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Tuesday, April 26, 2011

Paul Krugman Versus Budget Facts



  • Yesterday Paul Krugman, citing Brad DeLong's post earlier in the day, joined the commentary on my Wall Street Journal article of Friday which I further discussed in my blog of Sunday. Krugman takes issue with my statement that “Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent” and instead claims to see no “huge expansion of the federal government” once one takes account of the slowdown in nominal GDP growth due to the recession.


  • Krugman is wrong. The Administration's budget did propose spending levels which make the recently increased rate of government spending as a share of GDP permanent, regardless of the reason for the recent increase. If you want to see this in a way that takes account of changes in nominal GDP growth related to the recession, then you can compare actual spending before the effects of the recession began with proposed spending after the effects of the recession are over. For all of 2007, spending was 19.6 percent of GDP. For all of 2021—after the impacts of the recession and the final year of the budget window—the budget submitted in February proposed spending equal to 24.2 percent of GDP. These two budget facts are part of the data presented in my Wall Street Journal chart and are taken directly from CBO tables. The 4.6 percentage point increase represents $1 trillion more federal spending per year at 2021 levels of GDP.


  • Much of the increase comes in the form of mandatory spending. Using the CBO baseline of January 2011 (which is below the February budget), mandatory spending would increase from 10.4 percent of GDP in 2007 to 14.0 percent of GDP in 2021.


  • DeLong mainly quotes from another post which focuses on the increase in spending during the Bush Administration. But in the Wall Street Journal I said explicitly that spending increased from 18.2 percent of GDP in 2000 (at the end of the Clinton Administration) to 19.6 percent in 2007, and my chart shows that spending started increasing more rapidly in 2008. The increase in 2008 was in part due to the stimulus package passed in February of that year; I have been critical of that stimulus package as I have been of the discretionary fiscal actions taken in 2009. My critique of policies leading up to the financial crisis Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis was written before any policies were enacted by the Obama Administration.