A week to go until Debt Ceiling Armageddon, and the bond market and the Dow Jones industrial average seem to be taking the Washington impasse in stride. Stocks were down on Monday, but not much. The price of a 10-year government bond, which you would expect to be affected by the debt default, was down slightly, and yields were near historic lows, meaning few are really worried that the U.S. won’t be able to pay back its debt.
Of course, that hasn’t stopped some from saying this is much more than a temporary political stalemate, along the lines of the government shutdown in the 1990s, and instead a fight over the future health of the U.S. economy.
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Arthur Brooks, who is the head of the right-leaning American Enterprise Institute, in an op-ed in the Wall Street Journal on Monday tries to make the case that while the Republicans’ unwillingness to raise the debt ceiling may seem “petty, selfish and tiresome,” it’s really part of a larger “moral” fight against government spending. Brooks says that if government spending is left to the current status quo, the outcome, one way or another, will be disastrous. I’m not so convinced. Here’s why:
The basis of Brooks argument is that government spending is bad. Brooks says government spending has risen to 37% of our GDP. That’s up from 27% in 1960. He says we need to use the debt ceiling as a means to reign in government spending. Why? Brooks doesn’t say it directly, but his essential argument is that higher levels of government spending lead to lower levels of economic growth. The problem is it’s not clear to me that’s what economics says. Brooks seems to be conflating two issues. High levels of debt – government and individual – does seem to slow economic growth. But it’s not clear to me that spending alone would have the same effect. And it seems less clear that the level of government spending we have now would put us on a path for disaster, or at least not any more disaster than just about every other developed country in the world.
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First of all, as measured by other countries, the U.S. does not seem to have an abnormally high level of government spending. If anything, just eyeballing it, we appear slightly below average. Here’s a chart that another blogger put together two years ago. As you can see even at 37% (this chart, which puts the U.S. at 19%, is just of federal spending – but our all in government spending number that Brooks is calculated, which is the way to do it, you get to the higher number), we rank far from the top. More importantly, there are a number of economies – such as Germany and Australia – that are growing faster than ours these days that have much higher levels of government spending than in the U.S. What’s more, Japan, Russian, Haiti and Afghanistan have much lower levels of government spending than the U.S. Yet, those countries don’t seem better off than we are. I haven’t plotted the data on a chart, but this conclusion from the blogger who put together the chart seems right:
On its face, there doesn’t appear to be much to validate the libertarian view that minimizing the size of the federal government, and suffering the consequent economic distortions its continued growth will otherwise cause, should be the primary goal of a society wanting economic prosperity (and a high quality of life). Ceteris paribus perhaps, but there are clearly a host of other demographic and cultural variables that are more important. Who would rather operate a business–or live–in Haiti instead of in Denmark?
And while U.S. spending is higher than in the 1960s, here’s a chart of how it got to where it is today:
As you can see, government spending was about where it is today back in the early 1990s on the eve of one of the greatest periods of economic expansion in American history.
I e-mailed Brooks and the AEI to ask them about all this, and they said that there is plenty of economic literature to suggest that higher government spending leads to lower growth. He pointed me towards a study, which was published by AEI last year, that concluded that on average a 10 percentage point increase in government spending, which is what we have had over the past five decades, would lead to 1/2 to 1 percent lower growth rates. But even the study acknowledges this isn’t a rule. There are some countries that seem to do quite well with high levels of government spending.
As for the large amount of economic literature that suggests government spending is bad, noted economist Robert Shiller of Yale seems to disagree. In his own op-ed piece over the weekend in the New York Times, Shiller says that economists such as Nobel laureate Paul Samuelson and others have long argued that spending increases when matched with tax increases can lead to higher levels of average personal wealth and higher economic growth.
Where does that leave us? To me, government spending alone can’t explain our problems. Government spending can lead to debt, but it doesn’t have to. It’s government spending that we don’t pay for that’s the problem. And that’s the problem we have now. The question is how we solve it. But if we start the negotiations with the idea that all spending is bad, the solution we come up with might leave us worse off.