Thursday, March 8, 2012

Gov’t Spending In Recessions and Recoveries

Paul Krugman earlier in the week... noted that:

Adjusted for inflation, Reagan-era spending rose 10.2 percent in the first 10 quarters of recovery, Obama-era spending only 2.6 percent.

Why did government spending rise so much under Reagan, with his small-government rhetoric, while shrinking under the president so many Republicans insist is a secret socialist? In Reagan’s case, it’s partly about the arms race, but mainly about state and local governments doing what they are supposed to do: educate ... children, invest in infrastructure for a growing economy.

Under President Obama, however, the dire fiscal condition of state and local governments ... has led to forced spending cuts. The fiscal straits of lower-level governments could and should have been alleviated by aid from Washington... But this aid was never provided on a remotely adequate scale. ...

We’re talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc...
And once you take the effects of public spending on private employment into account, a rough estimate is that the unemployment rate would be 1.5 percentage points lower..., or below 7 percent — significantly better than the Reagan economy at this stage.

Obama isn't a big spender--especially on the things that matter contrary to what Fox News tells you... 

The 80’s/now comparisons are plotted below and the table compares the last four recessions/recoveries.


Source: NIPA

President Reagan’s military Keynesianism shows up clearly in the early 1980s, with marginal fiscal drag from the states.  In the Great Recession (GR), both President’s GW Bush and Obama kicked up the non-defense federal spending, but what really stands out here is the state/local fiscal drag.

The table shows just how limited total gov’t spending has been over the past four years when you combine the feds with the states.  And while the dates don’t line up that neatly, you certainly can’t make the case that it’s D’s Presidents who are the big, fat Keynesians.  If anything, they look kind of tepid.

John Lennon once said something to the effect of “everything you think you know is wrong.”  He was right.

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