Krugman’s argument for bloated government

March 6, 2012

Paul Krugman, Nobel Prize-winning economist and New York Times columnist, is once again banging the drum for federal aid for state and local governments. In theory, the federal government has the capacity to prop up states and municipalities by providing stimulus dollars to keep economic activity from stalling. However, this would require Congress to raise the debt limit and the Treasury to borrow from bond markets to get the money. Krugman contends that this would cost little and that the Obama administration is postponing the recovery by not fighting for more money from Congress:

The federal government has been pursuing what amount to contractionary policies as the last vestiges of the Obama stimulus fade out, but the big cuts have come at the state and local level. These state and local cuts have led to a sharp fall in both government employment and government spending on goods and services, exerting a powerful drag on the economy as a whole.

What Krugman’s analysis overlooks is that government at the state and local levels has been ballooning for decades and that a contraction may be necessary to purge the system of bureaucracy and outdated programs. Krugman’s borrowing plan would simply freeze budgets which, on their own, are basically unsustainable for state and local governments. As their costs increase, there is no more “fiscal space” in many state and local budgets to maintain the status quo without large tax increases. So after Krugman’s proposed federal stimulus expired, states and municipalities would likely have to raise revenues to support their expanded size.

Hoping that state and local government can provide a large number of jobs is unwise policy, since government employees have substantial attendant costs, notably generous pensions. Unlike private corporations, government cannot quickly add and reduce jobs as public budgets must go through the legislative process, which is infinitely more complex than corporate planning.

You can see the growth of government in the graph above, which plots state and local government employees per capita. In the early 1980s one government employee served 179 citizens. By 2002 one government employee served 155 citizens. This increase in employees either happened because governments took on more responsibilities, became less productive or padded the employee rolls as a result of political pressure (or a combination of all three).

A more striking example of the expansion of government is spending on law enforcement. As seen in the graph below, spending (in constant dollars) for law enforcement went from $192 in 1982 to $344 in 2007, far outpacing population growth. After watching police in riot gear break up peaceful Occupy protests and swat teams being used for small-time drug arrests, we might ask if there are too many public resources dedicated to “peacekeeping” already.

Steve Malanga at the Manhattan Institute wrote about a similar trend for public education:

In education, for instance, our public schools have been hiring robustly for years, and we’ve doubled education spending in real terms since the Reagan recovery. In 1980, our schools employed 1 teacher per 18.7 students, and today they employ 1 per 15.5 students. Schools have hired non-instructional support personnel at an even faster rate, going from 1 worker per 15 students in 1980 to 1 per 10 today.

School budgets have soared as a result, placing an increasing burden on taxpayers. In 1980 we spent $6,024 per pupil (in current dollars) on public education; today we are spending $10,667, a substantial gain in real spending.

If America had achieved positive returns for all this spending, it might be argued that borrowing from the future to spend more is worthwhile. But, sadly, spending has increased, and we have slid further and further behind. More spending to maintain a weak status quo is no path to real growth.


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No doubt all government workers, especially management, could be paid 20% lower wages for the benefit of having such steady employment compared to the private sector. The hiring practices are very weak and the crap floats to the top. Education is a farce and we are losing the skills needed to function as a civilization.

The budget draining salaries and pensions for so-called “safety” members are the worse as they retire early at puffed up salaries or disabilities. I would bet that the Corrections department has been the nastiest part of that group as our society has incarcerated more and more for the ridiculous drug war that also pumped up the number of state lawyers and cops.

Pharmecuticals, Hospitals, and doctors could use a smack down on their quackery and overcharging.

The oil barons drumming up wars across the world should lose their shirts and be nationalized.

However, maybe the biggest problem and root of all evil is Wall Street = Federal Reserve and the congress/executive that feeds off them, who should be put in jail for crimes against the citizens because they have completely messed up our economy. We need a financial system reboot with a tax on the speculative day trading done by the “expert” computer systems and outlaw derivatives. This is no way to run an economy and country.

Posted by My1stComment | Report as abusive

Structual deficits exist when a City spends more than it earns (via property taxes, sales taxes, and fees). Over the past 3 years, these deficits have been plugged by Federal and State aid as well as cash reserves. Now the cash reserves are gone and Feds and States have limited funds to help plug the gaps….lets not keep kicking the can down the road and lets stop spending more than we earn!! Granted, it all starts with politicians that are willing to negotiate labor contracts (which are usually 75% of the general fund budgets) with the taxpayors best interests at heart.

Posted by LetsTalkMunis | Report as abusive

The federal debt interest rate is literally below inflation, adding to the federal debt is currently not a problem.

The increased spending on police and education reflects the ramping up of education standards worldwide. I understand the need for reform, but cutting funding to education isn’t the solution. The same can be said for law enforcement.

In many ways, the idea of cutting government spending in a recession makes no sense. Programs like education and law enforcement a) directly pump money into the economy, raising employment and b) have overarching benefits for society, no matter where the economy is. If those programs are not worth our spending, I don’t know what is.

As for unsustainable local/state governments, there is definitely a problem there. I advocate a serious resturucturing on a state-by-state basis, but only AFTER unemployment reaches normal levels. There’s no point in sacraficing jobs for a balanced budget: there is no short-term benefit, and the long term benefits won’t be realized if we keep ourselves in this rut for too long.

For those who say “stop spending money we don’t have,” I say stop looking at marcoeconomic policy like you would a personal bank account. Large governments like the USFG can handle the debt burden. WWII proved that, an example classical economists would love to forget.

Posted by Ludendorff | Report as abusive