Deal or No Deal on Shutdown and Debt Ceiling, Biggest Fiscal Policy Crisis Remains Unaddressed

The biggest fiscal policy crisis the U.S. economy faces is guaranteed to continue for at least the rest of the year, even if resolutions are found for the government shutdown and the debt ceiling. This larger crisis is the extraordinary degree of spending-side austerity undertaken by the public sector since the Great Recession officially ended in 2009. The figure below shows growth in real (i.e., inflation-adjusted) spending by federal, state and local governments in the years before and after recessions.

It shows clearly that public spending following the Great Recession is the slowest on record, and as of the second quarter of 2013 stood roughly 15 percent below what it would have been had it simply matched historical averages. This spending austerity has enormous economic consequences—if public spending since 2009 had matched typical business cycles, this spending would be roughly $550 billion higher today, and more than 5 million additional people would have jobs (and most of these would be in the private sector). In fact, this extreme cutback in public spending can entirely explain why the recovery from the Great Recession has been so sluggish compared to recoveries following previous recessions.

And, needless to say, the latest fiscal showdown has done nothing to reverse this deeply damaging trend.