Derek Thompson has a post at The Atlantic about the economic recovery and the effects of austerity called The Battle for the U.S. Economy's Future: Cars and Houses vs. Washington. It would be more accurate if it read The Political Bias of Derek Thompson or the title I chose above.

Thompson rightly points out that the economic recovery so far is being supported primarily by the recovery in the auto and housing industries:

Barely perceptible, behind the cacophony of the Egypt & Zimmerman news cycle, you can make out the steady drumbeat of good news about the economy. Consumer confidence at a six-year high. About 200,000 new jobs per month in the last quarter. A 20-year low in credit card delinquencies.

And for this, the U.S. economy has two things to thank. Cars and houses.

I don't know about a steady drumbeat of good news as this recovery leaves a lot to be desired from an investment standpoint, but Thompson is certainly right that these two sectors are about the only thing keeping GDP on an upward path. And as he points out, these are the two sectors that traditionally lead recovery. The reason for that is rather simple. Every downturn is met by lower interest rates from the Fed and these two sectors are about as interest rate sensitive as you can find. 

I do agree with Thompson that Washington is the problem when it comes to the feebleness of the recovery but he pinpoints the cause as "austerity" or more specifically government spending cuts. In support of this idea he quotes Olivier Blanchard of the IMF:

So, fine, don't take my word for it. Listen to IMF chief economist Oliver Blanchard, whose organization just slashed our estimated growth rate this year due to "stronger than expected and stronger than desirable fiscal consolidation [that] has been only partly offset by a good performance of the housing market."

And the kicker: "If fiscal consolidation had been weaker, then growth in the US would be substantially higher." In other words: The rush to cut the deficit is cutting into growth.

Mr. Thompson immediately equates this with reduced government spending:

The IMF isn't Nostradamus. But you don't have to have access to a crystal ball to know that cutting spending too quickly in an economy recovering from a debt overhang is dangerous.

Put aside for the moment the appeal to authority from an organization that should have absolutely no credibility. Because of what I can only assume is political bias and a preference for ever rising government spending, Mr. Thompson puts words in Blanchard's mouth. You'll notice that nowhere in Blanchard's quote is spending or taxation mentioned. I haven't read the IMF report because I have better things to do, but if there is a reference to cutting spending too rapidly, why didn't Thompson use it? 

The budget deficit has been reduced this year to date but it isn't just because of reduced spending. It just so happens that the CBO released its June budget review earlier today:

What you'll immediately notice here is that tax receipts are up 14.4% while spending is down just 4.7%. Higher math skills are not needed to analyze this. Even if one assumes that spending cuts and tax hikes affect the economy equally, the obvious conclusion is that if reducing the deficit too fast has hurt the economy, it is from higher taxes more than reduced spending. The debate is more complicated than that of course, but an honest appraisal can't just ignore the tax hikes that went along with the sequester. 

Digging just a little deeper one finds that the available research on multipliers for spending and tax changes show they are not in fact equal. Christina Romer's research - that would be the Christina Romer who helped design the administration's stimulus package - shows a multiplier for tax changes of around 3. There is no consensus on the multiplier for spending changes but the average would appear to be around 1. I've never seen any research that shows a spending multiplier that had a handle higher than 1 (although that surely doesn't mean such research doesn't exist). There is plenty of debate about the tax multipliers as well of course, but all the ones I've seen show a multiplier higher than for spending.

It isn't deficit reduction that is hurting economic growth, it is how it was structured. If we wanted to cut the deficit while providing a stimulus the obvious combination would be to cut spending and taxes. The tax cuts, with a multiplier of 3, would only have to be 1/3 the size of the spending cuts to make it neutral to economic growth (assuming the available research is accurate). Instead, our politicians, in all their wisdom, decided to raise taxes and cut spending both of which provide negative multipliers. And in this case, taxes were raised more than spending was cut, making the outcome even worse.

There is a discussion that needs to happen in this country about the proper size of government and how to fund it. That conversation should also include a debate about the best way to regulate the economy to account for externalities and limit the phenomenon of regulatory capture. I prefer a smaller, smarter, more efficient government. My guess is that Mr. Thompson prefers a smarter, more efficient government too even if he has no problem with the current size of the one we have. Unfortunately, like so many others in this debate, he thinks we have to put off the smarter, more efficient part just because higher government spending has a plus sign in the GDP equation. The math says different.