A followup, for the purposes of a project I’m working on, on this post about falling government spending recently. Here are two figures, both in natural logs: overall real government spending per capita, and state and local real government spending per capita, this time in levels rather than changes.

Overall government:

State and local:

One comparison I find instructive is between Obama and Reagan at this point in their presidencies, in each case compared with four years previous — which in each case roughly corresponds to the beginning of each era’s economic crisis (the double-dip recession that began in early 1980, the financial crisis that began in 2007 but really got serious in early 2008). Here’s what it looks like:

Much more government spending under Reagan. Some of it was Reagan’s weaponized Keynesianism, some of it state and local — sustained in part by revenue-sharing that no longer exists, but also by a much greater willingness at the time to raise taxes on a temporary basis.

Just putting it there for the record.

I’m hearing from various sources that my rather mild-mannered post on Estonia has generated a vitriolic response from the nation’s president. I’m not going to try to track the thing down.

Let me instead ask the following. Since some people insist that Estonia’s partial — but only partial — recovery from a severe economic crisis demonstrates the wonders of austerity, would they also agree that the evidence below demonstrates the incredible success of FDR’s New Deal policies of promoting unions, raising wages, and increasing government employment?

I’m in Austin for this:

“During a recent panel on the numerous failures of American journalism, I proposed that almost all stories about government should begin: ‘Look out! They’re about to smack you around again!’” – Molly Ivins

In that spirit, The MOLLY National Journalism Prize is an annual celebration of fearless investigative reporting and has become a must-attend event in Austin. This year is no exception with Nobel-Prize winner Paul Krugman as keynote speaker. The event will take place on Thursday, June 7, 2012 at the Four Seasons Hotel in Austin, Texas.

Long breakfast with local friends, hence lack of blogging.

I’ve been hearing various attempts to explain the ECB’s utterly bizarre refusal to cut interest rates despite soaring unemployment, sliding inflation, and on top of all that the special problems of a monetary union that probably can’t survive unless overall demand is strong. The most popular story seems to be that the ECB wants to “hold politicians’ feet to the fire”, letting them know that they won’t get relief unless they do what’s necessary (whatever that is).

This really doesn’t make any sense. If we’re talking about enforcing austerity and wage cuts in the periphery, how much more incentive do these economies need? If we’re talking about broader fiscal union or something, what is it about the imminent collapse of the whole system that the Germans supposedly don’t understand? Is there any conceivable way that cutting the repo rate by 50 basis points will somehow undermine actions that would otherwise happen?

What does make sense, maybe, is a two-part explanation. First, the ECB is unwilling to admit that its past policy, especially its past rate hikes, were a mistake. Second — and this goes deeper — I suspect that we’re seeing the old Schumpeter “work of depressions” mentality, the notion that all the suffering going on somehow serves a necessary purpose and that it would be wrong to mitigate that suffering even slightly.

This doctrine has an undeniable emotional appeal to people who are themselves comfortable. It’s also completely crazy given everything we’ve learned about economics these past 80 years. But these are times of madness, dressed in good suits.

Since Estonia has suddenly become the poster child for austerity defenders — they’re on the euro and they’re booming! — I thought it might be useful to have a picture of what we’re talking about. Here’s real GDP, from Eurostat:

So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?

Every time I hear some smug pundit or politician saying that we can’t spend to create jobs because that would be laying too much of a burden on our children, I get angry — because of reports like this:

For this generation of young people, the future looks bleak. Only one in six is working full time. Three out of five live with their parents or other relatives. A large majority — 73 percent — think they need more education to find a successful career, but only half of those say they will definitely enroll in the next few years.

No, they are not the idle youth of Greece or Spain or Egypt. They are the youth of America, the world’s richest country, who do not have college degrees and aren’t getting them anytime soon.

Everything we know says that this generation will never — never — recover from the terrible job market into which it has graduated. But hey, we can’t do anything about that; we must have austerity, for the sake of the next generation.

Martin Wolf is shrill (and rightly so):

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.

Right on cue, the European Central Bank has declined to cut interest rates, or announce any other policies that might help. Because what possible reason might there be to take action?

Oh, and survey data suggest that the euro area economy is really plunging now, plus Spain is on the brink. What about inflation? It’s falling fast — which is a bad thing under the circumstances.

I don’t think there’s any conceivable economic logic for the ECB’s decision. It can only, I think, be understood as some kind of refusal to admit, even implicitly, that past decisions were wrong.

Like Martin Wolf, I’m starting to see how the 1930s happened.

The best lack all conviction, while the worst are filled with a passionate intensity. Obviously I’m not happy with the result; not just out of political sympathies, but because all the recent political trends have been rewarding the side that caused the very crisis from which it is now benefiting, not to mention politicians who have been wrong about everything since the crisis hit.

I’m even more unhappy with how it happened, with national Democrats basically sitting on their hands while conservatives poured resources into the race.

This combination of Democratic diffidence and confusion, on one side, with right-wing ferocity on the other, is the main subject of a long piece Robin and I just wrote for the NYRB; deadline pressure on that piece is why I blogged so little yesterday. So much more about it all in the near future.

Still, my rule for myself is, never give up. All seemed lost politically in 2004; it wasn’t. Then a lot of people, including, I’m sorry to say, Obama, slacked off after 2008, believing that the other side would have to compromise.

It’s never over, for good or bad. Keep on plugging.

An embedded version of Newsnight:

And a special. I gave a book talk and signing at Barnes and Noble in Union Square last night, and B&N graciously had a book party just after. Among the guests was a guy who gave a special performance — my photos came out too dark, but I’ll post better ones if someone provides them. Meanwhile, here’s that guy singing the same song in better light:

A really, really nice guy, by the way; I was quite starstruck.

Since we keep hearing about how the problems in Europe demonstrate the failure of Big Government, I thought it might be interesting to post, for the record, the top 30 countries in the 2008 Heritage Index of Economic Freedom:

Ireland was the highest-ranked Western nation. Iceland looked pretty good too. Sweden, which has done very well and suddenly become a conservative darling, not so well.

It’s by no means a perfect negative correlation. But I suspect that you would have done rather well financially by shorting the Western economies the right exalted most.

His speech is getting a lot of attention, and rightly so. It’s not so different from what many of us have been saying, but given the source — and, to be fair, the historical breadth of his perspective — I can see why it’s getting people to pay attention in a way they hadn’t before.

His point about the euro bubble is particularly well taken. I’d put it this way: it so happened that the euro came into existence at a time when the German economy was in the doldrums. Then the euro made investors believe that southern Europe was safe, causing a huge fall in interest rates there:

This in turn led to vast inflows of capital; the flip side of these inflows was large trade deficits, and large counterpart German surpluses, which was just what the Germans needed. Everyone was happy! For a few years.

And then the bubble burst, leading to the crisis today.

Needless to say, this story bears little resemblance to the morality play of profligacy and its consequences that has dominated European discussion until just about now. If there were any villains, they were the architects of the euro, who waved away warnings about the system’s flaws. But never mind the villains: the question is what to do now. And time is running out fast.

And other insights from an interview with the Guardian. Meanwhile, Salon says I’m a European celebrity (the piece includes a good summary of the showdown on Newsnight). And This Week has brief after-game analyses from the participants, including me.

A quick note on what has happened to the level of government spending since the economic crisis began.

Of course it has risen — we have a growing economy (usually) and a growing population, and you expect spending to rise even if the role of government remains unchanged. The question is how it has changed relative to some unchanged-role-of-government baseline.

The chart below makes a first stab at such a calculation, but requires some further comment; when all is said and done, the role of government hasn’t actually grown.

So, both lines below show total (federal, state, local) government spending as a share of potential GDP, the CBO’s estimate of what the economy would be producing at sustainable full employment:

The first line shows the total; the second takes out unemployment benefits, which are an obvious example of spending that rises temporarily in a slump, but doesn’t represent a permanent change.

What this second line suggests is that we’re left with a rise of about 1 percentage point of GDP. But even that is basically not a change in policy, for two reasons.

First is that there are other programs that have ramped up because of the depressed economy, such as Medicaid and food stamps, not to mention more people going on disability and taking early retirement.

Second is that demography and rising health care costs continue to do their thing.

Overall, then, government’s role has not increased. The whole Obama/socialist thing never happened.

And here’s the thing: government’s role should have increased, at least for now. We still have a private sector in the throes of deleveraging, which means that this is a time for the government — which can borrow at negative real interest rates! — to be spending more. Instead, the entire brief increase in government’s role during 2009-2010 has now been unwound, with more cuts to come.

Apparently I said something harsh but true this morning.

Also, my forecast wasn’t completely wrong: George Will did bring up Trotsky!