image Paul Krugman continues his series on the lack of government spending under the Obama administration.  I don’t think he hits the point quite hard enough that when economists say government spending they mean government consumption and investment. Government outlays are the sum of all checks the government writes.

However, many of those checks are just pass-throughs: collect from person A, distribute to person B. At the end of the day the money is still spent by individuals on things that they themselves want. Such funds are not subject to the Friedman critique:

Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.

So what we really want to look at is Federal Government Consumption and Investment. Lets check the tape:

The Long View


This is with a log-scale. Why logs? Because with logs a straight line means a constant growth rate. In a world where population and productivity are always growing, virtually any long economic series is going to look like a giant swoosh. That’s just because America is much bigger now than it was in the 50s.

As you can see the growth has been pretty steady accept for that flat period during the 90s. It becomes immediately clear why that it is when you think of what the government actually spends money on. That flat period is the peace dividend.

Now lets take a closer look at recent times


Not much of a discernable trend that I can see. Maybe a bit of a slow down around 2007. So, far this is largely in concert with Krugman’s point.

However, I want to make a different one as well. If I remember correctly we passed the American Recovery and Reinvestment Act of 2009. This chart includes not only government consumption but government investment – roads, bridges, etc.

I don’t see a lot of reinvestment going on. This is because there isn’t much. There isn’t much because it is hard for the government to spend money. Lots of studies have to be done. Lists have to be prioritized. Contracts have to be bid out. Lots of anti-corruption hoops have to be jumped through.

In the end the Federal government spends money like men with benign prostatic hyperplasia urinate, slowly and weakly. What the economy needs is flomax.

There are, however, two institutions that do have to power to deliver enormous funds on demand: the Federal Reserve and IRS. I have obviously been focused on the former, but there is a role for the later.

With the debate over the Bush tax cuts looming I am not sure what can be done before the election. However, when the election is over, there are numerous options for moving tons of money via the IRS.

The first is of course a payroll tax holiday. Its big, its bold and it moves money right into the hands of consumers and small businesses. Yes, it moves money right into the hands of the very large businesses that are sitting on cash.

However, it does give them an incentive to hire additional workers and it allows you to move lots of money without having to get into the weeds of favoring this over that.

Another option is a radical increase in the standard deduction. I believe in bold yet, simple measures and so I don’t see a problem with increasing it by a factor of ten. This accomplishes several goals.

First, it gets money into the hands of consumers. Its our helicopter drop.

Second, it avoids any debate later over whether this should be the new tax structure. No one is going to suggest that a standard deduction of 100K should last forever.

Now, doesn’t this run afoul of the permanent income hypothesis? If its temporary then people will save it, no?

I am not so sure that the PIH holds in a recession like this. Unless we think that the massive phase shift we got in retail sales is because people suddenly downgraded their entire future income stream by 10% there is a scramble for liquidity going on here. This is precisely what we will help undue.

In any case, however, even if people save it, that’s not the worst thing in the world. It takes private debt and makes it public debt. This helps repair household balance sheets. Its a nationwide bailout, but its not targeted at people who got in to deep into debt, everyone gets it.