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Are state and local budget-cutting slowing economic recovery?

This thought-provoking analysis by Nobel economist Paul Krugman probably has implications for the decisions that Oak Ridge needs to be making on various aspects of the city budget. He says that state and local budget cuts are “exerting a powerful drag on the economy as a whole.” He compares government spending during the Obama-era economic expansion (starting in June 2009) with the Reagan-era expansion (starting November 1982):

By this stage in the Reagan recovery, government employment (which is mainly at the state and local level, with about half the jobs in education) had risen by 3.1 percent; this time around, it’s down by 2.7 percent.

Government purchases of goods and services by this stage of the Reagan recovery (adjusted for inflation) had risen by 11.6 percent; this time, they’re down by 2.6 percent.

And the gap persists even when you do include transfers, some of which have stayed high precisely because unemployment is still so high. Adjusted for inflation, Reagan-era spending rose 10.2 percent in the first 10 quarters of recovery, Obama-era spending only 2.6 percent.

He says “We’re talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc., than are currently employed in such jobs. And once you take the effects of public spending on private employment into account, a rough estimate is that the unemployment rate would be 1.5 percentage points lower than it is, or below 7 percent — significantly better than the Reagan economy at this stage.”

We could read this as saying that local governments should be increasing property taxes (and water and wastewater rates) to get more money moving faster within our local economy, but Krugman says the spending should happen at the federal level:

We can take a big step toward full employment just by using the federal government’s low borrowing costs to help state and local governments rehire the schoolteachers and police officers they laid off, while restarting the road repair and improvement projects they canceled or put on hold.

That federal spending isn’t going to happen. Oak Ridge has not (yet) laid off police officers, but the schools have cut teaching assistant positions, and there are some capital projects we’ve deferred… How would our economy — and retail shopping areas — look right now if we dug into our pockets and spent more on our local needs? (That’s not likely to happen, but this is the kind of discussion we ought to be having.)

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3 Comments

  1. Jim McDaniels says:

    The economy under Reagan expanded in spite of the increased spending. In fact, government spending increases EVERY year, even when our politicians (Federal, State and Local) say they cut spending since they mean a cut in the increase in spending. There were several reasons there the economy was expanded under Reagan. First, he cut taxes. Second, he deregulated the economy and let Capitalism work. Third, he was a great leader who inspired confidence in the American people, as well actually loving this country.

    Ms. Smith, Oak Ridge already has one of the highest tax rates around this area. Do you not already have enough of our money to spend?

  2. Ellen Smith says:

    Jim, you are repeating the conventional wisdom, which Krugman’s column says is wrong. Almost everyone knows that consumer spending on goods and services drives a lot of economic activity. Krugman’s column is pointing out that local and state government spending on goods, services, and jobs, such as jobs for police officers, teachers, and lifeguards, also fuels the economy. When you think about it, that seems kind of obvious, doesn’t it?

    Krugman says: “Conservatives who love to compare Reagan’s record with Mr. Obama’s should think twice. Aside from the fact that recoveries from financial crises are almost always slower than ordinary recoveries, in reality Reagan was much more Keynesian than Mr. Obama, faced with an obstructionist G.O.P., has ever managed to be.”

    And, no, I’m not proposing that the city should increase taxes to fuel the economy. It doesn’t work that way! But as a city we do need to continue to look at our decisions and actions from a variety of perspectives, and recognize that our decisions and actions may have unexpected results.

  3. Jim McDaniels says:

    Actually, what Krugman says is for government to spend massive amounts of money to get us out of economic trouble. Obama has tried this already, with less than anemic results. The problem with massive government spending is that the government somehow has to get the money to spend. One way is to borrow money, another is to increase taxes and another is to print more money. Of course, city government can only do the first two. All three take money from taxpayers or their children. Since government is taking the money from a taxpayer, the taxpayer has less money for consumer spending. Then the government has to pay employees to determine how to spend the money, and then someone to actually spend it. Of course, that is a big pile of money to spend, so lots of people line up to get some of that “government” money. In the end, less money gets spent on consumer spending than if the actual taxpayer spent the money. Plus, the money would actually be spent where the taxpayer wanted it spent, instead of where the politician wanted it spent.

    Krugman is confused when he says …”financial crises are almost always slower than ordinary recoveries”. All recoveries are from some form of financial crisis. The Reagan recovery was quick and dramatic. Obama’s is weak and unremarkable.

    Also, what is Krugman’s reasoning in saying Reagan was Keynesian? The impetus of Reagan’s recovery was from lowering taxes and deregulation, which is classic Supply-side economics. Personally, I think Krugman was just trying to sully the reputation of a man who couldn’t defend himself.

    You said in your reply, “And, no, I’m not proposing that the city should increase taxes to fuel the economy. It doesn’t work that way!” But in your original post you said, “How would our economy — and retail shopping areas — look right now if we dug into our pockets and spent more on our local needs? (That’s not likely to happen, but this is the kind of discussion we ought to be having.)” Either you are saying you want us to spend more money or that you want the City to spend more (which would require borrowing or taxing more). Which is it?

    Ms. Smith, please, in the future when addressing me formally, please accord me the same level of courtesy when replying as I showed you.

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