Debunking the latest from the New York Times on “smaller” government spending

The government is getting smaller under President Obama, proclaimed an astonishing headline in the New York Times last Friday. Really?

For the first time in 40 years, the government sector of the American economy has shrunk during the first three years of a presidential administration.

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

In the first quarter of this year, the real gross domestic product for the government — including state and local governments as well as federal — was 2 percent lower than it was three years earlier, when Barack Obama took office in early 2009.

The story includes a link to a series of charts showing the growth rate in the Gross Domestic Product (GDP), and the government spending component of GDP, under President Obama compared to prior administrations dating back to the first Bush presidency. But the key chart is this one:

It took me a while to figure this out, but what they’ve done is plotted the percentage change in GDP and government spending relative to what the total was at the end of the first quarter of 2009. So the totals at the end of the President’s first quarter in office were used as the baseline to which all subsequent quarters through the end of March 2012 were compared to. This explains why the rate of GDP growth in the chart above (the black line) is shown exceeding 5% when it has never exceeded 4% for any quarter under President Obama, and has been no higher than 3% since early 2010. These figures are based on cumulative totals, computing the net percentage change in GDP since the end of March 2009. The cumulative increase in GDP over the last 3 years is actually 6.6%, which represents very stagnant growth on a historical basis.

The brown line in the chart then represents the percentage change in the government spending component of GDP since March 2009; and in fact, the total for the first quarter of 2012 was 2% lower than the total for the same quarter in 2009.

If you are confused by all this perhaps that’s what the Times intended because their data is misleading in a couple of critical ways. First and foremost, total government spending adjusted for inflation was actually higher on a calendar-year basis for 2009, 2010, and 2011 when compared to 2008, or any other year of the Bush administration. The only actual reduction in overall spending came in 2011 when spending declined by $54B relative to 2010, but the mid-term elections undoubtedly had a lot to do with this.

The Times piece is also misleading because by focusing on GDP, their data includes only direct government expenditures on goods, services, and investments, while leaving out two key categories which now make up well over 50% of total government spending: transfer and interest payments. Government transfer payments (e.g. Social Security, Medicare, food stamps) have increased by over 15% from March 2009 to March 2012, and interest payments on government debt have increased by over 30% (neither figure is adjusted for inflation). This spending ultimately shows up in the private sector for the purposes of computing GDP, but would normally be included in any discussion about the growth in government spending.

Even excluding interest and transfer payments (which really shouldn’t be excluded), the Times’ assertion that federal spending has “risen at a slow rate” under Obama is ridiculous. As you can see in the chart I created below, federal spending (included in GDP) has increased in every single quarter compared to March 2009, while state and local spending has dropped like a rock.

While the Times disclosed that the overall decline was due to spending reductions at the state and local level, I doubt many Americans would view a 5-10% increase in federal spending as a “slow rate” of growth, especially with their own incomes stagnating. And if the President had his way the past couple of years, these totals would be even higher.

But perhaps the most egregious point is from later in the Times piece where they suggest that overall growth, and hence poor President Obama, has suffered due to a lack of “acceleration” of government spending. Where exactly do they think the government gets the money that it spends? A dollar taxed is a dollar not spent in the private sector. After racking up an additional $5 trillion in debt since January 2009, is the Times suggesting that we should have borrowed even more?