The Austere Recovery

Gross Domestic Product equals net exports plus business investment plus household consumption plus government consumption, so we can chart above the state of government consumption during the Obama years and see that it’s been a large net drag on economic growth.

Note that this is not “spending” as we conceive of it in budget terms. The government spends a lot of money on transfer payments — Social Security checks, Medicare and Medicaid bills, unemployment insurance, food stamps and the rest of the social insurance state — that either become household consumption or else are saved. But in terms of GDP, this is what counts: the government buying stuff (bullets, computers, printers) or building stuff (bridges, highways, schools) instead of the private sector doing it.


In NIPA terms, then, we can see that the Obama recovery has been quite austere. Not particularly because of the Obama administration’s policies, but because state and local governments have been forced to massively cut back and congressional Republicans stymied Obama’s efforts to counteract that with the American Jobs Act and other measures. But a good question to think about is, what do you think the counterfactual is here? Had there been more building of military equipment and schools, would that have been fully offset by less private consumption? By less business investment? By fewer exports? It seems to me that there would have been more business investment since private firms would have invested in the capacity to meet those increased orders. And there would have been more household consumption, since people would have had higher incomes.

I’m happy to believe net exports (i.e., the trade deficit) would have taken an even bigger bite out of growth. But fully offsetting the increase? No way.