Why the recovery has been so weak: an extension

Kevin Drum posts:

I don’t really have any good hook for posting this chart, but it’s one of the most important ones you’ll ever see. It’s from the Wall Street Journal and it shows total government spending (state + local + federal) during the recession and its aftermath:

Kevin Drum_1

For about a year following the Obama stimulus, total spending was a bit higher than average for recession spending. But after that, spending fell steadily rather than rising, as it has after every previous recession. The result: a sluggish recovery, persistent long-term unemployment, and anemic wage growth.

Not so fast Kevin. The chart below compares Aggregate Nominal Spending (NGDP) on the same basis.

Kevin Drum_2

While spending fell a little for the first two years of this recession, it never faltered on the other occasions.

But, one might argue that in many other instances inflation went up a lot. Therefore, the next chart compares NGDP only for the noninflationary occasions, considering only the previous 3 recessions/recoveries. The pattern is the same.

Kevin Drum_3

The least one could say is that you also have to consider monetary policy. This time around both fiscal and monetary policy have been tight!

How can we distinguish their relative “guilt”? The next chart compares fiscal policy (government spending) in the 1990 and 2007 episodes.

Kevin Drum_4

Initially, fiscal policy was more expansionary in the present episode, although this expansion has been weaker throughout.

Now, contrast nominal spending in the two episodes.

Kevin Drum_5

Maybe monetary policy really trumps fiscal policy!

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