

Source: Hutchins Center

Welcome to Austerity U.S.A., where the deficit is back below 3 percent of GDP and growth is still disappointing—which aren't unrelated facts.

It started when the stimulus ran out. Then state and local governments had to balance their budgets amidst a still-weak economy. And finally, there was the debt ceiling deal with its staggered $2.1 trillion of cuts over the next decade. Add it all up, and there's been a big fiscal tightening the past few years, something like 4 percent of potential GDP. Indeed, as Paul Krugman points out, real government spending per capita has been falling faster now than any time since the Korean War demobilization.

And, as you can see above, all this austerity has been hurting GDP growth since 2011. It shows the Hutchins Center's new "fiscal impact measure," which looks at how much total government tax-and-spending decisions have helped or harmed growth. The dark blue line is what policy has actually done, and the light blue one is what a neutral policy would have done. So, in other words, if the dark blue line is below the light blue one, like it has the last three years, then policy has subtracted from growth.

Now there are two caveats here. The first is that this doesn't account for what economists call "monetary offset." That's the idea that the Federal Reserve, which is always trying to keep inflation near its 2 percent target, might raise rates to undo any government spending that heats up the economy too much. In that case, more spending during a boom wouldn't help the economy as much, or at all, as this measure says it would.

The second, though, is that this doesn't include any fiscal multipliers, either. See, when interest rates are zero, monetary offset isn't as much of an issue, and government spending might boost the economy more than the amount it actually spends. That's because there might be spillover effects, as the people the government pays go out and spent that money themselves, and so on and so forth. Recent research suggests these multipliers might be as high as 3.1—that is, $1 of government spending increases GDP by $3.10—during a deep recession like our last one. In other words, this chart probably understates how much damage austerity has done.

The tragedy isn't that stimulus didn't work. It's that it was barely tried.