She’s so glad, she’s telling all the world, that her baby buys her things you know, he buys her diamond rings you know, she said so. She’s in love with me and I feel fine. So goes the Beatles classic 1964 song, I Feel Fine.
Last week, in a hastily planned press conference, President Obama sought to explain the current economic situation in the country. I would argue that he should have at least spoken with Krugman, Krueger, or Meyer or any of the other Keynesians that supposedly advise him, because not only did the President sound totally confused about the state of the US Economy, he blamed the problems on a lack of spending and job creation by state and local government, and on the situation in Greece. Even from someone who expects very little in the way of economic understanding from presidents (both Democratic and Republican), President Obama’s foray into the minutia of the economy left a lot to be desired.
Not only was the President’s message confused, but the factors that he blamed for the weak economy were nonsensical at best. Let’s take them in order. As we discussed in the last blog post (Grease), Greece is a tiny economy that is really only linked to international markets as a tourist destination and debtor. In fact, the largest sector of the country’s GDP is government (over 40%) followed by tourism at about 15%. Shipping accounts for about 4.5% of the economy and international aid contributes over 3%. In other words, what happens in Greece really does not impact what happens in most of the rest of the world. To blame the lack of job growth in the United States on a country that accounts for at most $680 million in two-way trade (or about 2 one thousands of one percent of total trade) is mistaken at best. Even if Greece were to default on its debt the impact on the Eurozone would be tiny, and anyway is already priced into the depreciation of the Euro over the last few months. At worst the Greek problem has slightly strengthened the dollar against the Euro but this has both positive and negative effects depending on which sector of the economy one looks at.
So blaming Greece for America’s economic problems is at best a mistaken comment and at worst a canard or ruse to take attention off of the country’s true underlying problems. But what are these problems? According to the President the private sector is doing just fine. Ok, he probably misspoke but the further explanations from the Administration continued to argue that the real problem in the economy is in the public sector, as state and local governments have been laying off people for some time reflecting the need for these entities to balance their budgets, and the displeasure for tax increases on the part of most voters.
But does the Administration’s argument hold water? When one looks at the actual data probably not. In fact, state and local government spending have been increasing throughout the recession. While full data through FY 2012 is not available yet, estimates from USGovernmentSpending.com suggest that state and local government spending increased by $945 billion or nearly 18 percent between 2008 and 2012 – hardly a collapse. In addition, data from the US Department of Labor show that while state and local government employment did fall by 2.5 percent from January of 2008 to January of this year (about 486,000 jobs), these same governments have added 516 net jobs (2.17 percent) since the beginning of the year alone. In other words, state and local governments have not cut spending because of the recession, nor when the most recent data are taken into account, have they cut jobs. Again, the President’s claims just don’t stand up to the data.
In fact, the two economic “problems” cited by the President go a long way in discrediting his own Keynesian advisors. Not only have massive government employment schemes and deficits totally destroyed the Greek economy, but a growing government sector has not done much to help the American economy. At best, buying government workers things and diamond rings transfers resources from the private sector to an underproductive government sector which makes government employees at least, feel fine.