U.S. Government Spending

March 4, 2010

President Obama has been criticized for overseeing a big additional rise of the government deficit.  The recession, not discretionary policy change, is the primary factor behind the advancing fiscal shortfall.  During economic downturns, tax revenues automatically shrink, and many expenditures such as unemployment insurance payments increase as the number of claimants climbs.  Claims peaked near 7.0 million in the middle of last year, remained above 6.0 million until the fourth quarter and are still sizable at 4.5 million.  More worrisome, the downtrend in new jobless claims, a proxy for the layoff rate, has stalled.  They averaged 470.75K over the past four reported weeks to February 27, virtually the same as the 468.75K mean in the previous four weeks to January 30.  Before that, new claims averaged 450.25K in the four weeks to January 2nd and 468K per week in the four weeks to December 5.  No improvement has occurred since November.

An interesting detail from the last release of U.S. national income accounts figures on February 26 seems to exonerate Obama further from blame in allowing the deficit to grow further.  Real government expenditures, an element of GDP, increased 1.3% between 4Q08 and 4Q09, that is during the first year of Obama’s stewardship.  In the final year of the Bush presidency, that is the four quarters between 4Q07 and 4Q08, public-sector spending increased significantly more rapidly with a gain of 3.0%.  The spread between those two figures doesn’t capture the full torque of fiscal support, which can be seen by the deviation in growth between government spending and GDP.  If government expenditures increase faster than GDP, they are augmenting the overall growth rate and vice versa.  The difference between the growth of public demand and GDP, or aggregate demand, measures how big an impact, in support or restraint, the government is exerting.

When government spending rose 1.3% in the first year of Obama’s presidency, GDP went up 0.1% or 1.2 percentage points more slowly.  Over the four quarters of the Bush presidency, government spending growth of 3.0% was 4.9 percentage points more rapid than real GDP growth of negative 1.9%.  Obama inherited a bad and worsening situation.  Under the circumstances, the government was too timid in its response and actually less profligate than the previous administration had been during in its final lap around the track.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



4 Responses to “U.S. Government Spending”

  1. Jimbo says:

    The general sentiment in New England ( other than the islands of Cambridge and Boston), is that government spending at excessive rates must stop. The independent thinking New Englanders do not want their grandchildren paying excessive amounts of their tax dollars for debt payment. What are the implications of this for the U.S. economy if this sentiment spreads throghout the U.S.? “Suffer now so our “.grandchildren won’t”

  2. Opinion polls suggest your views are not localized and indeed already have spread far beyond New England. The main short-term cause of the ballooning deficit was the recession, not discretionary policy changes. It’s very important for the government not to downshift its deficit too abruptly, as that could push the economy back into recession and make the deficit even larger this decade. Before Federal deficit spending was increased sharply, the private sector had spent far beyond its means. It was an unsustainable trend, and sudden rush to reduce private indebtedness had to be offset by either extra fiscal spending or though more net foreign demand. The struggles of other economies ruled out the export option. If the government had not acted, the recession would have been deeper and longer and evolved into a depression in all probability. The biggest factor behind big deficits many years down the road is runaway health care system costs under the present arrangement. If this system is not changed, health care will exhaust ever-mounting resources.

  3. Matthew W, Econ Student says:

    One thing I do not understand is how Government Purchases only increased 1.3% despite the stimulus bill. I understand it is allocated over a few years, but I would have expected a larger increase than 1.3%. Is part of the reason due to transfer payments, which are not included?

  4. larrygreenberg says:

    Good question, Matt. Although I do not have the precise reason why gov’t spending rose just 1.3% in the year to 4Q09, I can direct you to the source of that figure. Go to the Bureau of economic analysis report on gross domestic product at http://www.bea.gov/newsreleases/national/gdp/2010/pdf/gdp4q09_2nd.pdf . Table 8 in that release provides percentage changes from the quarter one year earlier for real gross domestic product and all of its components of demand. The table covers the period from the first quarter of 2006 to the fourth quarter of 2009. Look down the left-most column to government consumption expenditures and gross investment (shown in bold), and you’ll see the the figures shown in 4Q08 and 4Q09 are 3.0% and 1.3%. Now you’ll see that this line includes state and local, but the line just below that is for only the Federal government, and shows an even bigger deceleration in spending to 3.6% in the year to 4Q09 from 8.9% in the year to 4Q08.