The Ryan Budget Is an Affront to Economics and American History

A few years ago, when the unemployment rate was near its peak, two Swedish economists, Stefan Eriksson and Dan-Olof Rooth, conducted an experiment. They wanted to find out just how hard it was to get a job if you’d been unemployed for a long time. They sent 8,466 fictitious job applications to employers across Sweden. They varied the number of months that each “applicant” had been unemployed. For some, it was a matter of days. For others, several months. Then they waited for the employers to call them back for interviews.

Overall, one out of every four job “applicants” received an interview. Unsurprisingly, it was higher for high-skill jobs and lower for low-skill jobs. What was more significant was the effect of unemployment on the fictitious resumes.

Eriksson and Rooth found that unemployment didn’t matter if it lasted less than six months. Applicants who had been unemployed for the past six months were just as likely to receive an interview as applicants who just quit their job yesterday. If they had been unemployed for nine months or more, however, they were 20 percent less likely to get an interview, even if they had the same work experience, education, and other qualifications as everyone else.

In the United States right now, over 3 million people have been looking for work for nine months or more — and that doesn’t include the millions more who gave up searching because they couldn’t find anything.

Eriksson and Rooth have mostly confirmed what we already knew, but their experiment adds more specific and more reliable evidence to the overwhelming conclusion that these people need our help. Fortunately, another paper, published alongside Eriksson and Rooth’s, proves that we can help them.

While Eriksson and Rooth were sending out job applications, Emi Nakamura and Jón Steinsson were reading military procurement forms.

Both economists at Columbia University, Nakamura and Steinsson were trying to figure out what effect the federal government has on the economy when it increases its spending. They found a database at the Pentagon that summed up all large military purchases in every state in the U.S. from 1966 to 2006. It wasn’t exactly an experiment, but it was close enough.

The danger in estimating the effects of government spending is that it’s hard to tell whether states had faster economic growth because they received more funding — or whether they received more funding because they happened to enjoy faster economic growth. With military purchases, Nakamura and Steinsson knew they didn’t have that problem. States don’t receive military contracts based on the state of their economy. The two are usually independent.

Nakamura and Steinsson compared military spending in each state with subsequent economic growth over the course of four decades, and they found that a 1 percent increase in government purchases resulted in a 1.5 percent increase in income per person in that state.

Then they calculated the effect on the national economy. When the Federal Reserve couldn’t lower interest rates any further — the situation we’re in now, known as the “zero lower bound” — Nakamura and Steinsson found that a 1 percent increase in government purchases resulted in at least a 1.7 percent increase in national income per person.

In other words, the federal government can stimulate the economy and create jobs, and the resulting increase in income will far exceed any cost to the taxpayers.

Budget ProposalsLike Eriksson and Rooth, Nakamura and Steinsson aren’t telling us something we don’t know, but they are giving us another valuable piece of evidence that our government is headed in the wrong direction.

At a time when the long-term unemployed need more support, our government is giving them less. The leadership of both parties have agreed to shrink the federal budget drastically over the coming decade, and now Paul Ryan, the Republican chair of the House Budget Committee, has issued a new proposal that will cut the budget even further, to the point where most programs that support the unemployed will be half the size that they were during the Reagan administration, relative to the size of the economy.

This is a cruel, counterproductive path we are on, and that is not a statement of mere opinion. It is the inescapable conclusion of data-driven, cutting-edge economic research based on real-world evidence and the accumulated lessons of American history.

==========

This op-ed was published in today’s South Florida Sun-Sentinel and Huffington Post.

Don’t Attack Big Government Until You’ve Done the Math

“We have to get rid of Big Government,” said a friend of mine recently, as if it was obvious. I looked around the table and saw only nodding heads.

So I asked my friend: What exactly do you want to get rid of? Social Security? Oh no, she said.

Medicare? No. Medicaid? No. The Children’s Health Insurance Program? No. The Defense Department? No.

Then you don’t want to get rid of Big Government.

Those five programs make up two-thirds of the federal budget. They are Big Government, and the American people love them — even most of the people who say, “We have to get rid of Big Government.”

Of course, that’s not what she meant. When she said “Big Government,” she wasn’t talking about those programs.

She was talking about Obamacare, which will account for 3 percent of the federal budget in the coming decade. She was talking about food stamps, which comprise another 2 percent of the budget. She was talking about welfare, which takes up a whopping 0.4 percent.

I hope she wasn’t talking about the Department of Education, but even if she was, its budget is roughly the same as the amount allocated to food stamps.

So anyone who thinks they can “get rid of Big Government” by attacking these programs is either uninformed, lying, or very bad at math.

It’s exactly this kind of misunderstanding that allows politicians to foist their radical agendas on an unwilling public.

Witness the “sequester” debate. Why is the government planning to cut its spending by $1 trillion over the next decade, starting with an $85 billion cut to this year’s budget that takes effect on March 1? Because people are somehow under the impression that it has grown too big.

It’s hard to square that belief with this week’s report from the Congressional Budget Office. It shows the size of our federal government relative to the overall economy, and believe it or not, it’s been shrinking for many years!

This year, the federal government will spend 22 percent of our nation’s income, the same as it did in 1981. In fact, throughout most of Ronald Reagan’s two terms in office, federal spending was higher, as a percent of our nation’s income, than it is today.

It wasn’t until Bill Clinton came into office that our government made a consistent effort to shrink the size of government. Remember Clinton’s 1996 State of the Union? “The era of big government is over.” It sure was. By the end of his term, the federal government spent less money, relative to the size of the overall economy, than at any time since the mid-1960s.

George W. Bush reversed that trend, but even Bush’s government paled in comparison to Reagan’s. In 2007, federal spending was 19.7 percent of our nation’s income, a far cry from the peak of 23.5 percent in 1983.

That’s a quarter of a century during which our federal government was smaller than it used to be.

That ended with the Great Recession, of course. When Bush left office, he handed over the reins to 24.4 percent of our nation’s spending.

But most of that increase was temporary. Just as economists predicted, that number has fallen, and it will continue to fall as the economy improves and grows faster than the government.

And that’s why the sequester is a misguided attempt to fix an illusory problem. The federal government has not gotten bigger in the last three decades, and it’s only getting smaller.

There is one part of the budget that’s been growing, however, and that’s health care. As medical costs grow faster than inflation, so do the budgets of Medicare, Medicaid, and CHIP. If you want to slow the long-term growth of the government, that’s the problem you have to solve.

But don’t take it out on innocent programs that have nothing to do with the budget deficit and even less to do with so-called “Big Government.”

========

This op-ed was published in today’s South Florida Sun-Sentinel.