Saturday, August 07, 2010

Krugman on Spending

Paul Krugman argued that the Obama administration actually hasn't spent that much. When you adjust for potential GDP (as defined by the CBO), government consumption and investment is about 19% of GDP. Throw in the transfer payments--Medicare, Medicaid, Social Security, unemployment insurance--and we get a leap to almost 34% of GDP.

All interesting stuff. But then it gets weird.
In short, the giant increases in government spending we keep hearing about are a myth
Wait, what? Let's look at that chart again.

That looks like a giant increase in spending to me! Yes, Krugman's addressing the concerns about Obama going on a spending binge with policy but really the increases are coming from automatic stabilizers. But since Obama approved extending unemployment insurance, that automatic stabilizer Krugman credits for the spike, then those arguments about a spending binge stay just were you left them, though admittedly in a different form.

It seems strange to judge if someone's spending too much by basing it on GDP: you can still overpay for something if you're rich, especially when the opportunity cost is high. And since government tends to be less efficient than non governments, you can almost always bet that opportunity cost is high. A government spending 30% of a small GDP country is less damaging than a government spending 10% of a country with 100 times the GDP (ceteris paribus). The bigger country has more potential: more schools, technology, fashion, whatever that is lost. That's because the "slimmer" country is sacrificing more wealth than the bureaucratic country, even if (and possibly because) it is producing more wealth, too.

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