Quick, what is this graph showing?
The answer (in the bottom left) is total government employees in the USA, in thousands). Only a tenth (2.2 million) of these are Federal employees, while over 19 million are State and Local, where despite Federal aid the budget cuts have been savage. Government out of control, right?
Okay, what about the huge deficits – government spending run amok, for sure? Well, here are the numbers.
Source: BEA, Bloomberg
Use a microscope if you wish, but the truth is that government spending peaked with a 6.7% increase late last year, and is already declining, down 2.5% since. And of course, government has grown far more slowly than the more dynamic sectors of the great American economy, evidenced by G/GDP coming down over 50% over the decades. The stimulus was largely “wasted” on tax refunds and cuts (don’t get me wrong, I made out like a bandit investing my refunds in junk bonds, but they didn’t do much to help the economy) and in preventative measures like aid to the states that could have made the first chart even worse.
Over at Project Syndicate, Ken Rogoff points out that diagnosing the problem is a prerequisite to finding a cure. He proposes two solutions worth trying: higher inflation (or perhaps nominal GDP targeting), and debt reduction cramdowns (well, he says “governments could facilitate”, but I’m reading between the lines, and HAMP seems hampered). I couldn’t agree more that policymakers should be more aggressive, and take more risks. But what the above charts show is, as James Surowiecki mentioned back in January, isn’t that Keynesian policies won’t work, but rather, that they haven’t even been tried. I’m politically neutral and certainly not a big-government guy, and this is neither an argument for a permanent expansion of bureaucracy or a Swedish nanny state, nor for ignoring long-term unsustainability of entitlements. In the aftermath of Hurricane Katrina, it was clear to just about everyone, no matter his political leanings that the government had to intervene to help (handing out cash cards, rebuilding infrastructure, hiring people to clean up, providing businesses with incentives). Well, the Great Recession/Contraction is many times worse, in economic terms. Just Do It. If only politics allowed it.
For economists, the fun part will be the next few years, when we’ll finally see what effect Keynesian policies will have. Sadly, this will be run in reverse, as governments like the UK and the US will adopt budget austerity. Japan, for once, shaken out of complacency by natural disasters, looks like it might see an expansionary budget even hamstrung by dysfunctional politics – RGE sees 3.8% growth in 2012 and an end to deflation. But, the end of deflation might actually bring forward a fiscal sustainability problem that the BOJ will not be able to paper with (strengthening) Yen. So will 2012-2013 be the years of reckoning for Japan’s fiscal accounts? And does that mean austerity and perhaps another policy mistake of removing accommodation too early?