Sunday, November 21, 2010

Krugman, The 1990s & Government Spending

Paul Krugman again lauds the 1990s as a good example of Democratic policies creating success.

Yet apart from the increase in the top marginal income tax rate, policies weren't especially statist. Indeed, the Clinton years featured the biggest reduction in government spending relative GDP since the end of World War II, with federal spending relative to GDP dropping from 22.1% in fiscal year 1992 to 18.4% in fiscal year 2000.

This decline was mostly the result of lower military spending after the end of the Cold War (and before the beginning of the "War on terror") and lower interest payments due to the surpluses, but even excluding military and interest spending, federal spending fell from 14.1% of GDP to 13.1%.

Also, while the taxation of regular income rose for top earners, the capital gains tax was actually reduced. The 1990s was above all incidentally a decade of fiscal austerity, with a deficit of 4.7% of GDP turning into a surplus of 2.4% of GDP-hardlu consistent with Krugman's current "deficits are good"-theory.

The boom in the 1990s was of course partly the result of the unsound tech stock-bubble, but to the extent it was sound, it was because it feayured the biggest reduction in the burden of federal spending since the end of World War II. By contrast, growth has been weak after first Bush Jr. and then Obama started to dramatically increase the burden of federal spending.