Austerity is working

It's finally starting to look like a real recovery for the U.S. economy. One aspect that makes the upswing look sounder is that it has happened while government spending has declined. 

By , Guest blogger

  • close
    A worker is pictured at a residential construction project along N. Beverly Glen Boulevard, a two lane road in Los Angeles, California February 3, 2012. Construction spending is at its highest in four months.
    View Caption

With both the manufacturing and the non-manufacturing surveys indicating increased expansion and with construction spending and employment increasing, it seems clear that the U.S. economy has started to go from the ""recovery" that feels like a continued recession for most people" state it has been in since the summer of 2009 to something resembling a real recovery, though still nowhere near as vigorous as for example the 1983-84 recovery.

What are the causes of this turnaround? In part it reflects the fact that growth is the natural state of the economy and that the factors that depressed it are dissipating and in part it reflects a credit-driven investment boom. Fixed business investments rose 7.5% in real terms in the year to the fourth quarter financed by a 11.4% gain in commercial & industrial loans. The fact that it is credit-driven indicates that it is an early stage of a classical Austrian business cycle scenario, but with the level of investments still below the peak levels of previous expansions, there is room for further expansion.

One aspect that makes the upswing look sounder is that it has happened while government spending has declined. The category government purchases (spending excluding transfer- and interest payments) has dropped from a post-1992 peak of 21.1% of GDP in the third quarter of 2009 to 19.7% in the fourth quarter of 2011, mostly because of spending cuts at the state and local levels.

Recommended: What can be done to create jobs? Six leading ideas.

This makes what Krugman wrote a few months ago especially interesting:

"Basically, government has been shrinking for the past year — in practice, fiscal policy has been doing exactly what Republicans say it should be doing. Where’s my confidence fairy?"

Right here, it seems.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on stefanmikarlsson.blogspot.com.

Share this story:
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...