American Austerity

By Paul Krugman

May 1 (NYT) — With all the focus on Europe’s sudden discovery that austerity doesn’t work, we shouldn’t lose sight of just how much de facto austerity we’ve done on this side of the Atlantic. Here’s a comparison of changes in government employment (federal, state, and local) during the first four years of three presidents who came to office amid a troubled economy:

That spike early on is Census hiring; once that was past, the Obama years shaped up as an era of huge cuts in public employment compared with previous experience. If public employment had grown the way it did under Bush, we’d have 1.3 million more government workers, and probably an unemployment rate of 7 percent or less.

61 Responses

  1. The Obama administration has swallowed the line: public employment = bad employment; private employment = good employment. Hopeless.

    1. @Dan Kervick,

      As has already been pointed out by me and others, the decline in public employment is entirely due to cutbacks in state and local government, which from a fiat currency perspective are more akin to private sector employers than public sector. Federal employment growth has been close to zero, as it was during the 2001 recession.

      And during the 2001 recession, the growth in state and local government employment was mostly due to education, a trend likely supported by demographic trends.

      And for the record, one should generally be more skeptical of the utility of public employment versus private employment. When private employers make bad investment decisions (on employment or otherwise), they go bankrupt and get weeded out from the gene pool, so to speak. This evolutionary process does not happen with government programs. Not saying that all government employment is bad, but I think it’s undeniable that failed government programs rarely are defunded. In fact, their very failure is usually cited by advocates as a reason for increasing funding (see e.g. public school funding).

      1. @ESM,
        Local government programs certainly get weeded out through evolution. Police, Fire, Registry of Motor Vehicles, Schools, Medicaid Dentistry, Programs for Retarded Adults to name a few have all been pared here in Massachusetts. And Mass. is doing better than many states.

      2. @chewitup,

        That’s not natural selection. That’s trimming. Usually, all programs are cut back equally when a state or local government is revenue constrained. Shared sacrifice and all that. It’s rare for an entire program to be eliminated. And the employees who are laid off are the ones with the least seniority rather than the ones with the worst performance.

      3. @chewitup,
        You’re right. They rarely totally eliminate the program. My town still has a program to pick up “garbage” to help feed the local pigs, but there are no longer local pigs.

      4. it’s still govt. And I can’t say I like state and local govt any more than the federal govt. And Obama did preside over the economy so I’ll give him credit for reducing Federal (for the last year or so), state, and private sector employment. The best you can say is it could have been worse. He’s the largest job destroyer I’ve ever seen, and it isn’t over yet.

        And best not to defend the utility of either sector…

  2. I would hazard to guess that most of the drop in employment is at the local and state level. Cities,town, and states do not currently have the money to maintain the previous levels, especially when they have to pay so much to retirees. Illinois is a current example in the news. Their pension liabilities are underfunded.
    Retiring teachers ere not being replaced and many positions at schools are being eliminated. If there has been a huge drop in private sector jobs, it only follows that the public sector must lose jobs.

    1. @chewitup, I do not understand, I thought if there was a huge drop in private sector jobs, it was the governments job to be countercyclical and make a bunch of makework jobs to keep the engine humming until the private sector returned. Like department of homeland security which added 3 million jobs right? Without the makework jobs, those 3 million might be sitting at home only watching TV instead of frisking you at the aiport to make sure you don’t have weapons.

      1. @Willie Lomax,

        It is indeed their job, however only the federal government has the power to fulfill it and allow the local governments to do so.

        Local governments and states are as financially constrained as any of us, they are users of the currency, therefore their spending is constrained by revenue. Only the federal government issues its own currency, and therefore isn’t constrained by revenue.

        That means the federal government could increase whatever grant they give to states and local governments anytime (I suppose there are such things, although not sure how it works in the US works). That way local governments could keep people in their public job (and hire some more!).

        Or the federal government could hire them directly.

        I imagine the department of homeland security is a federal agency, and therefore the federal government can decide to spend whatever it wants on it, they just have to change the number on the corresponding line in their budget spread sheet.

        The same cannot be said for any city or state. They can’t hire more people to clean the streets nor can they hire more nurses or firefighters without getting hold of dollars in some way or another.

        You can read Warren’s book (the 7DIF) here on this website for free! It’s easy to read, straight to the point and makes everything crystal clear.

        Hope this helps.

      2. @Tristan Lanfrey, I have read the book, lets get deeper to your point:

        “Local governments and states are as financially constrained as any of us, they are users of the currency, therefore their spending is constrained by revenue.”

        Right, so washington DC can decide to send some money to mayberry and give money to andy griffith for a deputy fife, or not. But why does washington DC have better information than the state boys in Raleigh NC or better information than andy griffith himself on the needs of the local community?

        Ultimately, the longer I live, the more I fail to see how washington DC is the best decider for wether barney fife has a job or not, either as a local deputy or federally employed homeland security agent that inspects your underwear and andy griffith with his local knowledge and information is a much better decider. Many times that bum, otis, he needed to sleep off his drunken state so he wouldn’t run over anyone, and andy let him do that in the jail, but I bet a centrally planned washington DC information system couldn’t take all that local “knowledge” that andy had and properly process it and filter good decisions back out into the system.

        Under your system a lot of power is going to the federal government and away from state and local, and I see towns in greece that have basically reverted to a barter system and “come off” the euro monetary grid because it no longer serves thier needs.

        Lets take a real world example, the fuel refinery in USVI next to Warren, is DC a better decider for the thousands of unemployed closing the fuel plant will bring, or some local guy like warren who has more direct info and knowledge of the people, thier lives and families, and local community needs? There are 350 million people all over the federal governments reign, and that government also has lots of information to process about foreign nations and thier citizens too, so we could expand it up to all 7 billion, that is a lot of citizens for just a few people in DC to make all the decisions for, don’t you think? I have a hard time making up my mind about my own life and choices, much less my direct family and then local neighborhood and community, I can’t imagine the information processing that the big brains in DC must have to do by the nanosecond, how do they do it?

      3. @Tristan Lanfrey,

        “I imagine the department of homeland security is a federal agency, and therefore the federal government can decide to spend whatever it wants on it, they just have to change the number on the corresponding line in their budget spread sheet.”

        Problem is some of us don’t like being patted down and felt up by TSA. America is slipping into a police state. Besides, jobs like these are not productive in the sense that they produce little if anything of value. GSA scandal comes to mind.

      4. @Willie Lomax,

        I’m not saying your federal government has a better picture, or should decide of local policy, I’m saying it’s the only thing that can spend without revenue constraint.

        How it spends is for the American people to decide, so I’ll leave that to you 🙂

      5. @Ed Rombach,

        That seems to be besides the point, the point here is that the US federal government can hire people if it choses to.

        Since I am not a US citizen, what your government decides to make its workforce do is not for me to decide, it’s yours 🙂

      6. @Tristan Lanfrey, Tristan Lanfrey Reply:
        I’m not saying your federal government has a better picture, or should decide of local policy, I’m saying it’s the only thing that can spend without revenue constraint.

        I don’t know where you are from Tristan Lanfrey, but why shouldn’t we have a global currency, one world monetary order? One dollar to rule them all and one central body to be the central bank of it all? Why have 200 currencies floating against each other (minus things like the chinese peg)?

        Why have that diversity? I see it as the same for the euro nations and for US states and even cities, if a central authority is the best for making monetary decisions, why not have 1 body planet wide? If diversity is the best and 200 floating national currencies is the best, why not have all 50 states have thier own currencies and have them float and why not break the euro experiment back up into individual national currencies. Labor mobility is massive in today’s world, I first lost my american job to mexico, then to india, now the computers in googles cloud and the robots and AI algorithms have taken my most recent job, its not even humans that I am losing my jobs too now, labor mobility is virtual now – transcending national borders and going between virtual clouds and digital realities 😉

      7. @Tristan Lanfrey,

        Don’t forget, they could also just lower taxes instead of increasing spending.
        Or they could just mail everyone a check.
        That’d be fine by me, very easy to turn it on and off as needed.

  3. This is the first time ron paul and paul krugman have faced off. Reminds me of the rickards/mosler debate a few years ago.

    Krugman says he was not a defender of Diocletians policies; however Ron Paul says we needed to let the market clear instead of the bailout and propping up the shadow system. Citigroup chairman Chambers recently said he is in shock that washington takes wallstreet seriously anymore after thier failure and amazed that any of them are still in positions of power or listened too, agreeing with Ron Paul. So do we go back 100 years like Ron Paul wants, or 2000 years like Paul Krugman wants?

    1. @Willie Lomax,

      Watching that was like being waterboarded alternately via two different orifices!

      RP doesn’t understand fiat monetary systems, PK doesn’t understand banking operations, and our electorate doesn’t know the difference!!!

      Is this the best we can do? Weepin’ Croesus on a Midas touch!

      1. @roger erickson, I really liked the part where Ron Paul told Krugman we should just print up a bunch of money and buy everything we need from the rest of world and let all americans sit down and not work anymore. He showed PERFECT understanding of warren’s ideas that exports are cost and imports a benefit. As warren has often said, right now we get the chinese and others to give us lots of real work and goods for pieces of paper and digits in electronic spreadsheets, what a racket! Ron Paul must read warren to have so eloquently slapped paul krugman with that, krugman was dumbfounded, sadly I agree with you about our electorate! 🙂

  4. Warren,

    When IBD posted an editorial that ignored available facts to better make their case, you decried their behavior. Isn’t this the same thing?

    How much of the reduction in Public Employment has occurred in the Federal Workforce? Of that how much was in defense? Non Defense? Aren’t those easily available data points that Krugman could have availed himself of?

    I think the story here is much more complex than “Obama has ushered in a new era of Austerity” and Krugman knows it. Yet like IBD’s editorial board he has made no attempt to tell the more nuanced story because it doesn’t fit well with the narrative he’d like to tell.

    1. @JCD,

      That was exactly my question, how much was military and how much non-military? Reagan and Bush enlarged DoD, Obama shrank it.

      Krugman also said that of Obama, Romney, Gingrich and Santorum, Obama has proposed the smallest budget deficits.

      I guess Krugman will be voting Republican this time around, eh?

    2. @JCD, Fact still remains that the ratio of private/public employment – and the net % of workforce employed – should have been compared to the Hoover/FDR administrations too.

      “Data is meaningless without context.” Walter Shewhart

      1. @roger erickson,
        Why didn’t Krugman ever compliment Bush? Sometimes I think I’d favor Ron Paul, in the sense, let the cards fall as they will, and let the market clean things up. That’s in comparison to what I think’s happening now: the federal government holding a noose around the economy(inefficient/over-taxation, and inefficient/over-regulation, while reducing spending (taking the floor out). It’s the difference between getting on a train that might go around or off the cliff, or one that’s definitely going off of it.

      2. @Vincent,

        “(inefficient/over-taxation, and inefficient/over-regulation”

        No, I think you’re still missing the crux. Here’s how we’re killing ourselves:

        1) unproductive distribution of taxes & over-taxation? check

        2) random underfunding of distributed, individual initiative by public initiative? check
        [i.e., not enough public funding to optimize maximal fruits of individual initiative]

        3) grossly under-regulating and mis-regulating combo of [1&2]? double check! (not to mention failing to control individual & organized fraud)

    3. The only point I was trying to make was that Republicans are going to have a problem labeling him as a big spending liberal.

      The federal govt headcount is down a bit for the last year or so, up a bit before that.

      And if I’m not mistaken income inequality has widened?

      And he did take 500 billion out of the medicare budget to give to the insurance companies?

      And supported union leaders as he crushed union members?

      Have you seen any taxed raised on anyone, apart from ending the ‘work for pay’ or whatever it was called at the beginning of 2011?



        I liked what ron paul just said to paul krugman, if Obama wanted to help middle class america, why didn’t he give the money directly to the homeowners instead of the banksters and pay off thier houses? Doesn’t the USA have the economic power to give every citizen a free house? I also liked what Ron Paul said about the fed giving the world dollars and the USA getting real goods in trade and no americans having to work real jobs anymore, that goes along perfectly with what you have said about imports being a benefit and exports being a cost. Ron Paul showed perfect understanding of MMT principles you have advocated here when he uttered that, he must read your stuff. Krugman didn’t know what to say when ron paul slapped that one across his face 😉

      2. @Willie Lomax, Citigroup chairman Chambers disagrees I think, or at least that was what I understood watching him on his charlie rose financial crisis interview.

      3. the gov didn’t gift any capital to the banks

        technically it didn’t. but didn’t the liquidity injection at the time keep banks afloat so that their capital wasn’t lost? then you can look at it as government gifting capital to bank owners.

      4. with floating fx banks are public private partnerships with the gov’s role liquidity provision, whether it likes it or not.
        note the ecb doesn’t like it at all, but ultimately has no choice.

      5. @WARREN MOSLER,

        A President doesn’t operate in a vacuum. He is constrained by Congress, and he is constrained by his desire to be reelected.

        But, in general, I think you’re mistaking incompetence for ideology.

      6. @ESM,

        Until he was swept away.

        If only the ideas of his successor could be placed in the dust bin of history.

      7. @WARREN MOSLER,

        And if I’m not mistaken income inequality has widened?

        Are you sure? I thought it peaked around 2006 or 2007. And I’m pretty sure many of the recent batch of income and wealth inequality studies mysteriously only had data out to 2005 or 2006.
        Gini typically takes a big hit during recessions, and I don’t think it was any different this time.

        And supported union leaders as he crushed union members?
        Well, there was GM, and rewriting the rules on bankruptcy. I’d think that would upset you more. Perhaps it did, I don’t recall.

        Have you seen any taxed raised on anyone, apart from ending the ‘work for pay’ or whatever it was called at the beginning of 2011?
        So the attempts and talk have all been a big fake? He never wanted cap and trade either? Sometimes Congress actually does its job.
        He did put in place a gov program that pretty much assures higher taxes going forward, and I think he knows that.

      8. all to my point.

        with the labor force participation rate pretty much at multi decade lows (back to before women entered the labor force in size?)
        the stock market doubling, wages ‘well contained’, real wages going no where, millions of residents going from owner owned to investor owned/rentals, looks to me like the 1% gained a bit vs the lower half, but agreed, just guessing at this point.

        And yes, I’m looking at the actual outcomes, not the ‘talk’

        And I’m not saying there wasn’t a lot of bad policy.

      9. @djp,


        “the stock market doubling…”

        Oh, you mean from the brief bottom touched during the first week of Mar 2009. I suppose the 99% sold all of their stocks on Mar 9, 2009, and the 1% bought?

        For the record, the S&P index is still down quite a bit from where it was in autumn 2007. And it’s even down from where it was in 2000 (although with dividends, there’s probably a small positive nominal return).

        As to income inequality, I’ll just throw out one incendiary idea. The standard liberal policies, whose purported purpose is to mitigate income inequality, (e.g. welfare, subsidies, unemployment benefits, support of unions, more onerous labor regulations, higher corporate taxes, higher income taxes, and set-asides for disadvantaged groups/businesses/whatever) actually have the perverse (but eminently forseeable) effect of exacerbating income inequality.

        Not that income inequality is necessarily a bad thing…

      10. the 1 make disproportionately more on stock market gains, including management fees for assets under management that increase and comp options tied to stocks.

        and some of those policies do, some don’t.

        and agreed incomes should not be equal, but too often today’s resultant distribution, entirely politically determined, makes no sense at all to me

      11. @djp,


        But don’t you agree that the 1% are hurt the most from a zero interest rate policy? I think recessions tend to compress incomes, although there probably is an overall trend towards greater inequality because technology exacerbates productivity differences.

        “…entirely politically determined…”

        You have written something like this before, but I always thought you were being sloppy with your language. Do you think that the distribution of resources in an economy is entirely determined by arbitrary institutional structure? Is it arbitrary that the strongest, fastest, smartest, or hardest-working people should earn above-average incomes? Frankly, without our “arbitrary” institutional structure, the bottom 20% of the population would probably be left to starve to death, and another 30% would be at subsistence level.

        Yes, I think it’s arbitrary that an athletic 7 footer can make millions of dollars for learning how to put a rubber ball in a basket, although I have no problem with it since his skills apparently bring happiness to millions of people around the country. But I don’t think it’s arbitrary at all that a whiz software programmer can make millions. Nor do I think it’s arbitrary that a savvy trader can make millions. Perhaps it’s unfortunate, but I suspect that such a trader would be able to make his millions (of whatever) under virtually any sensible institutional structure. Remember, aside from kings and emperors and the like, the wealthiest people throughout history have been traders.

      12. seems like, in general, if we are going to generalize, those losing their jobs are ‘hurt the most’ in real terms?

        and rate cuts without fiscal adjustments can be said to destroy paychecks.

        And yes, in our society the distribution of income is entirely determined by institutional structure.
        change the laws so that trading is a capital offense and traders don’t do so well (in general) for an extreme example.

        And how much did a software programmer make before there was software? And now that there is he’s supported by limited liability corps and a govt. created financial sector, without which he doesn’t do nearly as well financially.

        yes, traders have always been the wealthiest and also the most despised and subject to public regulation to try to keep them ‘honest’

      13. “Frankly, without our “arbitrary” institutional structure, the bottom 20% of the population would probably be left to starve to death, and another 30% would be at subsistence level.”

        That is happening with the so-called institutional structures in place.

        Are you suggesting replacing that method of elimination with something faster more in line with the Eugenics principle you are suggesting.

      14. @djp,


        “Are you suggesting replacing that method of elimination with something faster more in line with the Eugenics principle you are suggesting.”

        By a widely accepted corollary to Godwin’s Law, I guess I win this round.

      15. @djp,


        “And yes, in our society the distribution of income is entirely determined by institutional structure.”

        Forgive me as I paraphrase Inigo Montoya, but you keep using that term “institutional structure”. I do not think it means what you think it means.

        For if it does, then it is not a useful term.

        The fact that the world runs on computers and software is not just some arbitrary social construct, one of many equally good ones from which human beings could choose. By contrast, having a Treasury bond market or even a Federal Reserve system is somewhat arbitrary, and it’s far from clear that there aren’t better alternatives.

      16. The fact that the world runs on computers and software is not just some arbitrary social construct,

        The fact that software can be protected by IP laws, or that the government buys Microsoft software and turns in into a de facto monopoly, is institutional.

      17. @djp, “And how much did a software programmer make before there was software?”

        Woody allen once said if he had been born in an indian tribe in the 1500’s he probably would have been scalped and not been very successful as a comedian, but working in NY as a film maker in the present age allowed him the ability to be very happy and successful and even marry his own daughter. I think the point is valid, we exist and thrive within the bounds of the society, if that society is a good one, you can even marry your own daughter like woody. Wait what?!

    4. @JCD, I know it’s an election year, and people can get excited, but I think this kind of discourse is always misplaced here.

      One of the great charms is that MMT is an ideology free zone. One does not have to right or left of center to agree with it.

      I’m right of center, Warren is left. Big deal. But if this sight becomes a place to argue about Obama vs Romney, MMT takes a big step backwards. There’s a lot of places to do that that are frankly better at it.

  5. Krugman also made another slight against paul, saying that people have a choice to use other currencies besides the feds money, but ron paul said NO, you will go to jail if you do. I do know you warren have often said it is the man with the gun in the room pointing it at people that if they don’t collect his money then they go to jail, so who was right? Krugman or paul? (krugman did say you could do barter, which some greek towns are now doing instead of using the euro) Krugman also said there is no clear line between money and non-money so he couldn’t really define money? Isn’t that big news, that paul krugman can’t define what money is and doesn’t know where the clear line is between money and non-money?

    1. @Willie Lomax, You know thinking about this more, if our best economic experts can’t even define what money is like Krugman admitted, and no one knows where the line is between money and non-money, how can we possibly create policy responses involving money when no one is quite sure what it is? Very confusing for me. Is this the best 7 billion can do?

      1. @WARREN MOSLER,
        Then why do those not subject to taxation (say, the Chinese) want it? It is a serious question, which was asked of me recently. I had no good response. I said maybe it was to buy oil, but that didn’t seem right. Any help would be appreciated.

      2. 1. because they see things for sale in exchange for dollars which makes them want dollars
        2. to help their exporters, though at a real cost to their macro economy, because exporters have political power

  6. If this is true, which I doubt, at least Obama has done one thing correctly. Obama would not require them to work, just give them the money/welfare. That is an even surer vote..

  7. “with the labor force participation rate pretty much at multi decade lows”

    Warren you seem to be implying this in a negative way, however, this could be looked at as a positive, that our modern society has become so productive and efficient with AI algorithms and robots and such that few humans are needed to serve the wants and needs of 10 billion or 350 million just in USA. I think the really big problem is that you have all these people brainwashed that they MUST WORK to deserve to live and in a world of 10 billion where the robots and computers are more efficients users of resources to supply us, that leaves for a lot of unhappy people who feel worthless. A lot of other people start thinking these people are redundant and worthless, we need to shrink the population somehow of all this redundancy to be more productive and efficient.

    Since the computers and the cloud have replaced me, I watch a lot of ricks steves travel videos, and he says Americans are the most heavily worked people ever with the shortest vacation time of any developed nation. Most people only getting a couple weeks a year. I think more people need to do like you and start wasting lots of time fishing instead of worrying about how much harder they can work to contribute to the world, I hate to break it to all of you here posting on this MMT blog, but most of you are redundant, and in the big picture, are going to contribute nothing really groundbreaking to this planet, but that doesn’t mean you can’t have some fun on the way to your grave. Don’t take life so seriously, you will never make it out alive! Warren I remember when Carney didn’t talk to you before posting some article at cnbc and you had a fit and seemed to get very emotional, perhaps wether MMT lives or dies or thrives and changes the world or not, you are getting too emotionally attached? Maybe you need to go fishing more so if people like carney ignore you or not, you don’t get emotional….. Here was ron paul in 1988, he got very emotional, not cool….

    1. @Save America, Its funny because at the beginning ron paul says people should have the free choice to eat what they want, and near the end this fat guy picks on him and ron paul makes cruel fat jokes against the fat guy, what a self-contradiction, it was the fat guys free choice to get fat, why does ron paul do something so evil? 😉 Emotions can really make you look dumb when you let them get riled up Warren.

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