Rebutting Krugman & Invictus: The Rest of the Story

Rebutting Paul Krugman: The Rest of the Story
By Chris Turner
May 3, 2012


Residing in Kansas and working as a military pilot with 26 years of service, Chris Turner manages a private Hedge LLC, contributes guest articles to Doug Short at, and manages a database that determines S&P 500 Index Equivalent Fair Value.

Think Tank presents alternative discussions on topical issues of markets, economics and financial policy. The views presented here represent those of the author.




I recently read an interesting article over at Barry Ritholtz’s blog (one of my daily mandatory reads after Advisor Perspectives) triggered by one of Paul Krugman’s recent commentaries, The Secret of Our Non-success.

Krugman showed the following chart from the Federal Reserve Economic Data (FRED):


Krugman analyzes the data this way:

Obama, far from presiding over a huge expansion of government the way the right claims, has in fact presided over unprecedented austerity, largely driven by cuts at the state and local level. And it’s therefore an amazing triumph of misinformation the way that lackluster economic performance has been interpreted as a failure of government spending.

Before dissecting Krugman’s analysis, let me point out that readers who closely read Krugman’s article would correctly point out the chart shown above (taken from the FRED site directly) is a bit different from what Krugman posted in his article (shown below).



Since data-miners and hobby chartists like me relish the opportunity to present data to readers so they can make their own decisions, I zipped over to FRED to recreate Krugman’s chart. To make an exact replica of Krugman’s chart, one would have to make purposeful changes to the original data shown. The date range must be changed to an exact 2001 September to 2011 September and the scale had to be changed from billions of dollars to the percent change from year ago. Everyone knows that Krugman has an agenda – that’s OK (author’s note: both political parties have agendas). But let’s highlight Krugman’s agenda by telling … The Rest of the Story!

When originally viewing the chart from Ritholtz site, I just simply couldn’t decipher how spending decreased in an era of unprecedented deficits. The chart featured by Krugman clearly showed a decrease. Ironically, Krugman did say that most of the change occurred from local and state government decreases. To analyze the data, the first step is to obtain the source data without “real” or CPI adjustment. Just plain numbers.

First up in our sequence of “self-actualizing” charts — what if we understand where this data resides originally and make our own conclusions? Per FRED, the source data are BEA and NIPA tables. Government Consumption Expenditures consist of the following (from NIPA table footnotes):

  1. Government consumption expenditures are services (such as education and national defense) produced by government that are valued at their cost of production. Excludes government sales to other sectors and government own-account investment (construction and software).
  2. Gross government investment consists of general government and government enterprise expenditures for fixed assets; inventory investment is included in government consumption expenditures.

The chart below shows the makeup of GCE and growth since 1929 (non-logarithmic).




To zero in on the same time period for Krugman’s chart, we have the following showing the Total Government Consumption Expenditure:



By separating the individual components, we have the following that shows the “cuts at the state and local level.”



Krugman’s analysis becomes more clear in showing that the “rate of change” has slowed since 2009. By simply applying a CPI adjustment, the rate of change would become negative and explains the first chart in decline. However, the chart above clearly shows an “unprecedented level of spending” that is rising, not declining. The cuts in local and state governments have only stagnated since 2008 (and that is Krugman’s definition of “Austerity”).

While studing the data on which Krugman based his opinions, some additional thoughts occurred to me, generally along the lines as Ritholtz’s effort to look for more context. I thought an instructive set of charts might show how each presidential term faired when using deficits as a comparison tool (not simply the last 10 years or so). Let’s be fair to both sides of the aisle and provide the set without comments:



After studying these charts, readers, I hope, will have a better appreciation of the fact that both political parties contributed to our massive national debt through continuous deficit spending. We voters share responsiblity with those we voted into office. Additionally, I would hope this article provides a little more clarity and context to Krugman’s assertions about “unprecedented austerity.”

Now you know what I mean by … The Rest of The Story!

(c) Chris Turner

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