforming.

Only in Washington, and to liberals, could the slightest step toward spending normalcy be misnamed “austerity.” Only if Europe -- which taxed to the verge of bankruptcy everything hinting at success, and then sought to subsidize its failures into perpetuity by borrowing to square this impossibility -- is the model, could this pass as austerity. Of course, if Europe is to be America’s model, then as bad as our economic and budget problems have been, they are just beginning.