True Economics Applied in the Real World
Since my last update included some projections and my own estimates, I am herewith updating data on US government growth with completely and 100% finalized actual data:
All this data is of course as always available at the US Government Printing office.
Update: I have now corrected this chart by excluding the budget addendum for Federal grants.
Anybody who seriously supports even $1 more government spending in the United States may want to ponder the following simple facts:
In case anyone is interested and hasn’t yet looked at relative numbers:
The size of government in relation to private sector has grown to 40% in 2009, according to www.gpoaccess.gov estimates.
Below please find a historical chart that shows the growth of the size of government in the US from 1930 on through now. I estimated the numbers of state/municipal expenses prior to 1948, based on the general observable trend back then, applied the GPO’s estimate for 2009 federal expenses, and assumed that state/municipal expenses in 2009 remained at the same level as 2008:
Do you see where this is going? Do you understand what we mean when we say “things are out of control”? This train wreck is headed for a cliff and the public is cheering on its acceleration. The system will have to play itself out, and in the very process it is going to destroy itself.
All we can do is remain calm and collected, don’t stress over this madness. Educate yourself and your friends and family about the truth about Freedom, Peace and Happiness. Act upon it. Understand the concepts of Ethics, Human Nature, Government, and Liberty. Act upon it.
Once people understand the truth, society will be transformed into a viable, peaceful, and prosperous system.
Brad Delong seems to be coming to the realization that we are in a depression:
For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it–that we know what to do and how to do it and will do it if things turn south.
I don’t think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy–a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more–are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d—– thing about it.
We could cushion the impact of another big downward shock by a lot more deficit spending–unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government’s money is as good as anybody else’s. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030. The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.
… unfortunately he also deems it necessary to draw precisely that conclusion which is farthest from the truth. He is yet another sad casualty of the phenomenon I expected to occur sooner or later, as I outlined in The Great Depression 2.0:
Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.
At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.
I would submit that precisely this is the case now. Deficits are larger than ever and are likely to get higher. People are sick and tired of it.
I would like people like Krugman and Delong to answer some simple questions: How much more until you’re happy? Which sum of money borrowed from foreigners and banks, owed by taxpayers, and spent by bureaucrats on goods and services (and your salaries of course) will be our salvation? What’s the magic mark?
The truth is: there is no such number. In fact, every single dollar more is a dollar too many spent by government. There is nothing new to this development. Government spending has been on the rise for at least half a century. The direction couldn’t be more false. The path could hardly be more disastrous. The repetition of past mistakes couldn’t be more appalling. The apathy and ignorance of academia, media and politics couldn’t be more mind boggling, the gulf between illusion and reality more severe.
In A Dark Age of macroeconomics (wonkish) Krugman writes:
Brad DeLong is upset about the stuff coming out of Chicago these days — and understandably so. First Eugene Fama, now John Cochrane, have made the claim that debt-financed government spending necessarily crowds out an equal amount of private spending, even if the economy is depressed — and they claim this not as an empirical result, not as the prediction of some model, but as the ineluctable implication of an accounting identity.
Yes, every child understands that if the government spends money it has to come from somewhere. We shall see how well Krugman does in understanding this simple causality.
There has been a tendency, on the part of other economists, to try to provide cover — to claim that Fama and Cochrane said something more sophisticated than they did. But if you read the original essays, there’s no ambiguity — it’s pure Say’s Law, pure “Treasury view”, in each case. Here’s Fama:
The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.
And here’s Cochrane:
First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”
Yes, there is nothing new, strange, or arcane about these statements. They are simple common sense and don’t require any further elaboration.
Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.
Now here Cochrane errs: The economy does care very much whether money is spent on a consumer good or on a factor of production. The entire structure of production depends on it. How many consumer goods and how many factors of production are needed on the market is indicated to entrepreneurs via interest rates and prices. It is of primordial importance to understand this causality.
There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.
Nobody asserts that savings are automatically converted into investment. Money might just as well be saved up by one individual without any investment on the part of this particular person. If he just saves up the money he effectively steps back from the market and leaves factors of production and/or consumer goods available for use by other entepreneurs and/or consumers. I already pointed this out in Welcome to Krugmanland.
What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship.
Wrong. What is Krugman talking about now? Nobody is interpreting an accounting identity as a behavioral relationship. All that the authors have done is explain behavioral relationships as such. Cochrane may have referred to the fact that this also makes sense accounting wise, but Krugman doesn’t understand this at all.
Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.
It’s like the fact that the capital account and the current account of the balance of payment have to sum to zero: that’s true, but it does not mean that an increase in capital inflows magically translates into a trade deficit, without anything else changing (what John Williamson used to call the doctrine of immaculate transfer). A capital inflow produces a trade deficit by causing the exchange rate to appreciate, the price level to rise, or some other change in the real economy that affects trade flows.
Again wrong. A capital inflow represents an inflow of factors of production. When money is borrowed from abroad and used to purchase factors of production from that same country, imports increase and create a tendency toward a trade deficit without any effect on the exchange rate, especially when the government meddles with this process. More on this in The US Current Account Deficit. Krugman also conveniently mentions “some other change in the real economy” without any further elaboration. The reader himself shall decide if he believes that this kind of cursory writing is even in the slightest acceptable in an economic inquiry.
Similarly, after a change in desired savings or investment something happens to make the accounting identity hold. And if interest rates are fixed, what happens is that GDP changes to make S and I equal.
That’s actually the point of one of the ways multiplier analysis is often presented to freshmen. Here’s the diagram:
A case of mistaken identity
In this picture savings plus taxes equal investment plus government spending, the accounting identity that both Fama and Cochrane think vitiates fiscal policy — but it doesn’t. An increase in G doesn’t reduce I one for one, it increases GDP, which leads to higher S and T.
This is all but laughable. No explanation at all is offered. We established above and at many other occasions that government spending needs to be funded by a restriction of private consumption/investment. Now Krugman “refutes” this by saying in effect: “Government expenses do NOT reduce private investment. Period.” But this doesn’t make his fallacy right. It merely shows that he has no way to argue his case on logical grounds.
Now, you don’t have to accept this model as a picture of how the world works.
OK. Thanks. Then why do you use it to argue your case. Mr. Krugman? The model is wrong. Everything derived from it is just as wrong.
But you do have to accept that it shows the fallacy of arguing that the savings-investment identity proves anything about the effectiveness of fiscal policy.
No. Wrong. We don’t have do accept a wrong thesis. There is no fallacy at all in believing that government spending has to be funded from somewhere. There is no fallacy to reject magic as the solution to our financial crisis. If anyone has to accept that his theory is a sheer fallacy, it would be Krugman himself. The fact that there is no such thing as effectiveness of fiscal policy has been shown long ago in The Trouble With Bureaucracy.
So how is it possible that distinguished professors believe otherwise?
The answer, I think, is that we’re living in a Dark Age of macroeconomics. Remember, what defined the Dark Ages wasn’t the fact that they were primitive — the Bronze Age was primitive, too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed.
And that’s what seems to have happened to macroeconomics in much of the economics profession. The knowledge that S=I doesn’t imply the Treasury view — the general understanding that macroeconomics is more than supply and demand plus the quantity equation — somehow got lost in much of the profession. I’m tempted to go on and say something about being overrun by barbarians in the grip of an obscurantist faith, but I guess I won’t. Oh wait, I guess I just did.
We do in fact live in the Dark Age of Macroeconomics. An age where Keynesian clowns such as Paul Krugman have launched a succcessful assault on logic and reason. An age where people like him are rewarded for their nonsense with Nobel Prices. An age where virtually every common sense causality suddely disappears in the sphere of economics.
Paul Krugman bears partial responsibility for this unfortunate development. It will take decades to repair the intellectual damage caused by people like him, not speaking of the damages done to people’s lives as a result of irresponsible policies of credit expansion and big government.
(Check here for much better and updated charts regarding government growth.)
If there has been one consistent trend in economic developments in the United States over the past 60 years it would be the growth of the size of federal, state, and local governments in relation to the private sector.
The extent to which federal, state, and local governments in the US spend on the one hand and tax and borrow on the other hand has grown consistently. The best way to measure this is to take a look at the development of government receipts and spending as compared to total spending in the United Stated which is measured by GDP ( = Total Consumer Spending + Total Investment Spending + Total Government Spending + Exports – Imports):
As can be seen in the first chart above, government expenses as % of GDP in the US increased from 17.2% in 1948 to 31.5% in 2007. The second chart shows that taxes rose from 21.7% to 29.2% in the same period.
What is noteworthy that there was a brief period (1992 – 2000) where federal, state and local governments as a whole managed to cut its expenses as compared to the private sector from 33.4% to 29.2%. From 2001 through 2007, however, total government expenditures have once again grown consistently.
The fact that government expenses have grown throughout US history is hardly ever acknowledged or even mentioned in media outlets or by the responsible authorities. This is not surprising. For once one acknowledges it, the age-old myths about neo-liberalism, free markets on steroids, anarchy, merciless capitalism, or insufficient government funding would immediately be debunked and could no longer be utilized as convenient excuses by those in power.
