Monday, May 28, 2012

The Truth About Federal Spending

http://krugman.blogs.nytimes.com/2011/07/29/the-truth-about-federal-spending/

Paul Krugman July 29, 2011, 12:39 pm

Whenever someone like me or Bruce Bartlett points out how little Obama resembles the right’s portrait of a raging leftist, someone is sure to come back with the assertion that Obama has presided over a vast expansion of federal spending. Even people who really should know better, like John Taylor, do it.

So what’s the truth? I’ve written about this before, but here’s another take.

The fact is that federal spending rose from 19.6% of GDP in fiscal 2007 to 23.8% of GDP in fiscal 2010. So isn’t that a huge spending spree? Well, no.

First of all, the size of a ratio depends on the denominator as well as the numerator. GDP has fallen sharply relative to the economy’s potential; here’s the ratio of real GDP to the CBO’s estimate of potential GDP:

..... [see original article for graphs]

A 6 percent fall in GDP relative to trend, all by itself, would have raised the ratio of spending to GDP from 19.6 to 20.8, or about 30 percent of the actual rise.

That still leaves a rise in spending; but most of that is safety-net programs, which spend more in hard times because more people are in distress. The CBO breaks out “income security” (Table E-10 in Historical Budget Tables), which is unemployment insurance, food stamps, etc., and also gives us numbers on Medicaid; here’s what they look like as percentages of GDP:

.....

That’s another 2 points of GDP, or about half the rise.

So we’re still left with a bit, around 1 point of GDP. That’s the stimulus, more or less. And there are two things you need to know about it. First, it’s temporary, and already fading out fast. Second, a large part of the stimulus “spending” was actually aid to state and local governments, intended not to expand spending but to avert a fall — that is, it was about maintaining government, not expanding it.

Now, pointing out the Obama spending binge is a myth generally produces rage: people know that it happened, because Rush Limbaugh and the Wall Street Journal say so. But that doesn’t make it true.

No comments:

Post a Comment