Why Spending/GDP is a Terrible, Horrible, No Good, Very Bad Metric For Judging Obama's Performance

A post like this really shouldn't be necessary, but part of the right wing canard that Obama has been a profligate spender is based on spending as a percentage of GDP.

It looks like this - Graph 1.

Graph 1.  Fed Expenditures/GDP

Sure enough, by the end of Clinton's term the ratio had fallen from Reagan's high of 24% to a modern low of 19%.  But note that the 19% value wasn't typical.  It was the end point of a decade-long decline.  And, yep, there's Obama with an all-time-high approaching 26%.

What otherwise intelligent, and sometimes even famous people seem to ignore though, is that every ratio has not only a numerator but also that ol' devil denominator.   Let's have a look at both of them.  Graph 2 shows GDP and Expenditures since 1980, expressed in $ Billions.  I've also added a line representing 5* Expenditures, since 20% of GDP is a reasonable rough estimate for the post WW II era.

Graph 2.  Expenditures and GDP Compared

Actually, the 5x Expenditures line runs pretty consistently above the GDP line, telling us two things that we should have already known from looking at Graph 1.  First, Expenditures greater than 20% of GDP have been the norm since before 1980, and 2) Clinton's final number is not representative of anything other than a single year.  Using it as a comparator is cherry-picking and fundamentally dishonest.

The 5x line also emphasizes that the majority of the spending increase under Obama unavoidably occurred during the officially designated recession.  The GDP line shows that, post recession, GDP growth has not recovered to the pre-recession trend line.  In fact, growth has established a new trend line with a lower slope.  This is unprecedented in the scope of FRED historical data.  My guess is that insufficient Federal spending has been a big drag on this recovery.  But it's also true that GDP growth has been in secular decline since the Reagan administration.  Note that skewing the denominator down will automatically skew the ratio up.  This is what Bill Clinton calls "arithmetic."

Slicing across this a different way, Graph 3 gives us year-over-year percentage growth in Expenditures and GDP, dating back to the Eisenhower administration.

Graph 3.  YoY % Change in Expenditures and GDP

A few simple observations:
- The spending increase during the recent recession was modest by any standard, and dwarfed by earlier surges.
- That increase, coupled with the most severe GDP decline since the other Great Depression gave our beloved ratio a terrible, horrible, no good, very bad double whammy.
- GDP growth during this recovery is only marginally better than it was during the 2001-2 low, and far below Clinton era levels.
- Clinton was the most consistently frugal president of the post WW II era - until now.
- Since the recession was declared over, B. Hoover Obama has been miserly.

One can legitimately argue that Obama's approach to the economy has been excessively conservative.  Krugman has made this point repeatedly.  I often say that Clinton governed to the right of Eisenhower - who was a genuine deficit hawk - and that Obama is to the right of Clinton. That is intended to be slightly hyperbolic, but using this data as the benchmark, it's dead on.

Any questions?

Cross posted at Angry Bear