The reaction to the May employment report has been depressingly predictable: Republicans have been gleefully proclaiming that President Obama’s fiscal stimulus didn’t work. Many people who commented on my post about the political impact of the job figures parroted the same line, arguing that the lackluster economy demonstrates Keynesianism is a bust.
Having spent much of the past three years reading and writing about this subject, I wonder whether it is even worth engaging with these arguments. The aversion to government spending, and government activity generally, which animates many Americans isn’t actually based on economics, or logic: it is an emotionally driven belief system, founded upon a cockeyed view of American history and buttressed by a variety of right-wing shibboleths.
In the real world that rarely intrudes upon conservative economists and voters, both parties (and all Presidents) are Keynesians. Whenever the economy falters and private-sector spending declines, they use the tax-and-spending system to inject more demand into the economy. In 1981, Ronald Reagan did precisely this, slashing taxes and increasing defense spending. Between 2001 and 2003, George W. Bush followed the same script, introducing three sets of tax cuts and starting two wars. In February, 2009, Barack Obama introduced his stimulus. The real policy debate isn’t about Keynesianism versus the free market, it is about magnitudes and techniques: How much stimulus is necessary? And how should it be divided between government spending and tax cuts?
On both questions, Obama took the middle ground. His $800 billion stimulus program was smaller than many Keynesians, such as Christine Romer and Paul Krugman, wanted. (Romer reportedly pushed first for a $1.8 trillion package, then for $1.2 trillion.) Concentrated over a three-year period, it amounted to 1.1 per cent of G.D.P. in 2009, 2.4 per cent of G.D.P. in 2010, and 1.2 per cent of G.D.P. in 2011. So far, some $750 billion in stimulus money has been paid out: about $300 billion went to tax breaks for individuals and firms; roughly $235 billion was dispersed in the form of government contracts, grants, and loans; and another $225 billion was spent on entitlements—unemployment benefits, Medicaid, food stamps, and so on.
And what impact did the stimulus have? Without rehashing the entire debate—we’ve got another five months for that—here are three things to keep in mind.
1. It gave a much-needed boost to spending and growth. A simple timeline tells much of the story. In the first quarter of 2009, G.D.P. fell at an annual rate of 6.7 per cent—a depression-style slump. During the rest of the year, as the first stimulus funds were distributed, the economy rebounded. In the third and fourth quarters of 2009, G.D.P. expanded at an annual rate of about 2.7 per cent. In 2010, when the stimulus was at its height, the growth rate picked up to three per cent.
Of course, the stimulus wasn’t wasn’t big enough to bring down the unemployment rate very far, and it wasn’t the only thing that got the recovery started. The Bush Administration’s bailout of the banking industry and the Federal Reserve’s emergency lending programs helped stabilize the financial markets, an essential precondition for a turnaround. The Obama Administration’s bailout of General Motors and Chrysler rescued the auto industry, which is still by far the biggest manufacturing sector in the country.
But the stimulus definitely helped, evidenced by the fact that when it began to wind down the recovery faltered. In 2010, the stimulus injected about $350 billion into the economy in the form of spending and tax cuts. In 2011, the stimulus was cut in half—to roughly $175 billion—and G.D.P. rose by just 1.7 per cent. (Some of the dropoff in stimulus funds was offset by other legislation: in December, 2010, in exchange for an extension of the Bush tax cuts, congressional Republicans agreed to extend unemployment benefits and payroll tax cuts.)
2. The rise in federal spending under Obama was pretty modest. If you listened to the Republicans, you would think he had massively expanded the size of the U.S. government. That simply isn’t true—a point that can be illustrated in several ways.
One is to look at the path of federal spending as recorded by the Office of Management and Budget. In fiscal 2008, total federal outlays came to $2.7 trillion in inflation-adjusted dollars. In 2012, according to the O.M.B., they will be $3.2 trillion. That is a rise of about 18.5 per cent over four years, an annual increase of about 4.3 per cent. How does that rate of growth stack up with the record of previous Presidents? Well, it means Obama has expanded federal spending a bit faster than President Clinton. But Ronald Reagan and George W. Bush both increased spending at considerably higher rates. (Thanks to Rex Nutting, a columnist at MarketWatch, fordrawing my attention to the historic data.)
So the figures show Obama wasn’t much of a spendthrift. And he wasn’t even responsible for most of the increase in federal spending that happened on his watch: it came in the form of higher outlays for mandatory programs, such as Social Security, other entitlements, and interest on the national debt. Over the past four years, discretionary spending—the bit of the federal budget that policymakers can control—has increased by just $106 billion, or a little more than ten per cent. That’s an annual rate of increase of about 2.4 per cent.
If you delve into into the O.M.B. Web site, you find other rarely discussed figures. Take spending on infrastructure projects—roads, railways, bridges, and other big-ticket projects that are often labelled as Keynesian. In 2008, the federal government spent $154 billion on non-defense capital projects. Here are the figures for the past four years: 2009, $178 billion; 2010, $186 billion; 2011, $178 billion; 2012, $191 billion. If you average out these numbers, you will find that under Obama federal spending on “Keynesian” capital projects has risen by less than $30 billion a year. In a $15 trillion economy, that is a rounding error.
3. Paul Krugman is right. To some extent, we already have a Republican economy. With the flow of stimulus money having all but dried up, and with continuing budget cutbacks at the state and local levels, government spending on many goods and services—the government spending that directly impacts G.D.P.—is falling.
You don’t believe it? Take a look at Table 1 in the Commerce Department’s latest report on G.D.P., and focus upon the section labelled “Government consumption expenditures and gross investment.” In 2011, you will notice, these expenditures declined at an annual rate of 2.1 per cent. In the first three months of this year, the rate of decline accelerated—to 3.9 per cent. The cutbacks have extended to all the major areas of government. Federal non-defense spending fell at an annual rate of 0.8 per cent in the first quarter; federal defense spending declined at an annual rate of 8.3 per cent, a shocking figure; state and local spending fell at a rate of 2.5 per cent.
It is a central tenet of Keynesian economics that when the government sector cuts back its expenditures in an economy with slack resources, worried households, and cautious business enterprises, output and growth will stall. That, of course, is precisely what has happened. In a saner world, we would be talking about what should be done right now, rather than after November, to rectify the situation.
Photograph by Andrew Harrer/Bloomberg/Getty Images.