G, transfers and GDP in the Current Recovery

Just when I thought I had finally gotten out they pull me back in.

Matt Yglesias , Tyler Cowen and Kevin Drum have noticed that US GDP growth picked up exactly when US austerity stopped (as I noted here).

The pattern is so strong that it looks similar even though Yglesias, Drum and I graph different variables. I just graphed real G from Fred. Yglesias graphed the change in nominal total expenditures (G + transfers including for example social security pensions). Drum did total expenditures per capita deflated by the CPI.

Aside from bragging that I FREDed first, I have a bit to comment on Yglesias. He wrote

But now in 2014, government spending is surging again. Not back up to Bush-era levels, but up off the floor from the prime austerity level.

So what’s going on here? Well even though sequestration is still in effect, there’s no new sequestration cuts happenings. Meanwhile, the number of old people collecting Social Security and Medicare checks keeps steadily rising and thanks to Obamacare a bunch of people got signed up for Medicaid in 2014. Meanwhile, state and local budgets are generally improving.

It’s the state and local budgets. It shows up in G as well as in G + transfers. Also note that you can’t guess when sequestration occured looking at his graph either. Sequestration was a long feared reduction in fiscal year budgets — it didn’t force prompt spending cuts both because it was largely anticipated and because agencies still had months left in the fiscal year to do the cutting. Nothing special happened the quarter sequestration occurred (if you don’t remember, I suggest you look at the graphs before googling).