“The nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government economists.”
That is the lead sentence in today’s New York Times article titled, “Economists See Deficit Emphasis as Impeding Recovery.” Well, the implication is that all economists everywhere are finally in agreement and there is no more need to search for the elusive “one-armed economist.” But, the only economists identified in the article are Mr. Ian Shepherdson, chief economist of Pantheon Macroeconomic Advisors, Mr. Gregory Daco, a senior principal economist at IHS Global Insight, and Jerry Webman, chief economist at OppenheimerFunds. I’m sure there are many others who would agree and many who would disagree. Even the statements provided by these three sound a bit wishy-washy. For example, Mr. Webman says, “I join the likes of the I.M.F. in cautioning that too much austerity, too soon, is likely counterproductive.” Well, lacking clear definition of how much is too much and when is too soon, who could argue with that, especially with that poorly understood qualifier, “likely,” having snuck in? Even I find myself in agreement with Mr. Webman.
Remembering that actual current GDP is unknowable but is routinely estimated by totaling up the spending of individuals and government (explanation here), nobody can argue that increasing government spending would not increase the estimate of GDP. That would be true whether the spending were on vitally needed infrastructure improvements, fighting wars, or moving piles of dirt back and forth from one place to another. Transfer payments, however, don’t count as additions to GDP.
My only point here is to look at the data on federal revenues and spending and try to cast a little light on what is actually going on. Consumption spending by government has leveled out, beginning in 2010, at a bit over a trillion dollars per year. Had it continued on the 2000 to 2008 trajectory, it would be at about $1.3 Trillion per year. If it were at that higher rate, there is little question that the reported GDP, and the national debt, would be higher. Whether that additional spending would have added real value and would have been worth the required borrowing is unknown and another matter entirely. It would depend on what the money had been spent on and whether it had been well and wisely spent.
Since the crisis first hit, transfer payments, which are federal spending but are not counted as part of GDP, have increased by about a third from $1.8Trillion to $2.4Trillion per year. That increase also is funded by increased borrowing. As a result of all the additional spending, annual deficits, while somewhat diminished from the 2009 peak, continue at about six times the pre-crisis levels.
So, my questions to those economists who advocate even more spending and even higher deficits has to be, “How much is enough and how long must it continue and how long will it take to get the debt back to reasonable levels? And just how likely is it that a bit of austerity would be counterproductive? And how counterproductive? Having read quite a few of Mr. Paul Krugman's columns, I think I know what his answers would be: "I'll let you know when we get there."