Government Spending And The U.S. Economy

Official Manhattan Contrarian Worst Economics Writer Paul Krugman begins his New York Times column today as follows:

On Monday, President Obama will call for a significant increase in spending, reversing the harsh cuts of the past few years. He won’t get all he’s asking for, but it’s a move in the right direction.

I love how the term "cuts" never appears alone, but always paired with "harsh."  It's like sunrise in Homer -- never just the "dawn," but always the "rosy-fingered dawn."  Is there any possible reduction in government spending that Krugman would ever concede was not "harsh"?  Doubtful.  Anyway, Krugman goes on to argue, as usual, for vast added government spending to eliminate the remaining slack in our economy.

But what is the actual recent evidence of the effect of government spending on the U.S. economy?  If you read Krugman and the rest of the Keynesian commentariat, you very likely have the impression that the sharp recession of 2008 was cured by the "stimulus" of 2009, and then things improved until the "harsh cuts" of the "sequester" of 2013 ruined everything.  Does the evidence match up with that narrative even a little?  The short answer is: No.

Here is a chart from the Tax Policy Center of actual federal government spending by year.  They give it in both nominal and inflation-adjusted dollars.  I'll type out some of the relevant numbers, and hope that the format comes out somewhat comprehensible:

                                                 Current dollars                           Constant 2009 dollars

FY 2007                                    2,728.7                                          2,829.7

FY 2008                                    2,982.5                                          2,988.5

FY 2009                                    3,517.7                                          3,517.7

FY 2010                                    3,457.1                                          3,416.8

FY 2011                                    3,603.1                                          3,492.4

FY 2012                                    3,537.1                                          3,365.2

FY 2013                                    3,454.6                                          3,234.0

FY 2014 (est.)                          3,650.5                                           3,367.3

FY 2015 (est.)                          3,901.0                                           3,532.5

To my somewhat jaundiced eye, what that looks like is that the "stimulus" caused a jump in government spending of around $500 billion per year in 2009 and 2010, and then the spending just ratcheted up to the new level and never went back down like it should have.  Wasn't the "stimulus" supposed to be just a temporary thing to get the economy going again?  And then the so-called "sequester" of early 2013 looks here like a just-perceptible dip of about a $100 billion cut in spending, immediately overcome with increases the following year.  (However, holding the line on spending has had the effect of reducing government spending as a percent of GDP from a peak of 24.4% in 2009 to about 21% today.)  Today constant dollar spending remains multi-hundreds of billions higher than the pre-stimulus baseline of 2008.  Can you spot the "harsh cuts"?

And how did employment react to the changes in government spending?  Here's a chart from the good people at Department of Numbers showing the two U.S. employment surveys -- green line representing the household survey, and blue line representing the employer survey.  (What, you didn't know that our government publishes two different series for the number of jobs, and that they differ by about 7 million in any given month?) 

Sure looks there like the number of jobs just kept falling during the first year of the "stimulus" (approximately March 2009 to March 2010) and was rather flat during the second year (March 2010 to March 2011), particularly in the broader household survey.  But there is relatively steady job growth, and certainly no diminution, after the "sequester" kicked in in about March 2013.

Unemployment rate?  According to BLS data here, during the "stimulus" period (approx. March 2009 to March 2011) it actually increased from 8.7% to 9.0%.  Since the "sequester" began in March 2013, it has gone down from 7.5% to 5.6% -- almost 2 full percentage points in the right direction.

We'll soon get another real-world experiment from Greece on the effects of blow-out government spending.  Time to place your bets on how that one will work out.  I know what my bet is.