The Corner

What Krugman Gets Right

In his column today, Paul Krugman hammers out a tune that Krugman readers ought to find familiar: The federal government under Obama hasn’t really increased spending all that much, and that is why the recovery has been so weak. I believe the second part of this formulation is bunk: I and many others have written many times about why such thinking is flawed, so I won’t get into all that again. But let me tell you why Krugman has a point when he points to charts like this one for vindication:

Notice that Krugman limits the time frame to the last five years. “Government spending has continued to rise more or less on its pre-crisis trend,” Krugman writes. He’s right — and that’s the problem. Under President Bush, the “pre-crisis trend” in government spending got pretty ugly. Let’s broaden our view:*

Look back to 1980: Federal expenditures grew at a pretty good 6-7 percent clip per year under Presidents Reagan and Bush and the Democratic/divided Congresses with which they had to work. In the mid- to late-nineties, President Clinton and a new Republican majority brought the growth rate down to under 4 percent. But the 6-7 percent growth rate returned with the election of President Bush, the beginnings of two wars and the degeneration of the Republican Congress, which lost its way on spending. When the Democrats took control of the House and the Senate in 2006, things really spun out of control, and they got even worse with a Democrat in the White House. Government expenditures under Obama-Reid-Pelosi are on pace to grow by over 11 percent per year.

Now let’s look at spending under some alternative scenarios:

The green line is what would have happened if Obama-Reid-Pelosi had kept spending to a Bush-era rate of growth. This is where Krugman has a point. A $220 billion increase isn’t nothing, and the damage it will do is likely to be compounded by the fact that it represents an addition to the baseline. But it isn’t a gargantuan blowout compared to where we would be if the Bush-Reid-Pelosi trends had continued. 

The purple line represents where we would be if Bush had managed to keep spending growth to an average of 5 percent per year, and the light blue line represents a — dare I say it? — positively Clintonian 4 percent. Yes, Bush had two wars to fight, but the fact that he and the members of his party in Congress chose to finance those wars rather than pay for them by cutting spending elsewhere is having significant consequences now that Obama-Reid-Pelosi have chosen to put spending in overdrive. Government expenditures on the wars in Afghanistan and Iraq reached just under $1 trillion under President Bush. The graph above shows that paying for the war by cutting spending instead of borrowing is all that the Republicans would have needed to do to keep spending growth to a modest 4 percent. So then let’s say that the Obama-Reid-Pelosi stimulus binge bumps the nine-year average up to 5 percent and we’re back to the purple line. It’s still not great, but the deficit would currently be only half as large. 

Bush officials complained at the time that conservatives were judging them unfairly, because spending was not growing all that fast compared to GDP. These charts also show that GDP might not be the best way to judge the size of government. Our economy has been a tad prone to investment bubbles these past two decades. Out of prudence, as a rule, conservative politicians should attempt to control government spending regardless of how fast the economy is growing. There can be exceptions, of course, if a particular kind of rapid economic expansion has created a manifest and urgent need for a big increase in government services. But in general, a look at the numbers reminds us that, while economic growth occasionally goes in reverse, taking revenues with it, the growth of government almost never does.

* I am using federal government expenditures rather than total government expeditures, which is why the numbers in Krugman’s chart are higher. The trends are basically the same.

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