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Does Alan Krueger’s defense of the Obama Admin’s economic policies add up? You be the judge

Last week, I debated Alan Krueger, President Obama’s former Chairman of the Council of Economic Advisors on Bloomberg TV’s In The Loop with Betty Liu. I made the argument that the administration pumped trillions of dollars of fiscal stimulus into the economy over the last six years, over-predicted the impact stimulus would have on growth, and, as a result, did little else to fix the structural problems slowing the recovery. Because of this, we have suffered five years of mediocre growth from a permanently lower base. Krueger claimed the private sector recovered normally despite relatively low government spending.

Off camera, I showed that nominally over the last six years (2007 to 2013) federal spending, including transfer payments, grew 4 percent per year on average, GDP grew 2.5 percent per year, and tax receipts grew 1.3 percent per year. That pumped $5 trillion of fiscal stimulus into the economy beyond a continuation of the 2007 deficit—more than 5 percent of GDP on average over the last six years.

I also argued that real spending grew 2.5 percent per year (2.2 percent of federal spending plus state and local outlays), which is on par with expected long-term economic growth. So there was little, if any, reduction against trajectory either.

Alan countered with three graphs (from the White House Blog) that compared government purchases to prior recoveries.

7.8 image

But purchases exclude large increases in transfer payments and tax cuts. Krueger never explained why these puzzling and hard-to-justify exclusions should be omitted. One might wonder why, for example, government purchases might stimulate growth, but transferring money to people who spend it would not and, therefore, should logically be omitted.

He also presented the attached graph (also from the blog; to which I added clarifying modifications) as proof the private sector recovered as strongly as it did after prior recessions.

7.8 image_2

Of course, the graph shows the recovery was much slower than the last eight recoveries (the red line) albeit, on par with the slow growth leading up to the financial crisis. When you align the growth trajectories leading up to the recession, however—a more reasonable way to compare the periods—you can see that unlike other recoveries, which rebound back to pre-recession trend lines, this recovery has experienced little more than mediocre growth off a permanently lower base.

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