Austerity City: If Cutting Spending Creates Jobs, Why Is D.C. Shrinking?


There are two competing stories about government spending in the recession. One story says we're in a deep crisis where higher spending acts as a palliative. Another says we're in a deep crisis where higher spending exacerbates our problems. Now here's a story that helps to pit those stories against each other: Three-quarters into a year that's all about cutting spending, the Washington, D.C., is in a ten-month stagnation.

Once a bastion of economic stability, Washington, D.C., is catching up to the recession three years late. Since April, the number of employed people in the District has dropped by 9,000, according to the Federal Reserve Bank of Richmond. "The deterioration in the labor market since April is greater than the deterioration over any five-month period during the recent recession," the report finds.

During the recession and early in the recovery, Washington, D.C., and its suburbs were (relative) oases in economic conflagration. When the economy contracted in 2008, government grew steadily to assume the debts of the private sector. Cities that relied on government spending -- for health care, military bases, and business -- suffered much less than other metros.

In Part Two of the economy, however, these metro oases turned into mirages. Federal stimulus faded. State and local government contracted. The private sector hasn't picked up the slack.

This is an economic story about a city, but it's also an economic story for the country. The Republican argument for austerity today is based on the premise that cutting spending will lead to growth. And that argument is based on the belief that stimulus prevented growth. But the case of Washington (not to mention state capitals) suggests the opposite. It is government stimulus that acted as a bulwark against the economic crisis, and it is government contraction that has been leading the job cuts through this miserable and disappointing year.

I raise this point not to blame austerity entirely for the slowcovery. After all, it's more accurate to say we're experiencing light austerity after moderate stimulus. This is a $14 trillion economy, to which the stimulus contributed no more than $400 billion a year. What's more, we're still running a $1.4 trillion deficit to keep money in the private sector.

Rather, I'm highlighting this report to call into question Republican's explanation for the slow recovery, which relies on boogeymen like regulations and the specter of deficit spending. These are pittances compared to the pain of low demand, which government can mitigate with deficit spending while borrowing rates are low. If the GOP were right that reducing government should grow the economy, we would see Washington booming today. Instead, sales tax collections indicate the the District economy hasn't grown in the last 12 months. How does the Republican story explain that?

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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