Krugman: Our Incredible Shrinking Government (and the dip in 4th quarter GDP) [View all]

[pampango]

Most analysts are, rightly, shrugging off the surprise report of an actual decline in 4th quarter GDP. It will probably be revised away, and in any case it’s the result of one-off factors: a drop in inventories and a quirky sharp decline in defense spending.

Still, the report does highlight the role that shrinking government purchases of goods and services are playing in holding the economy back. And yes, I mean shrinking, not just growing more slowly than I’d like. Transfer payments like Medicare and Social Security are rising (although unemployment benefits are falling), but government purchases of stuff — mostly at the state and local level, where the stuff in question includes hiring schoolteachers — has been in fairly rapid decline.

Here’s a comparison, using the BEA numbers, of the relevant numbers in the current business cycle and during the Bush-era recession and aftermath:



So fiscal austerity is the difference between where we are now and an unemployment rate not much above 6 percent. It’s a policy disaster.

http://krugman.blogs.nytimes.com/2013/02/01/our-incredible-shrinking-government/

The impact of austerity rears its ugly head.