President Obama’s so-called stimulus is a dark cloud for the American economy. It will increase the burden of government spending by nearly $800 billion over a ten-year time period. At least that is what we are told. But if you include interest on all the additional debt, the cost will rise to more than $1 trillion. And if you realistically assume that the supposedly temporary spending increases will become permanent, then the cost climbs to around $3 trillion.
To make matters even worse, all this new spending will be added to the “baseline” growth of government. According to the Congressional Budget Office, the pre-stimulus federal budget was projected to climb from $3.54 trillion this year to $4.74 trillion ten years from now. Thanks to all the new spending just enacted, a more realistic guess is that spending will top the $5 trillion mark by 2019.
Obama promised change in Washington, but making government bigger is hardly a new path since spending other people’s money is the favorite pastime of the inside-the-beltway crowd. The Bush administration, for instance, expanded the federal government from $1.86 trillion in 2001 to $3.54 trillion in 2009 (and the majority of the new spending was for non-defense purposes). Now Obama has grabbed the baton and is racing in the same direction.
This ongoing expansion of government has important implications for short-term and long-term economic performance. Much of the recent debate about fiscal policy has focused on the “Keynesian” assertion that more spending somehow increases economic growth in the short run. This is an important discussion, but it is perhaps even more vital to focus on the long-run economic effect of bigger government (interested parties can click here for an explanation of why Keynesianism is misguided and here for a critique of Obama’s so-called stimulus).
Before jumping into the long-run discussion, it is worth noting that it is quite possible to be a Keynesian who believes in small government. Indeed, that seems to have been the view of John Maynard Keynes. Writing to another British economist in the 1940s, Keynes identified “25 percent [of GDP] as the maximum tolerable proportion of taxation.” Small-government Keynesians are on the endangered species list in Washington, however, if not already extinct. The politicians who voted for the so-called stimulus are the same ones who routinely vote for permanently larger government.