Charts: What if Obama spent like Reagan?

January 31, 2013

In 10 of the past 12 quarters, total government spending and investment has fallen, dragging down the Obama economy. That's in large part because state and local cutbacks have been so severe, but it's also because federal spending and investment has, on the whole, been falling since 2010.

This isn't an unusual analysis. You can see the numbers for yourself if you head to the Bureau of Economic Analysis's GDP data and scroll through column 21 of table 1.1.2. It's simply a fact that real government spending fell in three of President Obama's first four years.

That made me curious: How does government spending and investment during Obama's first term compare to Ronald Reagan and George W. Bush's first terms? The answer is poorly. Whereas total government spending dropped in 10 out of the 16 quarters that comprised Obama's first term, it rose in 13 out of Reagan's first 16 quarters, and 13 out of Bush's first 16 quarters.

Or, to put it differently, over Obama's first term, falling government spending and investment snipped, on average, .11 percentage points of GDP off of (annualized) quarterly growth. During Reagan's first term, it added .68 percentage points, and during Bush's first term, it added .52 percentage points.

The point isn't that Reagan and Bush were big spenders while Obama favors austerity. If it were up to Obama, the federal government would have spent much more since 2010. Moreover, these numbers are, in large part, functions of the economies the three men inherited. Each saw a recession in their first term, but Obama's was by far the worst, and so it led to much more severe cutbacks in state and local spending.

Rather, these graphs simply establish a basic fact about Obama's term: While deficits have indeed been high, government spending and investment has been falling since 2010. This is, in recent presidential administrations, a simply unprecedented response to a recession. Just for fun, I took Obama's GDP growth, netted out the effect of government spending and investment, and then added the total government spending and investment numbers — which include state and local government — from Reagan's first term. The result is a significantly better economy, with growth since 2010 averaging 3.2 percent rather than 2.4 percent.

Basic economic theory would hold that you want a larger contribution from government spending during a big recession in which private demand is weak than you do during a mild recession or a healthy economy. But that's been the case in Obama's economy, and all signs are that the pace of government spending cuts will accelerate sharply over the next year.

Really wonky bit: This gets a bit deep in the weeds, but it's worth taking a moment to clarify what's counted in these numbers and what isn't. Since this measures spending and investment, for instance, tax cuts aren't included, even though they were a significant part of the recovery effort. Similarly, these numbers are about contribution to GDP, and so they don't measure direct transfer payments, which are instead measured when they get spent.

Obama's stimulus really was very large, though it was also too small given the scale of the problem. But, in a sop to Republicans, much of its was conducted through tax cuts, and quite a bit was also done through transfer payments. There's a more market-oriented policy consensus that dominates Washington today than, say, in the time of the New Deal, and it holds that direct government spending is typically wasteful, and it's typically better to give people money or tax cuts and let them make their spending choices. But this consensus breaks down when it comes to defense spending, where direct government spending still has a lot of support, and that's partly why you see such large rises in the Bush and Reagan presidencies.

One last point: Phil Klein argues that it's important to note spending skyrocketed in 2008, and so Obama was starting from an abnormally high baseline, and so the comparison between change in government spending under Obama and change in government spending under other presidents is flawed. That's absolutely true. But it's applicable to much more than just government spending. The jump in spending in 2008 was the direct and sole consequence of the financial recession. But that's also largely true for our deficits, which would be much more normally sized if not for the recession. As I write in the piece, "these numbers are, in large part, functions of the economies the three men inherited."

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Dylan Matthews | January 31, 2013