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Krugman Misleads On Government Spending, Economic Growth

The public sector is growing while the private sector isn't.

4:30 PM, Oct 15, 2010 • By SETH FORMAN
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Does a Nobel prize winning economist have any obligation to demonstrate basic statistical honesty, even when editorializing? In his attempt to support his tedious and wholly unconvincing argument that the public sector has not grown substantially under Obama, New York Times columnist Paul Krugman writes that the narrative of Obama’s profligacy and the failure of Keynesian pump-priming “is a myth. There never was a big expansion of government spending.” (“Hey Small Spender,” New York Times, October 10, 2010).  

Krugman Misleads On Government Spending, Economic Growth

Krugman is being purposely obtuse. In fact federal spending rose a mind-numbing 34 percent from 2008 to 2009 (the finals for 2010 are not in, but are estimated to be somewhere near the 2009 level). You’d have to go back to 1952 before observing a higher percentage increase in federal spending in one year, and that was mostly a function of the severe federal spending drops in the years immediately after World War II. Indeed, even between 1932 and 1941, the depths of the Great Depression before preparation for World War II began, Franklin Delano Roosevelt raised federal spending by more than 34 percent only once, in 1934. In that year, federal spending increased by 42 percent in a failed attempt to quash a national unemployment rate of 21.7 percent. In that year, federal spending only amounted to 10.5 percent of gross domestic product. By contrast, with less than half of FDR’s unemployment problem, federal spending as a percentage of the economy surged to an estimated 24.4 percent in 2010 (from 21.1 in 2008 last year). Spending for all governmental levels is running at 42.7 percent of GDP in 2010, up from 36.4 percent only two years ago.

Surely Krugman is aware of these simple, irrefutable facts, so he contrives to redefine public sector growth. “When people denounce big government,” he writes, “they usually have in mind the creation of big bureaucracies and major new programs. And that just hasn’t taken place.” It is true that the number of total government employees is roughly the same in 2010 as it was in 2008 (22.6 million in 2008 vs. 22.2 million in 2010), but this is true only in the most literal and meaningless sense. At the same time that private sector jobs have declined by 5.7 million, the number of government jobs has remained stable. If public sector payrolls had declined proportionately to that of the private sector, there would be 900,000 fewer government jobs than currently exist. As it stands, government employment has risen to 17.1 percent of all jobs, up from 16.6 percent in 2008.

Obama has been roundly criticized for adopting the flimsy notion of jobs “saved” (rather than created) in defense of his stimulus bill. But if “saved” jobs has any meaning at all, it now seems clear that the stimulus bill’s transfer of $220 billion to state and local governments “saved” jobs only in the bloated and tax-dependent state and local government sector.

But all of this is far from the whole story of Obama era heedlessness. Anyone vaguely familiar with public sector budgeting knows that for years the federal government has been operating with a “shadow” workforce of millions of private contractors. According to New York University economist Paul C. Light, the number of federal contractors grew from an estimated 4.4 million in 1999 to more than 7.5 million by the end of the 2005 fiscal year. According to Light, “given the continued rise in federal procurement spending, the number of contractors is almost certainly higher today.”

Few welcome labyrinthine government agencies, but the growth of the public sector is a concern primarily in terms of its size relative to the rest of the economy, how much money the government borrows in order to get to that size, and the impact of that debt on financial markets, investor confidence, and the burden imposed on taxpayers, businesses, homeowners, and workers both now and in the future.

Where FDR’s total spending in 1934 amounted to 10.5 percent of GDP, the federal budget deficit alone (how much the government borrows each year) skyrocketed a whopping $1.8 trillion in the single year between 2008 and 2009 and in 2010 now stands at 10.6 percent of GDP. This is up from 3.2 percent in 2008. To put this increased financial burden in greater context, the total federal debt per person in the United States rose from $32,800 in 2008 to $46,600 in 2010. Total government debt, including states and localities, rose from $41,200 in 2008 to $55,700 in 2010. As a percentage of gross domestic product, total government debt rose from 86.8 percent in 2008 to 117.5 percent in 2010. Even during World War II, the nation’s total government debt never reached higher than 109 percent of GDP. Of course, the higher the debt-to-GDP ratio, the higher the interest rate government is forced to pay on money it borrows, the less money available for necessary programs and infrastructure, and the higher the risk of default.

Recently, Harvard economist Robert Barro calculated that an increase of 1 percentage point in America's debt-to-GDP ratio raises interest rates by approximately 0.05 percentage points. That means that the total government debt-to-GDP ratio increase of 31 percentage points under Obama amounts to a 1.5 percent increase in interest rates. Folks like Krugman are proud to point out that interest rates have in fact declined to historic lows in the last two years. But this is merely a measure of how much “easing” the Federal Reserve has engaged in to keep interest rates low, and the degree to which future inflation and higher taxes are “baked” into any future economic recovery. Already, even with unemployment at 9.6 percent, a dead real estate market, and industrial demand down, crude oil and other commodity prices are rising. Looks like a bout of stagnant growth and high inflation is on the way. Good thing Krugman’s lean and mean public sector is ready for the challenge.

Seth Forman is Associate Professor of Public Policy at Stony Brook University.

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