Thursday, May 23, 2013

The Loch Ness Austerity


I keep reading about austerity, but like the Loch Ness monster I just can't find it.

Here's a graph of federal spending since 2005. The source is the Monthly Treasury Statement put out by the Treasury Department.

I see the big increase in Federal Government spending from 2005 to 2009, and flat-lining since. When economists talk about a multiplier of government spending they are referring to a multiplier on government consumption and investment expenditures, which total about $1.4 trillion for the federal government and $3 trillion for state, local and federal government combined. The shape of the charts are not too dissimilar to the one above.

So austerity means government isn't growing? Really?

Like most discussions on the economy this one suffers from the "all else equal" fallacy. All else equal, if government spending changes, such and such will happen. All else equal, a change in the minimum wage results in x, y and z. All else equal, a change in interest rates causes the following...

All else is never equal. For instance, since the beginning of this year, the S&P 500, a broad measure of the US stock market is up 15%. The total market value of the S&P 500 is about $14 trillion, and the increase has been about $180 billion. Other asset classes have also had strong gains, including housing.  It seems that would be an offset to the LochNessAusterity. And what if the market is up BECAUSE of austerity?

The arguments for and against "austerity" are proxies on you view of government effectiveness. The recent news from the IRS, DoJ and CIA are not supportive of the efficacy of wise men in the government directing a $16 trillion economy.


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