I’m tempted to feel a certain degree of sympathy for Paul Krugman.
As a leading proponent of the notion that bigger government stimulates growth (a.k.a., Keynesian economics), he’s in the rather difficult position of rationalizing why the economy was stagnant when Obama first took office and the burden of government spending was rising.
And he also has to somehow explain why the economy is now doing better at a time when the fiscal burden of government is declining.
But you have to give him credit for creativity. Writing in the New York Times, he attempts to square the circle.
Let’s start with his explanation for results in the United States.
…in America we haven’t had an official, declared policy of fiscal austerity — but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments.
If you define “austerity” as spending restraint, Krugman is right. Overall government spending has barely increased in recent years.
But then Krugman wants us to believe that there’s been a meaningful change in fiscal policy in the past year or so. Supposedly there’s been less so-called austerity and this explains why the economy is doing better.
The good news is that we…seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. And the economy is doing much better as a result. We are finally starting to see the kind of growth, in employment and G.D.P., that we should have been seeing all along… What held us back was unprecedented public-sector austerity…now that this de facto austerity is easing, the economy is perking up.