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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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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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