Spending Rise Has Much To Do With Policy

The running debate between Paul Krugman and me is bringing more facts to bear on important budget and policy issues. Since I wrote my reply yesterday to Krugman’s criticism of my Wall Street Journal article, he has responded three times, with Taylor Digs Deeper, 2021 and All That, and One More Point about 2021.

Krugman now admits that spending as a share of GDP would rise from 19.6 percent of GDP in 2007 to around 24 percent in 2021 under the budget proposed by the Administration on Feburary 14, which is what I showed in my original graph.

And since spending averages around 24 percent of GDP in 2009-2011, this confirms my point that “Mr. Obama, in his budget submitted in February, proposed to make that spending binge permanent.” Krugman also reports some of the components of the rise in entitlement spending, showing that Social Security, Medicare, and Medicaid spending rise as a share of GDP under Obama’s proposal.

But Krugman now argues that that “the great bulk of this projected rise has nothing whatsoever to do with Obama’s policies.” This is wrong on two accounts.

First, in proposing his February 14 budget, Obama chose policies that did not control the growth of spending by enough to prevent an increase in spending as a share of GDP, even though he could have chosen such policies. In fact, the policies he chose for his second budget on April 13 did impose such controls including “setting a more ambitious target of holding Medicare cost growth per beneficiary to GDP per capita plus 0.5 percent beginning in 2018” (White House Fact Sheet April 13). These recent spending controls were proposed after the House budget proposal was put forth, and they take spending in the direction proposed by the House. That Obama’s second budget has lower spending than the first demonstrates that the rate of spending increase has very much to do with Obama’s policies.

Second, the Obama budget does propose new spending programs, including the new health care law. And there is a step increase in entitlement spending as a share of GDP in 2009-2011 which goes beyond what would be expected from the recession, and spending remains at the higher level through 2021. If demographic changes were the only reason for the increase in spending as a share of GDP, then you would not see such a step increase.

In the latest post on this subject, Krugman expands his criticism to include Senators Corker and McCaskill. Here Krugman admits that the rate of increase in government spending is affected by Obama’s policies, but he now gives reasons “why federal spending shouldn’t stay at or near the share of GDP it was at in 2007” arguing that Obama should not choose such policies. I disagree. Even with current demographic projections it is possible to institute good reforms which keep Medicare and Medicaid from rising so rapidly as a share of GDP and also deliver better health care services. And of course it is possible also to reduce other types of spending as a share of GDP, including national defense.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

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