The “austerity” of 2011-2012 in the United States

by on February 10, 2013 at 3:11 am in Games, Political Science | Permalink

It turns out that much more of it was phony than many people had realized.  From David Farenthold, this is from today’s Washington Post:

To sketch the bill’s biggest impacts, The Washington Post focused on the 16 largest individual cuts. Each, in theory, sliced at least $500 million from the federal budget. Together, they accounted for $26.1 billion, two-thirds of the total.

In four of those cases, the real-world impact was difficult to measure. The Department of Homeland Security officially declined to comment about a $557 million reduction. The Department of State, the Department of Agriculture and the Federal Emergency Management Agency — whose cuts totaled $1.9 billion — simply did not answer The Post’s questions despite repeated requests over the past month.

Among the other 12 cases, there were at least seven where the cuts caused only minimal real-world disruptions or none at all.

Often, this was made possible by a little act of Washington magic. Agencies got credit for killing what was, in reality, already dead.

Here is the article, and I did chuckle at the last paragraph.

Ashok Rao February 10, 2013 at 3:23 am

Even as a pretty liberal guy, I think there’s a lot of merit to the “starve this beast” premise (even if not the highly aggressive and dangerous way in which GOP goes about this mission). A lot of government agencies are bloated, with ineffective and ponderous “job training” programs.

Random across the board cuts would be fantastic. There shouldn’t be any rhyme or reason to it because the second Congress deliberates on what specific things need to be cut and formulates it in a bill, vested interests will take over.

Anon. February 10, 2013 at 5:37 am

I used to be a fan of starve the beast, but look at the European countries in trouble. The evidence is pretty damning to the strategy. Even in times of crisis and lack of funds, governments refuse to cut their most wasteful aspects (the Greek bureaucracy is stronger than ever, and the number of government employees has actually substantially increased during the crisis). And this after two defaults!

The special interests are taken care of (at the cost of basic services), because retaining their political power post-crisis is more important than achieving growth or ending said crisis. At best the beast is on a temporary diet…you can’t starve it.

Andrew' February 10, 2013 at 6:09 am

If you could starve the beast, why not go ahead and fix it? It might be because you only have the initiative on half of the equation. So, your choice might not be between reasonable governance OR starve the beast.

Ashok Rao February 10, 2013 at 6:23 am

Oh, don’t get me wrong, I’m all for reasonable, directed, spending cuts (and revenue increases). However, I think the highly robust lobbying apparatus will prevent any such rational action, like a Farm Bill reform.

By many accounts, government will increase in size over the next decade or so. A slower growth rate, staggering private sector, and need for good governance all factor into this reality. I’m not arguing for “starving” the beast in the Paul Ryan sense, where I actually expect government to shrink. Rather, I think random, across the board cuts make more sense than cuts directed by Congress.

Executive bureaucrats who implement those cuts will be less vulnerable to lobbying challenges than the Congressmen that institute it.

bjssp February 10, 2013 at 9:55 am

Not to be a pain, but “starve the beast” really refers to cutting revenue in order to force legislators to cut spending, not simply cutting spending. And in that sense, it’s a silly strategy, because there’s pretty much no proof it works.

That’s not to say that spending can’t or shouldn’t be cut, only that if we decide it should be cut, we should just cut it, not try to do it in a roundabout way of depriving the government of revenue.

Dan Weber February 10, 2013 at 9:43 pm

I think Cato has published some papers showing that cutting taxes to starve the beast makes taxpayers see government as cheap, and so they want to consume more of it. Low taxes tend to lead to new entitlement programs.

Ashok Rao February 10, 2013 at 10:20 am

You’re right. I knew that, I don’t know why I misinterpreted that this time.

Derek February 10, 2013 at 10:02 am

Would you have ever put money on the EU weakening a national bureaucracy in the process of fixing a mess?

anon February 10, 2013 at 11:24 am

a lot of merit to the “starve this beast” premise

Only if you forbid government to borrow to make up deficits in tax revenue, which is what we have now.

Please spare us the D/R either/or. If you believe the majority of “leaders” and rank and file pols in either party are “better” than the other then you are beyond help – stop being a rube and a tool.

All “starving the beast” and deficit spending has done is shift the tax burden to the future (i.e., children and grandchildren). Government spending should be paid for in the here and now, not the then and later.

We would be better severed by knowing what our government costs and paying for it than hiding the cost with loopholes, subsidies, fake budget cuts, and shifting the costs to the future.

anon February 10, 2013 at 11:27 am

*better severed*

better served (although better severed does have some appeal)

Ashok Rao February 10, 2013 at 11:29 am

Call me a simpleton, but I don’t think I’m a tool for thinking that the party that is not willing to compromise the faith of the American dollar for dire cuts on our economy is the better one (even if not a good one).

I’ve long argued that the neoclassical welfare state institutes the redistribution of wealth from the unborn to the elderly. Great system for the… elderly. I’m all for meaningfully bringing Medicaire costs down (the best way to do this, as I see, is a) don’t fund prescription drugs, b) get serious that the public shouldn’t fund ventilators and c) give everyone the option of taking a first-class flight to India for healthcare, and keeping 25% of the savings – wouldn’t take long for international competition to bring down the obscene cost of healthcare here).

James February 10, 2013 at 3:41 am

“Here is the article, and I did chuckle at the last paragraph.”

–hehe. Me too. I tip my hat to you.

dan1111 February 10, 2013 at 4:19 am

Yeah, it was a good one.

Now that the fake cuts are out of the way, budget cuts are no longer possible.

brian February 10, 2013 at 4:55 am

I wasnt going to click on the article ….until the tip for the last paragraph.

And I’m glad I did, but disappointed to realize that the ability to cut governmet has entered a great stagnation.

If true, is there ANY hope for being able to do so, say, even after the economy recovers?

Mogden February 10, 2013 at 4:32 pm

Not really, no. Welcome to the decline of the empire.

prior_approval February 10, 2013 at 3:45 am

And yet, mainly state and local budgets were cut, and quite strikingly in regards to payroll.

From calculated risk (which is a fantastic site for actual economic analysis of the areas it concentrates on, since McBride apparently has never worked in any government sponsored enterprise, like academia) -

‘Back in January I wrote:

It is looking like there will be less drag from state and local governments in 2012, and that most of the drag will be over by the end of Q2 (end of FY 2012). This doesn’t mean state and local government will add to GDP in the 2nd half of 2012, just that the drag on GDP and employment will probably end. Just getting rid of the drag will help.

It is time for an update since we are almost halfway through the year.

So far in 2012 – through May – state and local government have lost 7,000 jobs (8,000 jobs were lost in May alone though). In the first five months of 2011, state and local governments lost 126,000 payroll jobs – and 230,000 for the year.’

http://www.calculatedriskblog.com/2012/06/update-state-and-local-government-job.html

But like New Yorkers, people around DC think the only government that matters is the federal one.

prior_approval February 10, 2013 at 3:50 am

And getting my last paragraph in order – Like New Yorkers think their city is the only one that matters, ….’

And that last paragraph in the article? I think cutting around 250,000 government jobs pretty much took care of the low hanging fruit.

dan1111 February 10, 2013 at 4:22 am

This is an article about how real the cuts to the federal budget were. Your desire to talk about something else suggests you have no response to the actual point being made.

Andrew' February 10, 2013 at 6:37 am

Not to mention TCs primary, by a wide margin, prescription was to bolster state spending.

Andrew' February 10, 2013 at 6:38 am

In 2008 iirc.

Tyler Cowen February 10, 2013 at 7:50 am

Thank you Andrew’, on the mark…

Andrew' February 10, 2013 at 7:57 am

Turns out you were 100% on the mark, a priori (from the mainstream point of view ;)

prior_approval February 10, 2013 at 10:50 am

In 2008? Fascinating – because ‘The “austerity” of 2011-2012 in the United States’ (note, not the federal government in the headline), ‘… turns out that much more of it was phony than many people had realized.’

So back in 2008, states should have been bolstering spending, but in the 2011-2012 “austerity” in the U.S. was “phony.” A phoniness that only a quarter of a million families would have experienced. I really need to remember how to read this site, because as far too many commenters have been pointing out recently, it isn’t in a way that seems apparent by taking words at their face value.

prior_approval February 10, 2013 at 10:40 am

‘The “austerity” of 2011-2012 in the United States’

Was in state and local budgets, not the federal one.

GiT February 10, 2013 at 7:33 pm

But the blog post was about austerity *in the US*, not the federal government specifically.

john personna February 11, 2013 at 11:05 am

Exactly, when someone says “I only want to talk about federal spending” you know they aren’t serious. Government spending and it’s impact on the economy is top to bottom, down to township. That’s the only way you can look at it internally, and of course in comparison to other nations with different divisions.

Brian Donohue February 10, 2013 at 11:00 am

I had to renew my driver’s license this week. I live in Illinois, which is broke, yet the office was staffed with 30 employees, mostly sullenly hanging out and chin-wagging, to handle the trickle of customers. Worker’s paradise indeed.

maguro February 10, 2013 at 11:13 am

You can renew your driver’s license and get your tags online now. I haven’t been to a DMV in years.

Brian M February 10, 2013 at 11:33 am

I came here to mostly make this point. the austerity at the state and local level is nothing to joke about, and for all the grand philosophizing about our willingness to make hard choices/necessary budget cuts, this poor excuse for a policy is going to cause a lot of real harm to real people.

It probably says something about the economics field that the highest quality commentary on the current situation comes from Bill McBride.

Brian Donohue February 10, 2013 at 11:44 am

In the real world, pruning is a regular part of doing business. Compare involuntary termination rates in the private vs. public sectors (or more tellingly even, voluntary termination rates.) It’s almost impossible to shed government workers except during convulsions like this.

What did Obama and Emmanuel say? Don’t let a good crisis go to waste?

A forest fire analogy occurs to me.

Brian M February 10, 2013 at 1:25 pm

http://research.stlouisfed.org/fred2/series/CES9091000001?cid=32325

You can look at state employment, and see similar behavior. Look closely at the mid-1990′s.

At any rate, shedding government workers is only a good idea if the marginal value added by those employees in their government job is negative, or if the marginal value added by moving those employees to private sector jobs would be higher. Do you honestly think that is the case right now?

If you’re not arguing that, you’re just arguing for a dogmatic application of political ideology, and ignoring that economic policy is context dependent, and should change as the circumstances do.

maguro February 10, 2013 at 1:41 pm

Your graph is pretty much useless because it only shows Federal government employees. Where is the equivalent chart with contractors included?

Brian M February 10, 2013 at 2:34 pm

I’m not sure if the St. Louis Fed has that data series, but it’s sort of irrelevant. My point is that government employees are no more/less valuable to the economy simply because they’re government employees as opposed to being in the private sector. It depends on the marginal value added of the employees, either relative to marginal cost or to marginal cost relative to the same relationship in the next, best, alternative. Since the variables of those functions change depending on expectations and business cycles, the appropriateness of hiring/firing government employees changes. Right now, the marginal value added of more government hiring (either federal, state and local, or indirectly through contractors) is higher then it would be in other circumstances. So, letting go of government employees right now would be counter productive.

Brian Donohue February 10, 2013 at 2:42 pm

“shedding government workers is only a good idea if the marginal value added by those employees in their government job is negative”.

This goes for any job, not just government jobs. The problem is that there is no discipline in government to making this assessment. If you employ negative marginal value employees in the private sector, you soon run out of money.

Between March of 1954 and February of 1981, there was NO 12-month period in this country where total government employment declined. Zero! In 27 years! By contrast, in the private sector, jobs decreased in 1954-55, 1957-58, 1961, 1970-71, 1974-75, and 1980.

In the early 1980s, there was a brief shake-out in government employment, but nothing like what the private sector goes through routinely every 5-7 years.

Between February of 1984 and June of 2003, almost 20 years, there were only two negative periods for government employment (May of 1990 to May of 1991 and May of 2000 to May of 2001, both presumably related to blip census hiring). Meanwhile, the real world shed jobs for extended periods during 1991-92 and 2001-03.

And the gubmint went on another tear of uninterrupted job growth between August of 2004 and June of 2009. If you ignore the census blips, this is constitutes another 25 years run.

Overall, growth in private employment has outpaced government employment (thank God), but there is a rhythm to private employment that is absent from the governmental sector. Maybe the public sector is just really good at hiring high quality people that add value, but that was not my impression during my recent trip to the Illinois DMV.

The defense of keeping government employment up is pure Keynesian AD drivel. It’s not that these people produce value add, just that they keep the all-important C up in the national accounts. O, to be employed for this noble purpose!

Claudia February 10, 2013 at 2:54 pm

“It’s not that these people produce value add, just that they keep the all-important C up in the national accounts. O, to be employed for this noble purpose.”

I am paid not to keep C up but to figure out what the heck is going on with C. Not sure it’s noble, but I add value (and I’m not special either).

maguro February 10, 2013 at 3:04 pm

“I’m not sure if the St. Louis Fed has that data series, but it’s sort of irrelevant.”

If that’s the case, your graph is sort of irrelevant, too. The fact is that total Federal employment has dramatically expanded over the past 20 years, it has not remained flat, as the graph indicates. That all the job growth has taken place in contractors rather than government employees shouldn’t obscure the fact that the Feds are employing a lot more people than they used to.

Brian Donohue February 10, 2013 at 3:15 pm

Claudia,

I don’t think I’d compare your job to what I saw at the DMV this week.

Various levels of government employ 22 million people in this country. So you can be a value-add employee, and not special, and we’ve still got something to talk about, IMO.

Brian M February 10, 2013 at 7:20 pm

Maguro,

[citation needed]

maguro February 10, 2013 at 10:13 pm
Brian M February 10, 2013 at 11:10 pm

Come on, that’s not a terribly strong citation.

And, at any rate, you manged to both miss and get my point at the same time (which is kind of impressive). Jobs are only good or bad compared to the cost and the alternatives. The variables are influenced by business cycles, so jobs that might not be very “good” at the peak in an expansion might be fantastic in the case of a long, drawn out recovery, regardless of if they’re in the private or public sectors. So, with that in mind, trying to “shrink” the public sector right now just because you think the public sector should be shrunk leads to a suboptimal (we could even say “bad”) policy outcome.

Andrew' February 10, 2013 at 6:08 am

Purely anecdotally speaking, I witnessed just as much nothing from government before as after. For example, all the harassment at airports was already in place.

JWatts February 10, 2013 at 12:23 pm

As long as there is a TSA agent available to harass my 88 year old grandmother, put her in the isolation booth, threaten us with arrest if we enter the booth and leave her there 10 minutes waiting on a female TSA agent to pat her down, the cuts aren’t deep enough. There was no reasonable reason for the behavior of the TSA, but they’ve got their Rules.

ThomasH February 10, 2013 at 6:36 am

I don’t see what is “phony” about agencies cutting the least useful items first, including cleaning out line items that might have gone unspent for years. Shouldn’t they be praised for that? And why is a cut to a transfer to states and local government a “phony” cut; when I took macro “G” included all levels of government. Indeed, that agencies don’t have the flexibility to make cuts in the make cuts in the most sensible way is exactly what is wrong with the sequester. It made some sense to legislate the most damaging possible cuts as a way to encourage the supercommittee to come up with a plan, but that is just what makes it poor budgeting. Congress, particularly the last one deserves the esteem it holds with the public.

As for whether we have had austerity or stimulus, since January 2009, Local, State and Federal employment has fallen 3.2%. You will look a longtime before finding a reduction of that size in public employment during a recession/early recovery.

mw February 10, 2013 at 6:53 am

Yes let’s berate the administration for choosing to implement moronic cuts in ways that had minimal “real-world impact” rather than in ways that dismember the NIH and NSF.

Claudia February 10, 2013 at 7:49 am

Glad you got a good chuckle, but you know it’s not true right? There’s all kind of oddness lurking in the projected budget, so the counterfactual will always play at least a supporting role. Maybe they’ll even pick up some corporate accounting ‘tricks’ to protect spending.

You seem to have a clear vision of a better way: https://mobile.twitter.com/tylercowen/status/298917342874857473 How do you do that? (Stamp ZMP on people’s forehead and their life’s work?) I watch this stuff all the time and am amazed at how much inefficiency can creep in when the overall purpose is not clear to all at all times. It requires a thoughtful, honest, repeated discussion about the goals…I was happy to hear this need echoed in Leonhardt’s new ebook, which I started reading. Of course, that’s not low hanging fruit, but it seems a good time to take the high road.

JCW February 10, 2013 at 8:20 am

Since the 2007 crisis, Keynsians have consistently complained that government stimulus bills were always too small. On this site, I see Tyler constantly complaining that austerity isn’t really austere (see: UK). Maybe the two economic camps can come together over not getting enough of what they want?

bjssp February 10, 2013 at 10:06 am

In some ways, I am liking this. It’s as if both sides were mature enough to come together to full a fast one on the extreme elements of one side. But then, I’m a believing in fiscal policy.

Now, this isn’t to say nothing could be cut, but there were cuts ($17 billion of them, I believe) around the time of the first stimulus, and there were around another $17 billion here that were definitely legitimate. Considering there appeared to be little thought devoted to what was actually being cut this time around, I’m okay with that…for now.

Brian Donohue February 10, 2013 at 11:11 am

Great article. Keep up the good work!

mravery February 10, 2013 at 12:15 pm

I’m baffled by the article’s premise. If the point was to reduce spending on programs from one year to the next, why shouldn’t programs that are being cut/removed count towards this? Is the problem that instead of saying, “We cut $10 billion last month, $7 billion the month before that, and now we’re cutting an additional $20 billion”, someone just said “Look! We cut $37 billion!”

Why is that a problem? That entire amount was in the budget the previous fiscal year and now isn’t. Isn’t that the goal? Why does anyone care when the decisions to make the spending reductions occurred? It sounds like political whining about who won the messaging war rather than a substantive problem….

Brian Donohue February 10, 2013 at 12:32 pm

Yes. The ‘decision’ to not conduct a census in 2011, $6 billion of the total. Great call, government!

derek February 10, 2013 at 11:21 pm

Rounding errors.

Jan February 10, 2013 at 12:16 pm

A couple thoughts. 1) much of this money would in fact have been spent on other things that the relevant agency determined were priorities. So taking that spending authorization off the table actually does represent a cut to the budget. 2) many of the cuts were funds designated for state and local governments, which is something this blog’s author would have advised against, at least a few years ago. It is unclear to me whether those cuts are now considered appropriate, ill advised or fake.

Brian Donohue February 10, 2013 at 12:34 pm

re: your first point. Government is naturally dysfunctional- the golden rule is, you better damn well spend your budget, whether you need it or not. Good critique.

Evan Harper February 10, 2013 at 12:37 pm

I have to admit I’m sort of confused by what the point is supposed to be here.

As I understand it, in very broad-brush terms, the disagreement over fiscal austerity goes like this: one side says we need lots of government purchases, and transfers from those with low to those with high marginal propensities to spend money, for Keynesian reasons. The other side says we need the opposite for supply-side reasons.

How are baselines relevant to this debate? Are we saying that the macro-economy reacts differently to a change in government spending depending on whether it results from a program reaching the end of its natural lifecycle, as opposed to resulting from direct intervention by legislators? We can’t really be saying that, right?

What is even supposed to be deceptive about the baseline chosen? From early morning on 9 April 2011 through today, Wikipedia has accurately described the $38.5 billion figure as being pegged relative to 2010 levels. I went back and checked contemporary news articles, and while not all of them explicitly describe what the baseline was, none of them actually mislead about it.

The implicit criticism running through the Washington Post piece linked seems to be that politicians should have, in the midst of an exceedingly fraught high-stakes budget negotiation with potentially disastrous effects for uncertainty in the broader economy, taken time out to invent a new budget-baseline accounting scheme specifically designed to make themselves look less decisive while simultaneously emboldening the least rational and responsible segment of their peers in order to achieve some kind of vague metaphysical sense of moral uprightness. Because that way they might have made more cuts.

Yeah, colour me unconvinced.

PS: Isn’t the whole “centrist” ideology of folks like the Washington Post editorial board supposedly something like: “what we need to do is get the pragmatic, responsible leadership of the two parties together, away from the extremists and crazies, so they can hammer out deals based on their reasoned conception of what’s best for the future of the country?” Isn’t that… exactly what the article describes? But now suddenly it’s a problem. Because they didn’t cut Social Security.

RAstudent February 10, 2013 at 9:53 pm

Drunk blogging today? You do realize that agencies can repurpose unspent funds correct? As a result, any cuts to available funds are indeed cuts. It’s like you have absolutely no idea how the federal budget process works. Then you follow that up with Say’s fallacy. I thought you were smarter than this, you must be drunk.

Chris February 11, 2013 at 10:24 am

Many of the examples in the article were “cuts” of money that didn’t really exist or wasn’t available, though. Like the $6 billion “cut” because there was no 2011 census. This wasn’t money that would have been repurposed– the whole thing was an accounting fiction.

RAstudent February 11, 2013 at 1:16 pm

First of all, the census cut is the worst of the lot. That said, here are the appropriations for 2009, 2010, and 2011:

4.168 billion in 2009, 7.254 billion in 2010 and 1.296 billion in 2011. I fail to see how that is accounting fiction.

C February 11, 2013 at 10:36 am

I don’t deal with budgets of any sort beyond my personal one. That said, surely there’s a limit on how unspent funds can be repurposed. Things like building roads and bridges they go to the level of congress, right? I got the impression from the article that a lot of this was money that he various agencies *couldn’t* spend or weren’t able to in anything like a timely manner. Or perhaps didn’t want to spend.

RAstudent February 11, 2013 at 1:22 pm

Yes, there is a limit and the impression I got from the article was the same as yours. However, I think the author is doing the same kind of crap, just in reverse, exaggerating his case to the maximum extent.

The spending cuts were supposed to be from the 2010 baseline, and they were, plain and simple. I am not sure it matters what is being cut. I also find it amusing how its the administrations fault for congress appropriating money to a road that doesn’t exist. Call me crazy, but I fault congress for authorizing funds for a road that doesn’t even exist.

We Ask You to Expand Your Farthole So That We May Insert Our Meatsticks Into It February 11, 2013 at 12:14 am

Oh Yeah.

Barry February 12, 2013 at 7:55 am

Ryan Avent has covered this:
http://www.economist.com/blogs/freeexchange/2013/02/fiscal-policy-0

Paul Krugman has covered this extensively, the last post is at:
http://krugman.blogs.nytimes.com/2013/02/11/austere-indeed/?smid=tw-NytimesKrugman&seid=auto

He points put that the pro-austerity crowd has now switched to denying that austerity happened.

Comments on this entry are closed.

Previous post:

Next post: