Let the Excuses Begin

Krugman has already started explaining away the latest Keynesian failure, starting with the bizarre proposition that there has been very little increase in government spending under Obama:

"Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need ...

To be fair, spending on safety-net programs, mainly unemployment insurance and Medicaid, has risen — because, in case you haven’t noticed, there has been a surge in the number of Americans without jobs and badly in need of help."

Again, Krugman says there hasn't really been an expansion in government spending, because he excludes welfare spending. So, Krugman argues that federal spending hasn't increased much by arbitrarily excluding certain federal expenditures from his calculation of government spending.

"And there were also substantial outlays to rescue troubled financial institutions, although it appears that the government will get most of its money back."

OK, so there was more government spending, destroying Krugman's thesis that the government hasn't spent much. He sort of suggests, though is unclear, that it would have been better for the economy if the government didn't get its money back, and if TARP had been a total-black hole, which if true, is insane.

"government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years — a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth."

So, government spending has increased both in real terms and as a percentage of the GDP, the latter pretty dramatically. The latter is really the important number, because it provides a context for evaluating the size of the government. As Krugman notes, the government's share of GDP has increased dramatically:

http://krugman.blogs.nytimes.com/2010/10/12/special-bulletin-fractions-have-denominators/

He snidely dismisses this issue, but snarkiness is not an argument. Government expansion in a time of economic contraction means the government's true spending is very, very high.

This 3% figure also excludes welfare payments, which have gone up pretty dramatically, as he himself acknowledges earlier in the article.

"Furthermore, it wasn’t mainly focused on increasing government spending. Of the roughly $600 billion cost of the Recovery Act in 2009 and 2010, more than 40 percent came from tax cuts..."


Partly this is a definitional issue. Oddly, the largest welfare program is administered through the tax code, and welfare payments are made in the form of "tax credits" to people who don't pay taxes. Democrats try to frame these welfare payments as tax cuts, but the CBO, acknowledging the economic reality that you can't give a tax credit to somebody that didn't pay taxes, accurately characterizes them as welfare payments, a/k/a government spending. Using the CBO's numbers, the percentage of the stimulus that is tax cuts is far smaller:

http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/01/GR2009020100154.html

More fundamentally, Krugman is missing the point here. The issue isn't the raw amount of government spending, but the deficit. A huge deficit -- which Obama has clearly created -- should increase aggregate demand according to Keynesian theory, leading to an increase in employment.

As an aside, you'll note the incoherence of the left's attitudes towards budgets. Obama has overseen a huge increase in the deficit. In fairness, he inherited a bleak financial situation. As Obama himself noted:

"When I first walked through the door, the deficit stood at $1.3 trillion," Obama said, citing the estimates that greeted him a year ago.

But, under standard Keynesian analysis, this deficit should have been a good thing, because it represented increased aggregate demand, and the economy should actually have been on sound footing when Obama took office. How can it coherently be argued that Obama inherited an economic mess because of high deficits, but that he has has done a good job ameliorating the mess by increasing the deficit? Deficits are either good or bad. If they are good, then George Bush did a superb job managing the economy, keeping deficits high, and Obama was the beneficiary of that. If they are bad, Obama is an even bigger moron than Bush, because he's pursuing a policy of larger deficits.

"while another large chunk consisted of aid to state and local governments. Only the remainder involved direct federal spending."

Apparently, state and local government spending doesn't count as government spending.

"Instead, it has insisted throughout that its original plan was just right, a position that has become increasingly awkward as the recovery stalls."

Another failed Keynesian episode. Krugman again is offering excuses, not results. And, it begs the question of how large the deficit has to be for Keynesiasm to work. We are currently running the largest peace-time deficit in American history and government spending as a percentage of GDP is at an a peace-time high. If history-making deficit and spending won't solve the problem, what will? And, its worth noting that the federal government for something like 37 of the past 40 years has run a deficit. So, if deficit spending led to economic growth, America's economy should, according to the Keynesians, be in terrific shape. The fact that its not underscores that the theory is just wrong.