Thursday, August 16, 2012

Big Government?

Government spending has fallen during this recovery. In spite of what anyone tells you, in spite of what attack ads may say, government spending as a whole in the United States has fallen during this recession/recovery. Regular readers will know that I've written about this before back in the spring. I bring it up again for a few reasons, chief among them being that I think this is critically important to understanding why unemployment remains stubbornly high. The more proximate cause, though, is because I came across this chart, that compares historical post-WWII economic recoveries with our current recovery by comparing different economic indicators:
Any one of these indicators would be worth discussing, but I think there's one in particular (I bet you can guess which) that I want to point out. Yes, that's right, the change in government spending. Note how it is actually negative, while the postwar average is actually almost 20%.

This helps to invalidate one of the GOP's main talking points--that  tremendous and unprecedented levels of government spending are holding back our recovery, presumably because of the "crowding-out effect." For those of you who don't know what crowding-out is, I'll give a brief explanation. The idea is that there is a limited supply of savings available in the economy, and that savings are loaned out by financial intermediaries (like banks) to both the private and public sector. Now, crowding out is when public sector spending quite literally crowds out private sector spending--that is, the government borrows so much of available savings in the economy that banks have to increase the cost of borrowing (interest rates) because of the now-diminished supply. Thus, borrowing money is much more expensive for the private sector and hinders business expansion.

Let me be perfectly clear on this: crowding out is not going on right now. Interest rates are tremendously low. "But Andre," you say, "interest rates are only low because the Fed is holding them down by buying bonds! If they stopped buying bonds, rates would spike!" Not so, dear readers. Not so. How do I know this? Well, between June and September of 2011, the Fed stopped its bond-buying programs and interest rates failed to spike:


Anyways, you get the idea. Rates tumbled. Crowding out isn't taking place right now, both for this reason as well as the fact that government spending as a whole in the US economy has fallen by about 5% during the tepid recovery. 

Personally, I am of the persuasion that the decline in government spending is in part the cause for our persistently sluggish employment growth. In fact, I just found another study, this time by the Brookings Institute, that says that our current unemployment rate would be 7.1% had public sector employment held at the 2001-2007 average levels. 

Once again, I have to point out the irony of it all. In spite of GOP assertions to the contrary, Obama's big government isn't so big. And that's a huge part of why we're still in this mess.