Reagan, Keynes, government spending, jobs. Redux.

The blogosphere has batted around a good graph recently (from Antonio Fatas to Mark Thoma to Paul Krugman) showing the weakness of direct government spending (i.e., not including transfers) in the current recovery.

This is worth repeating, and not just because I said it a while back, but because the economic implications are huge. If government spending after the 2007 business cycle peak had seen the 19 percent cumulative growth that characterized the 16 quarters after the 1981 recession, this would have led to government spending that was higher by 3.2 percent of overall GDP by the end of 2011. Assume a reasonable multiplier of around 1.25 for government purchases (it’s probably higher than that) and you get a 4.1 percent boost to GDP. This translates into over 4 million jobs, or, more than a third of the total “jobs gap” that remains today after the Great Recession.

There are plenty of lessons to be learned from the rapid recovery after the early 1980s recession (among them – start with short-term interest rates at over 15 percent, so there’s lots of room to cut, rather than starting from right around zero), but one that is too often missed is that big government spending contributed a lot. That’s right, Reagan was a big Keynesian after all.