I think it is fair to point out that Reagan’s big spending was likely more for defense than now, and the decline is from a huge peak under President Obama.
Consider the following graph, with both series (coincident series for economic activity) normalized to 2011M01=0.
Figure 1: Log coincident economic indexes, both normalized to 2011M01=0. NBER defined recession dates shaded gray. Source: Philadelphia Fed, NBER, and author’s calculations.
One series pertains to the state I live in now (Wisconsin), and has pursued a policy of spending cuts and tax cuts skewed towards high income groups. The other is the state I lived in before coming to Wisconsin (California). It dealt with the serious fiscal problems it faced in part by cutting spending, and by raising taxes. Interestingly, both states had new governors taking power in January 2011 (Walker in Wisconsin, Brown in California). And in both cases, one party holds power in both houses of the legislature, as well as holding the governorship — Republicans in Wisconsin, Democrats in California.
It’s not surprising to anybody with acquaintance with data (or just plain reality) that the red line is Wisconsin, the blue is California. While this is not a controlled experiment — there are many other variables of importance (although they both share the same monetary policy) — the comparison is suggestive.
So, for completeness’s sake, here is the figure again, series labeled, and the US series added.
Figure 2: Log coincident economic indexes for California (blue), Wisconsin (red), and US (black), all normalized to 2011M01=0. NBER defined recession dates shaded gray. Source: Philadelphia Fed, NBER, and author’s calculations.
More on California here.
Two Approaches to Fiscal Policy
Tue, 27 Aug 2013 04:00:02 GMT