On Monday, Daniel Clifton, the head of policy research for the brokerage firm Strategas Research Partners, tweeted out a graph of government spending that has garnered lots of interest on the right. For instance, anti-tax crusader Grover Norquist implied that the chart, which shows that spending, as a percentage of GDP, has fallen dramatically in the past four years, disproves Keynesian economics.
This is a classic causation-correlation error. Just because the recovery strengthened in the past few years, it doesn’t mean that sequestration caused that strengthening. In fact, the evidence indicates that just the opposite is true.
To start, economists widely agree that the stimulus created jobs. A poll of economists from the University of Chicago found that 82 percent of economists believed that unemployment rate was lower as a result of the stimulus. Just 2 percent thought otherwise. Economists are more split on whether the total benefits of the stimulus exceed its costs, including future taxes necessary to pay them off. But a majority still favored the bill.
This makes sense. The Great Recession left a massive hole in aggregate demand—demand for goods and services in the economy. That caused businesses to lay off workers who then reduced their own spending and caused further layoffs. This cycle repeated itself. The government’s role in crises like this is to fill the hole in demand and break this cycle. It can either do that through monetary policy, like low interest rates that entice consumers to spend money and businesses to invest. Or the government can do it directly through fiscal stimulus—by giving tax breaks to Americans to spend money or spending the money directly itself. That’s what the stimulus was designed to do—and it accomplished its goal.
Clifton’s graph is right, though. Government spending has come crashing down over the past few years. Norquist and other see this drop in federal spending as the cause of greater economic growth. But that’s not the case. One reason that spending has declined is that automatic stabilizers like food stamps and unemployment benefits, which initially increased federal spending when the financial crisis hit, receded. In that case, the fall in spending is the effect of stronger growth.
That’s not the only reason the spending has declined. Health care costs have grown slower, stimulus spending ended, and sequestration caused sharp cutbacks. All of this has also reduced interest payments on the debt. Here’s where Norquist and others are wrong, though: The recovery actually strengthened despite the harmful effects of this drop in spending, not because of it. By one estimate, the sequester cost the economy 1.2 million jobs in 2013 alone.
In fact, one of the big reasons that the economy kicked into gear in the latter half of this year is that the Murray-Ryan budget deal alleviated much of sequestration. Fiscal policy, finally, is largely not standing in the way of stronger growth. In the New York Times Monday, Paul Krugman, as if anticipating that a graph like this would go viral, offered a helpful analogy for understanding this development.
Suppose that for some reason you decided to start hitting yourself in the head, repeatedly, with a baseball bat. You’d feel pretty bad. Correspondingly, you’d probably feel a lot better when you finally stopped. What would that improvement in your condition tell you?
It certainly wouldn’t imply that hitting yourself in the head was a good idea. It would, however, be an indication that the pain you were experiencing wasn’t a reflection of anything fundamentally wrong with your health. You head wasn’t hurting because you were sick; it was hurting because you kept hitting it with a baseball bat.
[I]n America we haven’t had an official, declared policy of fiscal austerity—but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments. The good news is that we, too, seem to have stopped tightening the screws: Public spending isn’t surging but at least it has stopped falling. And the economy is doing much better as a result.
And what the bounce tells you is that the alleged faults of Obamanomics had nothing to do with the pain we were feeling. We weren’t hurting because we were sick; we were hurting because we kept hitting ourselves with that baseball bat and we’re feeling a lot better now that we’ve stopped.
I’d argue that the economy was—and still is—sick. The labor market, while much improved, still has a ways to go. I don’t think Krugman would disagree with that. But the fact is that hitting ourselves in the head with a bat—in our case, imposing austerity measures—only made things worse.
If anything Norquist and co. are making the case that federal spending has already fallen so far that further deficit reduction should come from tax increases. Senator Patty Murray made an even stronger argument for that in an analysis released earlier this month. She estimated that projected deficits have fallen by $4.7 trillion over the next decade, with the entirety of it coming from a fall in federal spending. In fact, project outlays have dropped by nearly $8 trillion since August 2010 while projected revenues have decreased by more than $3 trillion. “[First], all of the net fiscal improvement has come from spending reduction,” Murray writes, “and second, the extent of the decline in federal spending is much greater than previously known.”
Unless Republicans are ready to give up on their deficit mania, it seems pretty clear that the next round of deficit reduction should come in the form of greater revenues. But Grover Norquist certainly won’t be sending that tweet anytime soon.