Monday, December 14, 2009

GDP Growth vs. Government Spending

GDP growth is chaotic.

Therefore to see if there's any kind of trend you need to average it out over longer periods of time. I did this on a 10 and 20 year trailing average, where I simply took the past 10 and 20 years worth of economic growth and averaged it out into a "rolling average."

I like to call this figure, especially the 20 year rolling average RGDP growth, "Generational RGDP Growth" because the 20 years spans a generation, economic booms and busts included, and shows their overall economic productive capacity over those years.

Now what I'm going to do is very simple, because that's what economics is. It's very simple (plus i don't want to confuse any leftists and socialists).

I took Generational RGDP growth and compared it to government spending (state and federal) as a percent of GDP. And wonders upon wonder, guess what? The relationship is inverted.

What this means is that as government spending has gone up, economic growth has gone down.

This simple chart has many economic ramifications, most of my readers already intuitively understand. But, for those of you who vote for your presidents based on their pecs, let me spell it out for you.

1. This is why the stimulus and by large Keynesian economics won't work. Understand the government DOES NOT PRODUCE ANYTHING. It does NOT PRODUCE WEALTH. It doesn't make X-Boxes. It doesn't make food. It merely TRANSFERS WEALTH FROM ONE GROUP OF PEOPLE TO ANOTHER. Now there are some genuine services that the government provides that helps society and does show up on GDP. BUT STIMULUS MONEY TO ART INSTITUTES, ACADEMIA AND WHATEVER OTHER FLOWERS AND PUPPIES POPPYCOCK HAVE YOU DOES NOT PRODUCE ANYTHING. The reason why is that even if an Obama-fanatic sculptor produces a worthless and sinfully ugly government piece of art for the local building, the money used to pay him came from somebody else, ergo a net production increase of ZERO.

2. The government is less efficient than the private sector.

Do you want growth?

Do you want jobs?

Do you want food on the table?

Then you better let the people have the majority of the money and not put it into the government. History has shown you this via this chart. Your eyes are not deceiving you. Look at the chart again. And no, I'm not Michael Mann or Phil Jones. The data has not been tainted and comes directly from the FRED Database at the St. Louis Fed. You can recreate this very same chart on your own, whereas I cannot recreate the hockey stick chart, so if you believe in global warming, you better damn well believe this chart.

3. No, majoring in sociology or planning on becoming a government worker will not help this situation.

See, I know what a lot of you are thinking. "I want to help people because it sounds like an easier job than engineering...errr....I mean, because I am noble and moral. Ergo I will go and work for the government as a social worker, a professor or run for public office."

The problem is none of these jobs PRODUCE ANYTHING THE POPULATION NEEDS NOR REALLY WANTS. And as a higher and higher percentage of the population goes and majors in worthless subjects in the hopes of a cushy job that doesn't produce anything, but merely transfers wealth, you can expect GDP to drop further.

4. If growth keeps dropping, then where precisely are you people going to come up with the money to pay for...

social security
nationalized health care
the Obama-corps
the stimulus
government financed day care

not to mention the extra money we'll need to pay back the national debt?

You see, the governments combined (state, local and federal) already spend about 45% of GDP, leaving only 55% left to be taxed (difference in revenue vs. spending duly noted), how much more do you think the economy will take before people just stop working altogether?

Is everybody supposed to work in government?

Who, might I ask, is going to produce the I-Pod you want?

Who, might I ask, is going to produce the Wii you want?

Who, might I ask, is going to produce the computer networking system so you can e-mail your friends, let alone put the food on your table?

Or are we supposed to be like the Pelosi's, the Bush's and the Gore's. Generation after generation of losers who never worked a real job in the private sector?

Of course, I know all of my regular readers understand this. My regular readers get this simple logic. Not to mention before they form opinions, they get the facts first. Not form opinions and then find facts.

But good lord, to the 60% of the population who voted for Obama, when does reality sink in? What does it take to get you people to grow the hell up, drop it with your naive, college-age thinking and idealism, and intellectually and honestly admit you have no FREAKING clue how the real world and economy works. LET ALONE take the time to study the federal effing budget and do some simple mathematical calculations much like you would your own personal finances to see if any of this socialism BS is even affordable, let alone feasible. Let alone (and this group really confuses me) for those of you with children, start to stop and really think about what you're doing to your childrens' financial future? When do you wake up?

Alas, what can I do aside from make a record of it here on this blog so that a thousand years from now historians will look back and say, "Wow, look how insane the population was. There was this one guy over here that saw it coming, but the rest of them were all doped up on REality TV, Obama's pecks, bread and circuses, they couldn't even understand how everybody working as a social worker and nobody farming the fields would result in a collapse of society!"

I'll be long dead by that time, and I'm supremely confident I'll be proven right, but in the meantime, good lord, why would anybody invest in America?


Milton Hayek said...

Shouldn't you do a 20-year and 10-year rolling average of government spending rather than comparing rolling averages of GDP to raw annual spending statistics?

A few other thoughts:
1) If government spending is largely deficit spending, then it does its real damage when it is confiscated as taxes later on, so maybe we should compare raw annual GDP to rolling averages of past government spending?
2) Due to the above, I think that deficit spending during boom times can create the impression that spending is harmless or that it even contributes to economic growth, so I think it's really important to keep hammering the point that government spending (beyond basic services and some public goods) doesn't produce anything of value--and we need to make it clear that the reason we know it doesn't produce anything of value is because what it produces would not sell on the market for what it costs, prices tell us that what they produce isn't in demand enough to make it worth supplying. Some people think that makework programs are productive because they miss this point.
3) I'd like to see a finer breakdown by types of government spending.

Anonymous said...

great post as usual
question: I've been looking for some kind of justification for the need for GDP growth and have come up with squat. Is it to fuel the notorious "tax and spend" scheme ?
I mean economic fluctuations are commonplace even without any governement intervention so why does anyone get so hung up on slower growth ? It is just an intermittent step towards higher growth, right ? up, down, up, down, etc.
Perhaps I am talking nonsense here but I am genuinely interested in an explanation or at least a pointer to some sincere and unbiased source material.

Thanks a lot

Anonymous said...

So why is socialism so popular in Europe and North America? The Federal government has never stopped growing. Reagan just slowed down the rate of government growth, he never actually decreased the size of the federal government.
Does anyone really believe American/European farmers will be cut off from their billion dollar subsidies?
Even professional sports, are just another example of corporate welfare.
Why do so many Americans support socialistic policies? Free market policies in the US, have produced such incredible wealth.
Does anyone have an answer to this question? Please help, because I just do not understand the support for more government intervention into the economy.

The Proud Profiteer said...


Hear, Hear! I get sick and tired of the Joe Bidens of the world and their "jobs, jobs, jobs". Jobs mean nothing to us if they aren't producing something of value.

I also throw up a little every time I hear that the US needs to be the leader of the "Green Revolution", and they have the nerve to compare it to the productivity increasing Tech/Internet revolution. Can someone tell me how the hell expensive green technology increases productivity?

This is the question I asked in my blog today, The Green Revolution and It's False Boom

Keep it up Cappy!

CBMTTek said...

Going to use those charts on the liberals I know that think the spendulus is actually doing something good.

Hold on...

{30 seconds elapses}

Nope, they ignored the evidence. They still believe that Obama can spend our way out of this recession. Somehow, Bush is still manipulating the economy from beyond the grave of political relevance.

Nick Rowe said...

Edward Leamer looks at GDP with a logarithmic scale and shows that GDP grows at a average rate of 3%, plus or minus 3% - a fairly stable rate.

I'm not at a computer to reproduce it, but read his paper, Housing IS the Business Cycle, which you can find online. He shows that graph everywhere. I've seen it three times at three UCLA Anderson Forecasts.

In that paper he makes the case that residential investment has been the most influential factor in business cycles. It leads us into and out of recessions. He discusses the few exceptions: the post-Korean War recession, the Internet Comeuppance, and a couple of false positives.

Government spending a dollar shouldn't affect GDP more or less than private consumption EXCEPT government expenditures distort the economy and crowd out private investment and consumption. The taxes to pay for government consumption are also distortionary and, thus, bear a deadweight loss.

If we KNEW when a recession would be over, government expenditures would be a nice bridge loan - smoothing future (or ideally past) consumption to the present. But with these distortions, the precriptive policy can prolong a recession. Cutting taxes at the cost of higher deficits is probably the best way to do it. Loose monetary policy, as we've seen, can create asset bubbles in a wounded economy.

There are FEW economic problems a tax cut can't cure. But like an airplane, you have to gain some altitude to get that glide. So in good years taxes need to be raised a bit. And I do mean a BIT. And the tax rate should be relatively flat with a few deductions and exemptions for things like retirement, education, and healthcare savings.

Governments need to use the extra revenue to build a lockbox for worse times. The full faith and credit system is a failure. Look at California which squandered all of its unemployment insurance money from the boom.

Elizabeth said...

I really like your tone in this post.

here's something to keep it that way. this is college?!

Pete said...

With the current generation, Government (and Governmental spending by-product), I figured that I would ditch this private sector rat race and get me a nice shiny government job. There's little impetus not to, especially with the increase in jobs in this recovery mainly being in the government sector.

After 15 years in the private sector, getting crapped on by Corporate execs and "Fat Cats" I'm planning on "Sticking it to those who don't pay their fair share" and get me a nice govt job.

I went to, click the search jobs tab, advanced search, scroll down to salary, put in 100000 to 500000 range, click search... Over 5000!!!! Woot! Refine search for internet, 677. Who ever said the Govt doesn't pay market rates :)

Change the search to Economist, city of Minneapolis, MN, 100 mile radius... Nice! Army Core Of Engineers Economist, in St. Paul....

Jeffrey Ellis said...

I have also hypothesized (here) that the rate of GDP growth is directly proportional to the degree to which a country embraces free markets -- and hence pretty much consistent with what you are saying about government spending.

Also see this info on GDP per capita of different countries (includes a cool plot of GDP per capita versus economic freedom index) and this info on the economic impact of the size of government -- all of which corroborates what you are saying.

Ryan Fuller said...

All other things equal, government spending increasing by a dollar increases GDP by a dollar. Because government spending is factored into GDP, it makes it kind of dumb to equate productivity with GDP.

Increasing government spending doesn't make for economic recovery unless you're measuring economic recovery by GDP, which a lot of people do because it's easy.

Replacing private spending with government spending doesn't seem like much of a step forward to me.

Stupid GDP. :(

Milton Hayek said...

Anonymous, that's because a free market economy is in everybody's general interest but in nobody's special interest, whereas government interventions into the economy are always in somebody's special interest.

Payner44 said...

Hey Anonymous, how the hell do come up with pro sports being corporate welfare? Makes me think you always got picked last, if at all, when teams where being created.

Ryan Fuller said...

Payner, I think it's because so many professional sports teams get huge subsidies in the form of city-funded stadiums.

There's no need to insult him just because you're oblivious to what he's talking about.

MPR Project said...

America's annual trade deficit is $500 Billion. The Debt to GDP ratio is 400%. 10% of Government Spending goes to serve Interest on Debt. Everything shows minus, minus, minus. The only plus is the $1 Trillion Stimulus package which is nothing but a postponement of another minus. So one fine day 20% of Americans are going to find themselves working overseas as immigrant workers to send money home. I believe that will be normal by 2030.

John said...

Great job, Captain! Now if we could just get a few people to read this - like those in congress and the administration.

Think they'd be willing to be confused by facts?