Dramatic changes (or not) in government spending

I’m teaching Methods again this semester, this time two sections with a total of 24 students. They’ll all be blogging again, so if you’re curious, I do recommend you check out their blogs. Links are forthcoming in the sidebar.

We started class this week with a little data work and a statistics refresher using data from the Bureau of Economic Analysis. It’s probably the only macro example I use all semester in great depth, but it serves to help students link their past work to what they are going to do in this class as well as give me the opportunity to show off impart some Excel shortcuts and basic data analysis skills and tips while reviewing statistics.

Since we use the entire set of GDP data from the NIPA tables, I like to take a bit of the class to talk about a few major events in economic history and highlight the idea that an action such as increasing government spending can both increase GDP and decrease it, according to economic theory. Which effect is bigger determines the outcome we see, even when both are happening.

Most students know that federal spending went up as a result of wartime production in the early 1940s and as a result of the New Deal in the mid-1930s, but I was surprised at how students answered my question of what effects does government spending have. Several students in both classes answered “debt” before anything else, and no one came up with “crowding out” (where government spending replaces private consumption and investment or drives up interest rates such that firms don’t invest but save) without significant prompting.

Once I said it, of course, they all recognized what I had been getting at, but I think it’s so indicative of the current political and news climate that students would default to an answer that’s not particularly true as a result of having heard it over and over again. Government spending, as anyone who was alive in the 90s knows, doesn’t have to result in more debt. A balanced budget is not outside the realm of possibility, and while crowding out is not necessarily a foregone conclusion either, it should fit much more nicely into students’ understanding of theory and a review of national income accounting. I know that Prof. Weise or Prof. Hu taught them about crowding out. It’s amazing how hammering on a subject can replace an outcome of an action in one’s mind. I was surely told over and over again that government spending caused crowding out, so it’s always first. These students have clearly been told that government spending causes debt. Weird. (As a side note, the Chronicle has a great article on how students struggle to transfer skills learned in one class to others.)

I’m getting away from the initial trajectory of this post, though. In addition to forgetting about crowding out, my students wanted to tell me that government spending had accelerated over the past few years. I immediately shot down the idea, saying how spending growth had slowed dramatically since we had officially left the recession, even if there had been an initial spike.

I was a little nervous when I said it that I had misspoken, but was grateful to come back to my office to this Krugman post: “the narrative that says that spending has surged under Obama is just wrong – what we’ve actually seen is a slowdown at exactly the time when, for macroeconomic reasons, we should have been spending more.” Ah, sweet vindication and relief.

Advertisements

2 thoughts on “Dramatic changes (or not) in government spending

  1. Pingback: The Beltway Deficit Feedback Loop. Or, why we should all commit to reading various news sources | Irrational Tonics

  2. Quarterly federal spending excluding transfer programs has retracted from ’09 to current by about 3% to 2.46 trillion. A very real and veiled expense is our drastic increase in M2, up about 20% in the past two years (over 2 trillion dollars). QE is just spending that makes subtle debt especially if the Fed takes on too much risk; or hide the spending skew the data. Theories aside, US debt to GDP has gone from 87ish percent to over 101% in the same relative time period.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s