Sunday, September 09, 2012

Government Spending has DROPPED under Obama? Yep.

Talking Points Memo (TPM) reports on "The Gobsmacking Drop In Government Spending Under Obama". In it we're told that the conventional wisdom that Obama is for big government "faces perhaps its starkest rebuttal in new figures that reveal the sharpest decline of the last half-century in real federal, state and local spending during this presidency."  Here's the graph:

This is true, as reported. But the devil, as they say, is in the details. The piece makes the mistake of glossing over some very important points in order to maintain its leftward lean. The first of these is that apples and oranges are being packaged together here. The Federal budget is a very different thing from state and local governments, subject to different pressures and different demands. The fact is that the majority of these spending cuts attributed to Obama were done at the state and local level.

A weak economic recovery is the reason. The Federal government is in a unique position. It literally cannot run out of money. At any time it needs more money it can simply issue Treasury bonds which must be bid on by primary banks and if not bought by them, must be purchased by the Federal Reserve Bank using money that is literally created out of thin air. The effect of this is that the Federal government simply asks for money and it gets it. Of course this is inflationary, but it's just a fact that the Federal government doesn't run out of money, despite political posturing to the contrary.

It's different for states and localities. They can't print their own money, and any borrowing they do isn't the borrowing of money created ex nihilo, it's from people that expect to get repaid. Many have balanced budget requirements which are inflexible. So if their means decrease, so do their expenditures. The fact that they have continued to cut jobs is simply an indication that their means have decreased. And for States (who cannot perform deficit spending, remember, unless they draw on savings), this means that tax income has decreased.

In a normal post-recession economic recovery, jobs in the public sector increase. This is because a recovery is typically strong, and the increasing prosperity leads to higher tax revenues, leading to the spending of those revenues by the states and localities that receive them. This is why you'll find that in times of economic recovery, government spending increases regardless of the party in power. This is typical of the charts that illustrate this:

Govt. Jobs growth. The spike in the red line is due to temporary census hiring.

The problem here is the misinterpretation of the chart. Some folks will hold it up as "proof" that Obama is for smaller government. This is a false proof. ANY president is looking for moderate gains here. Remember, increased tax revenue is what drives state and local government spending (the major component of these trend lines). This is only due to economic growth. You can get there by tax cuts or by deficit spending, and the results are largely the same. The Obama trend line illustrates poor economic growth.

Other folks argue that increased government hiring results in a stronger economy and that "if only" we hadn't laid off all those teachers and firemen we'd be in great shape today. Sadly, this is tail wagging the dog. They forget that states and localities are constrained to balance their budgets. They simply cannot go out and hire people they cannot afford. These trends, therefore, CANNOT be interpreted that way. Hiring follows recovery, not the other way around.

Chad Stone, chief economist for the liberal-leaning Center on Budget and Policy Priorities, has this to say:
“That saps demand still further aggravating a downturn and inhibiting a recovery. State fiscal assistance in the 2009 recovery act was largely gone by 2011 and state spending cutbacks continued due to pressures for budget austerity in many states and at the federal level.”
The goal of that state fiscal assistance he's referencing was to hang on to state government jobs until the recovery kicked in. Of course that didn't happen, and austerity measures HAD to take place in accordance with numerous state constitutions. This is WHY the graph at the top of this page shows that the spending cuts occurred AFTER the stimulus ENDED. The big factor isn't that Obama's cutting away at waste (though there may be some of that going on); it's that state governors, county administrators, and mayors have necessarily tightened their belts.

Personally, I don't think that's anything I'd be crowing about if I had the choice. But in an election year you have to spin what you've got, and Obama's campaign is doing their best to make lemonade out of a ton of lemons. They're hoping that you won't notice the sleight of hand.

Related: - Obama's Economic Sleight of Hand.

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