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Paul "Orwell" Krugman Touts Job Growth in the Obama Recovery

Paul "Orwell" Krugman Touts Job Growth in the Obama Recovery
Profile photo of Robert P. Murphy

For years, Paul Krugman has been warning that the inadequate fiscal stimulus package of early 2009, coupled with the disastrous spending cuts of the “sequester” package, were leading to a “postmodern recovery” and “jobless trap” for the millions of Americans locked out of employment due to coldhearted Republicans. Even though GDP growth had officially returned by the summer of 2009, Krugman told us, we could expect a terrible plight for America’s workers, all because the people in charge were more concerned with fiscal prudence than American families.

Well, now that we’ve had a few quarters of decent GDP growth and private sector job creation–at least according to the official statistics–Krugman has had to alter his narrative. Now, you see, Obama’s recovery has actually been impressive–much better than the recovery under George W. Bush from the dot-com recession. Does this prove that Krugman was wrong about the need for big deficits? Of course not. No, it just shows that the right-wing critics of ObamaCare and other regulations were wrong for thinking these regulations would hurt hiring.

A recent example of this newfound perspective is a December 28 Krugman post entitled, “The Obama Bounce”:

Dean Baker is, of course, right: this is not a boom, and comparisons to the 1990s are insane. Still, growth has clearly picked up, and the public seems to be noticing. So what can we say about the Obama non-boom?

I’d argue that much of what we’re seeing reflects the tapering off of austerity. The US has never had a proclaimed austerity plan, UK style, but we’ve had a lot of the thing itself, especially from cutbacks in state and local spending. Spending hasn’t rebounded yet, but at least it has stopped shrinking:

[Krugman then inserts a FRED graph showing the year/year level change in real government consumption and investment spending.–RPM]

And it’s important to realize that, despite all the rhetoric about how Obamacare/antibusiness rhetoric/Kenyan Islamic atheism is destroying business, the private sector has actually been relatively strong under Obama. Here’s employment:

[Krugman then inserts a FRED graph showing the levels of Total nonfarm employment minus total government employment.–RPM]

Since Obama took office, we’ve gained 6.7 million private-sector jobs, compared with just 3.1 million at the same point under Bush. But under Bush we’d added 1.2 million public sector jobs, while under Obama we’ve cut 600,000. The point is that relatively good private sector performance has been masked by public-sector cutbacks; this is the opposite of what you usually hear, but that’s no surprise.

First of all, let’s remind ourselves of just how awful Krugman said the U.S. austerity (under the sequester) was going to be. In a Feb. 2013 op ed Krugman called the sequester “one of the worst policy ideas in our nation’s history.” He then went on to quantify its impact:

The good news is that compared with our last two self-inflicted crises, the sequester is relatively small potatoes. A failure to raise the debt ceiling would have threatened chaos in world financial markets; failure to reach a deal on the so-called fiscal cliff would have led to so much sudden austerity that we might well have plunged back into recession. The sequester, by contrast, will probably cost “only” around 700,000 jobs.

So in case you think I’m being unfair by putting “Orwell” in the title of this blog post, now you know.

But let’s move on to the empirical content of Krugman’s latest post. The great thing about him using FRED charts is that I can use Krugman’s own arguments against him. For starters, in the following chart, I’ve merely taken Krugman’s separate graphs and combined them into one:

Chg in Fed Expend vs Level of Employment

 

To repeat, the above chart are the exact same data series (and choice of units) that Krugman used, but I’ve put them on the same graph so we can line them up chronologically.

Krugman’s wants to use these data to argue that the recent growth in private-sector employment (the red line above) can be attributed to the end of U.S. “austerity.” Specifically, the blue line recently rose back up above the black horizontal line, showing that finally U.S. government consumption and investment expenditures have stopped falling. (The units of the blue line are “change from year ago,” in absolute terms, not percentages.)

OK, but let’s step back and look at the very same graph starting in 2010. That’s when the red line bottomed out and started rising, meaning that total private sector employment began recovering. Do you see any major disruption in that upward growth in the red line? I sure don’t.

Indeed, if you had no prior economic theory, and just wanted to see if there were some relationship between the red and blue lines, you would look at the above graph and think that large increases in government spending destroyed private sector jobs.

Let’s make things easier to see by changing the units on the job line. Instead of showing levels of private sector employment (which Krugman had displayed), let’s make it changes in the level of private sector employment over the prior 12 months:

Chg in Gov Spending vs Chg in Private Employment

Just to review: The blue line in the above chart (left axis) shows the yearly change in government consumption and investment expenditures (which doesn’t include transfer payments). So up through early 2010, this number was positive, meaning that the level of government expenditures was higher compared to a year prior. But once the blue line dips below the black line, it means that year/year government spending is down. In mid-2011, the blue line turns around. This doesn’t show a year/year increase in government spending, but rather shows that the downward spiral was halted. Only recently, as the blue line pokes above the black line, has the year/year change in government spending been positive.

In contrast, the red line (right axis) shows the year/year change in total (nonfarm) private sector employment. (Specifically, it’s the change in total nonfarm employment minus the change in government employment.) The private sector was shedding jobs on net–looking at yearly changes–up through mid-2010, at which point the 12-month changes become positive. (Be careful: Note that FRED didn’t make the 0-line the same on the left and right axis, so the dark black line isn’t special if you’re looking at the red line.)

Now the way Krugman is handling the above data is to focus on the red line’s uptick from early 2014 to the present. You see how the red line reduced the space between it and the “2,740” line in the upper-right portion of my chart? Because that slight uptick in the red line coincides with the increase in the blue line, Krugman concludes that the end of U.S. austerity is responsible for the good labor market news.

But hold on a second. Step back and look at the entire chart. There was a bigger uptick in the red line (i.e. private sector employment) in 2013, precisely when the blue line bounced down again because of the sequester package. Remember, in early 2013 Krugman was calling that impending drop in the blue line one of “the worst policy ideas in our nation’s history” and said it would cost 700,000 jobs. Even if you think he meant “relative to the counterfactual baseline,” do you see any kind of 700,000 job change in 2013? No. If anything–to repeat myself–the red line drifted up a bit higher for most of 2013 than it had been during 2012.

Then, the red line drifted down again as the blue line shot up again in late 2013. Furthermore, the highest plateau of the red line–showing the largest year/year change in private-sector employment–occurred in early 2012, when government spending was still falling (i.e. the blue line was below the black line) and even its acceleration had stalled (the blue line itself was flat in early 2012, after having risen sharply in the second half of 2011).

To be clear, I am not saying we should get cross-eyed studying these types of charts. If you have a strongly held economic theory, you can always concoct a story ex post to “explain” the data.

Rather, what I’m saying is that on the very terms Krugman himself chose to show the virtues of government spending, I can make a much more compelling argument that cutting government spending won’t hurt private sector hiring, and if anything will stimulate it.

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Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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