According to President Obama, cutting government spending will “certainly slow our recovery.” Over and over again, he has described the sequester’s threatened $85 billion cut in spending out of a $3.8 trillion budget as “devastating.” But that represents a mere 2 percent cut in spending. Obama frightens people by pretending that the $1 trillion cut takes place right away rather than being spread out over 10 years.
Sounds like more of the same. During the 2008 presidential campaign, Obama continually promised to “cut net spending” and make government smaller. The stimulus was promised not to “raise projected deficits beyond a short horizon of a year or at most two.” Yet, now during the fifth year of Obama’s presidency, we are told that we can’t cut spending, that we need even more government “investments.”
During his first term, when he racked up record budget deficits, we didn’t see much job creation. As a result, the number of people not in the labor force has grown rapidly, by more than seven times the number of jobs created. Most of the unemployed have gotten so discouraged that they have stopped searching for work.
The last four years have proven that big government and deficit spending are not the answer, as we can see across the globe. Countries with the largest increases in spending or debt have also the fewest jobs created as well as the lowest economic growth.
This can be seen if we plot changes in the percentage of the working-age population employed in the 32 developed (OECD) countries. Start with 2007, the last full year before the worldwide recession hit and before governments started their massive government spending programs. And end with 2010, the latest year with enough data available.
To make sure government spending as a share of GDP isn’t simply rising because GDP is declining, I show two approaches. The first one looks at government spending a year before changes in the economy’s performance.
As can be seen in the simple graph, countries with the largest spending increases fared the worst during the recession. Ireland, Iceland, Estonia, Spain, and Greece are the most dramatic examples. The increases in per capita government spending in these countries — summing over these three years — ranged from 11.1 percent to 26.1 percent. These countries also suffered the deepest declines in GDP, contracting on average by 4.4 percent between 2007 and 2010. And the share of working-age people who were employed also declined by, on average, of 6.6 percent.
The most frugal countries were: the Czech Republic, Hungary, Israel, Poland, Sweden, and Switzerland. Their per capita government spending actually shrank by anywhere from 0.2 to 6.3 percent. The result? Per capita GDP grew by an average of 7 percent over the three-year period. These countries also saw the share of their working-age populations with jobs grow.
Contrast the performance of these frugal countries to that of the U.S., where the percentage of the working-age population employed has fallen well below the 2007 level. During this period, per capita GDP growth in the United States was only a quarter of that of the six most frugal countries.
The second approach is to see how much larger deficits are than they would have been if these economies had normal economic growth. I will follow others and assume that in normal times, government revenue would have grown by 2 percent a year.
So what results do we get for developed countries? Austerity works, Keynesian stimulus does not. And, again, bigger stimuluses have a detrimental effect on employment.
“Austerity” may be a bad word to some politicians, but the countries that followed Keynesian policies have assumed a triad of woes: poor GDP growth, poor job growth, and massive debt. Obama needs to stop using economic growth as an excuse for not cutting government spending.
John Lott is a former chief economist at the United States Sentencing Commission and the author of “At the Brink” (Regnery) to be released next week.