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Is Big Government a Myth?

Economics / Government Spending Dec 30, 2010 - 11:44 AM GMT

By: Robert_Murphy

Economics

Diamond Rated - Best Financial Markets Analysis ArticleLately the supporters of big government have deployed an interesting twist to their arguments, claiming that it is a dirty right-wing lie that government has grown under the Obama administration. Unlike arguments over economic theory, surely this should be an objective exercise in looking up the facts.


As we'll see, yes Virginia there is indeed a big — and growing — government in DC, as even that government's own numbers confirm. Although this conclusion won't surprise the readers of this column, it will still be fun to analyze Paul Krugman's attempts to deny the obvious.

Government Employment: Does Krugman Think His Readers Can't Read Graphs?

We'll split up Krugman's alleged myth busting into two parts: government employment and government spending. Here is Krugman on December 20, catching those dastardly right-wingers in an alleged lie:

Actually, this might be a better picture for making the point about how rightists used the temporary bulge in Census hiring to spread the false impression of soaring government employment:

See, if you measure right at the top of that peak at the right, pretend not to notice that it's all Census workers, and never update the number, you get your myth inserted into the discourse, and it becomes part of what everyone knows.

As always, let's make sure we understand what Krugman's point is. He is claiming that right-wing pundits and politicians were cherry-picking numbers from the temporary Census hiring — shown by the big spike in 2010 — in order to paint a picture of a growing federal government amidst a shrinking private sector.

Now of course, I am not here to defend every op-ed penned by an Obama critic, and certainly not the accuracy of Republican politicians. (That would be akin to judging Keynesian economics from the speeches of Joe Biden.)

But look at Krugman's own chart: It shows that federal government employment was relatively flat for five years — from 2003 to 2008 — and then it took off quite sharply. Just eyeballing the chart, it looks like federal employment has grown under the Obama administration by about 150,000, even after we net out the temporary Census hiring. If the above chart showed the number of Americans without access to basic health care — and if the last two years occurred under a Republican administration — does anyone doubt that Krugman would point to the shocking surge in the problem?

It's true, the upswing in federal employment began in 2008, under the Bush administration. And that's why it's silly for partisan talk-show hosts to blame "big government" on Democrats. But at the same time, it's silly for Krugman and other partisan bloggers to deny that government has indeed become bigger under Obama's tenure.

Government Spending: Just Look Up the Numbers

Krugman thinks he can debunk the "myth" of big government using data on expenditures, too. In a Christmas Eve blog post, Krugman wrote,

I've written a lot lately about the great government job explosion myth; I thought I'd put down a bit about the dollars and cents side of things, in part so that I have the data ready at hand for future reference.

So how does one debunk the exploding government spending story? It's not quite as easy as the employment issue — but it remains true that the idea that we've seen a surge in the size of government is basically wrong. Let me walk through the issues.

What you often see, for starters, is a chart like this, showing government spending (federal, state, and local) as a percentage of GDP:

Huge surge!

After his sarcastic "huge surge" comment, Krugman then goes on to explain why this graph really doesn't mean what your eyes might be suggesting. Yet before we delve into the various arguments Krugman deploys to explain away the above chart, it's important to point out that Krugman is stacking the deck from the start.

By saying, "What you often see, for starters, is a chart like this," Krugman makes it sound as if he is tackling the toughest bit of evidence for those trying to say Obama is a big-government guy.

Yet as Krugman himself knows — and has stressed many times — depending on which time period you analyze, some of the growth in federal government spending has been offset (though not fully) by a reduction in state and local government spending.

Now it's true that many right-wing critics of Obama probably don't have such fine distinctions in mind when they rail against the "recent surge in government." But I bet if a had a bullhorn I could get a Tea Party crowd pretty worked up by saying, "Can you patriots believe this? The federal government is growing, while state and local governments have to lay off teachers and firefighters! So grab your pitchforks and let's go give Obama a lesson in federalism he'll never forget!"

I should also point out that this isn't merely a case of adjusting the rhetoric to fit the facts. For example, suppose that there really had been an enormous surge — even by Krugman's odd definitions — in total government spending since 2009, but that it happened at the state and local levels, whereas the Obama administration actually slashed federal spending. Would Krugman shamefacedly admit, "Yep, 'government' has grown under Obama; Bill O'Reilly is right"?

Of course he wouldn't. He would rightfully argue that if we're going to judge whether Barack Obama is presiding over the growth in Big Government, we should look at the spending that is actually under Obama's control, i.e., federal spending.

When we do that, we find that from the 4th quarter of 2008 through the 3rd quarter of 2010, federal spending as a share of GDP grew about 3.4 percentage points (from 22.1 percent to 25.5 percent). In contrast, the statistic Krugman looks at — total government spending at the federal, state, and local levels — only grew about 2.7 percentage points (from 33.4 percent to 36.1 percent) in the same period.[1]

Another way to see just how unusual the growth in federal spending under Obama has been is to chart the 12-month growth rate of federal spending:

So when Krugman asks, "Where is this myth of a surge in spending under Obama coming from?" we can offer him a straightforward reply: well, Dr. Krugman, in Obama's first year in office, federal-government expenditures grew at the fastest rate in 17 years, far higher than in the first Bush administration, when you were railing against the Republican president for starting two wars without paying for them.

But let's return to Krugman's article, to see what other tricks he uses to wipe out the growth in government:

So, why doesn't this graph show a surge in government?

First of all, look at the fact that the ratio of government spending to GDP always rises during recession. That's largely not because spending is up, it's because GDP is down.

I'm surprised Krugman is still bringing up this point; it blew up in his face back in October when he first used it. Back then, in a post sarcastically titled, "Special Bulletin: Fractions Have Denominators," Krugman also tried to show that the apparent rise in government spending as a share of the economy, was due to falling GDP. And indeed, if you click the link, you'll see two different graphs: the first, depicting government spending as a share of GDP, shows a huge uptick since 2008, whereas the second graph (depicting the level of absolute spending) reveals a very modest increase.

Unfortunately for Krugman, several people in the comments (e.g. here and here) pointed out that the visual difference in his two graphs was due entirely to his use of the zero point in the bottom graph, but not in the top graph. If Krugman had used a consistent starting point for the y axis, then the two graphs would have looked similar.

Because "spending as a share of the economy" will be higher during periods of recession, Krugman wants to divide total spending, not by actual GDP, but by potential GDP. This way, Krugman hopes to avoid unfairly painting government as big when it's really just the fault of the shrinking economy.

Yet notice that this move depends on Krugman's Keynesian worldview. In the Austrian view, the reason we are in a severe recession — and hence the fall in measured output — is that we were previously in a Fed-induced artificial boom. So we can't simply assume that the economy would have continued along its trend line for the last decade, in order to compute what GDP "ought" to have been in 2009 and 2010.

In any event, whether we divide by actual or "potential" GDP, Krugman can't get around the basic numbers. Actual government spending has grown a lot in the last few years, so how does Krugman explain it away?

So what's behind that more limited rise? Mainly, it's about people losing their jobs and their incomes, and therefore turning to aid programs. Unemployment benefits account for almost half the rise in spending:

Food stamp outlays have also surged.

And while I've had trouble tracking down a dollar number, Medicaid rolls rose 13.6 percent from Dec. 2007 to Dec. 2009.

What's left after you take account of these emergency aid programs? Not much, if anything.

So that's the story: despite what you've heard, there hasn't been any surge in the size and role of government.

As longtime readers know, I typically treat Paul Krugman with kid gloves. That's why I won't come out and accuse him of actually lying here, although it's difficult for me to even understand how he's generating the above claims.

For example, Krugman says that unemployment benefits account for "almost half the rise in spending." Since his own chart shows that unemployment benefits are about $150 billion, Krugman's readers would think that government spending itself has only grown a little more than $300 billion.

Yet this isn't the case, no matter how you slice it. If we look at federal spending under Barack Obama, it's not even close: it has risen more than $600 billion since he assumed office. But even if we switch to total government spending, it's risen more than $575 billion in the same period. Finally, if we go back to late 2007 as the starting point — which Krugman did for his Medicaid stat — then the growth in total government spending is almost $800 billion.

We Have Always Been at War With Small Government

As we've seen, the actual numbers show what everybody knows: government at all levels has grown, and in particular at the federal level, since the crisis began, and also since Barack Obama took office. So it's really not a myth when people complain about the "big government" of Barack Obama.

Therefore, Krugman should not be so exasperated with Republicans when they try to pin the big-government label on Obama. In fact, Krugman himself did the same thing in August 2009, when he wrote:

So it seems that we aren't going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government. …

Probably the most important aspect of the government's role in this crisis isn't what it has done, but what it hasn't done: unlike the private sector, the federal government hasn't slashed spending as its income has fallen. …

In addition to having this "automatic" stabilizing effect, the government has stepped in to rescue the financial sector. …

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, aka the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.

All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

And aren't you glad that right now the government is being run by people who don't hate government?

We don't know what the economic policies of a McCain-Palin administration would have been. We do know, however, what Republicans in opposition have been saying — and it boils down to demanding that the government stop standing in the way of a possible depression. …

And Big Government, run by people who understand its virtues, is the reason why. (emphasis added)

And there you have it: When conservative pundits rail against "big-government Obama," Krugman says they are dirty rotten liars. But the same Krugman praises the Big Government of the Obama administration and contrasts it with the likely horrors of a McCain-Palin one. It's not merely the automatic stabilizers, and not even the interventions in banking that saved the day, but also the explicit efforts of the Obama administration to spend more money.

Conclusion

Experienced readers know that being a self-styled progressive means never saying you're sorry. I know full well that Krugman's fans will be able to explain away the above as a perfectly consistent record of economic analysis.

Nonetheless, it's useful to periodically explain just how Krugman and other proponents of big government try to frame the debate. Quite clearly, government has been growing, particularly under the administrations of George W. Bush and Barack Obama. Just as it is foolish for Krugman and other Democrats to deny the obvious facts of the Obama record, it is likewise absurd when many conservative Republicans make excuses for the Bush years. The only way to arrest this trend is for Americans to oppose big government, period, regardless of an "R" or "D" after a president's name.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog.

© 2010 Copyright Robert Murphy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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Comments

Alan
31 Dec 10, 06:54
progressives

"Experienced readers know that being a self-styled progressive means never saying you're sorry"

What a crock. As though Obama and the Democrats were

progressives. And you call yourself a "scholar"?!

Pick up a copy of (say) The Progressive, or read

zmag.org, or any one of the other progressive

publications. KNOW what you're talking about before

you shoot off your mouth, Bob.


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