Austerity? Now Krugman et al Tell Us

New York Times columnist Paul Krugman addressed the 2012 Netroots Nation convention earlier this month by calling for more government spending to end the country's and the world's economic crisis. Speaking the day after President Obama said the private sector was doing fine but government layoffs were holding back the recovery, Krugman quoted John Maynard's Keynes' dictum, "The boom, not the slump, is the time for austerity."

The problem, however, is that few of our elected officials and policy makers have lived by that maxim during the good times. Whatever you may think of Keynes' ideas of counter-cyclic government spending, state and local leaders are hardly promoters of restraint when the private sector is booming. Scratch someone today who uses Keynes' theories to justify more stimulus to the states and what you are likely to find is someone who is more or less always arguing for government to spend that next dollar.

It's become commonplace, for instance, for everyone from the President down to local school board members to deplore layoffs of teachers and urge that the federal government help invest more in local public education. But we've hardly been austere with public education funding in this country.

No major industrialized country has made the investment in K-through-12 education that America has. We've increased per pupil spending since the early 1960s from about $2,400 per student (in today's dollars) to about $11,000 per pupil today, more than a four-fold increase in real spending. In doing so, we now outspend other major industrialized countries like Germany, Japan, France and the U.K. on a per pupil basis by 20 percent to 30 percent, according to the Organization for Economic Co-operation and Development

Much of that money has gone into teachers, as our bulging public school payrolls attest. In 1960 we employed 1.4 million public school teachers to teach 36 million students. Today we employ 3.2 million teachers to teach 49 million students, giving us a ratio of about 15.5 students to every teacher, down from nearly 26 students per teacher 50 years ago. Hiring of non-instructional personnel exploded too, from 1 million non-teaching workers in our schools in the early 1960s to 4.7 million today. Enrollment in that time has increased by just 37 percent.

Other government hiring has also boomed. According to the Justice Department's bi-annual census of police personnel, which dates back to 1992, the number of state and local public safety officers in America grew by 29 percent through 2008, a period of time in which the American population increased by 19 percent. By the time we entered the fiscal slowdown, our ratio of police to population was as high as it's been since the census' public safety count began.

On top of these gains in personnel have come huge increases in compensation, especially in benefits, so that the average cost of employing all these additional workers has also soared. From 1999 through 2009 (the latest year data are available), spending on employee benefits in our public schools increased by nearly 120 percent to $110 billion. That alone has accounted for an additional $1,100 in spending per pupil.

As these numbers suggest, Keynes's biggest problem in promoting his theory was a political problem, namely persuading elected officials to show some restraint during times of expansion in order to prepare for the next downturn. Good luck with that.

Back in mid-2007, to take one example, governors and newspaper editorial boards were urging President Bush to allow the states to expand their subsidized health care programs to families earning as much as 350 percent of the nation's poverty level. Since the federal government shares this spending with the states, governors were essentially urging the President to allow them to spend more money on subsidized health care. The President vetoed the spending, however, because of its impact on the federal budget.

Barely a year later, governors came back to Washington to urge the federal government to give them more money, not for expanding programs, but merely to keep funding consistent amidst a downturn in revenues following the collapse of the housing bubble. That collapse, by the way, had begun back in 2007 even as states urged Washington to let them spend more.

The states were suddenly in over their fiscal heads in part because they'd expanded general fund spending by an annual average of 6.4 percent from 2003 through 2008, which was hardly Keynesian of them. Had President Bush allowed the expansion of Medicaid, states' fiscal problems would be even deeper now.

Ed Koch once excoriated me for suggesting that New York City should be using the Wall Street boom of the 1980s to prepare for the next downturn by salting away some tax revenues. When times are good, he said, the pressure is too great on politicians to spend the money they have. Or maybe it's just too tempting for elected leaders and their political advisers to sit on cash when there are votes to be bought.

Maybe we could help solve the problem if we required states and localities to pay back counter-cyclic stimulus grants from the federal government once growth resumed again. But unless we show some restraint when times are good and budgets are flush, this one-way Keynesianism will drive us broke.