Chart compiled by Paul Krugman showing decline in public investment by state and local governments since the 2008-2009 recession.

Austerity is a major issue abroad, particularly Europe, but it has more to do with the sclerotic economic pace in the US than most people realize. Republicans successfully got spending caps that will ratchet down the budget in years to come, and they’ve already effectively frozen it. But as Jared Bernstein and Krugman show, the bigger contribution to austerity comes from state and local budgets.

You can see the job loss track perfectly with the reduction in spending, and that probably understates it, because state and local governments contract out work to the private sector, which then gets deprived of those jobs when cutbacks occur. And, the cuts happen to be in the worst possible areas, namely investment:

That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

I’ll just allow one example that isn’t quite a state and local cutback and won’t commonly get associated with investment, but which has been extremely devastating to the population that usually avails themselves of the services. I’m talking about legal services.

Civil legal aid groups that receive money from the Legal Services Corp. estimated that they will cut 163 lawyers and 230 other employees this year after Congress trimmed the agency’s budget by 14% for fiscal 2012, according to an LSC survey released Thursday.

The projected reductions among 132 of the 135 LSC-funded organizations follow a loss in 2011 of 833 positions. The groups in 2010 had 9,059 employees, including 4,351 lawyers. In 2012, the organizations expect to have 7,833 workers, including 3,769 attorneys.

“I was not surprised to see this,” LSC President James Sandman said, adding that the staff losses will harm the ability of civil legal aid groups to help the poor.

You’re talking about groups that just cannot afford legal aid, and therefore rely on these government provided sources for their protection from harm. But those resources are getting taken off the playing field.

All of a sudden, we’ve seen this shift of emphasis, away from the deficit and toward jobs and inequality. Even Washington Post op-ed scribbler had to admit defeat on this recently. But even if Hiatt laments about how his pet issue isn’t up in lights on the marquee anywhere, he isn’t seeing the fact that he won. He won back at the 2010 State of the Union, when Barack Obama proudly took up the cause. And look what Fred Hiatt has won! With the austerity supports in the economy, fiscal policy is subtracting from economic growth at a time when little alternative growth is getting generated, and no catch-up growth to deal with the aftermath of the Great Recession.

Austerity is a big part of that story. And austerity just doesn’t work.