Has America's government shrunk?

There are a lot of people that has pointed out and criticized that government under Obama has increased in size. Now some supporters of Obama try to claim that it is a myth. The latest example of this is Menzie Chinn who in his latest post has a chart that appears to show that government has recently started to shrink in size.

But the charge against Obama wasn't that he and his fellow Democrats in Congress necessarily have expanded government in general, as they can't decide over budgets in state and local governments, but that they have expanded the federal government.

And that is certainly something that they have done.

If you look at government purchases for example, you can see that it was unchanged between the fourth quarter of 2008 and the second quarter of 2010 at 20.5%. However, this unchanged number masked that federal purchases rose from 7.9% to 8.3% of GDP, while state and local governments has reduced their purchases from 12.6% to 12.3% of GDP.

Moreover, transfer payments such as unemployment benefits have also increased at the federal level. As a result, "core" (excluding TARP and support for Fannie & Freddie) federal spending rose 7.6% from a year earlier during the first 11 months of fiscal year 2010. Nominal GDP by contrast increased less than 4% in the year to the second quarter of 2010, and even less during Q1 2010 and Q4 2009.

During the same period in fiscal year 2009, the increase in "core" spending was even greater, 12.6% even as nominal GDP fell.

So, while it is true that many state and local governments are cutting back as they have no central bank to support their borrowing, federal spending is at an all-time high in absolute numbers and relative to GDP the highest since World War II, and by any measure a lot higher than when Obama became president.

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