Monday, December 7, 2009

On the Growth of Government (Part 2 of 3)

If you run a business you may compare this year's sales to last year's, to see how much your business has grown. If sales are up 6%, you could say your business has grown 6%. But if prices went up 4%, then really your business grew only 2%. To get a better gauge of how much your business grew, you have to adjust for inflation.

I want to look at government spending by that standard: adjusted for inflation.

I'm using the GDP Deflator as a measure of inflation. The data comes from Federal spending numbers come from, as in the previous post.

This graph shows year-to-year changes, so it's full of spikes and jitters. Still, you can see that the red line (Federal spending) is higher when inflation (the blue line) is higher, and lower when inflation is lower. It almost looks as if the red line in this picture sits on the blue line. They rise and fall together.

That only makes sense, for things cost more when prices go up.

So, I took the inflation-rate numbers and subtracted them from the growth-rate numbers, to get numbers for Federal spending growth with inflation removed. The result appears as the blue line below. The red line is the five-year average of those inflation-adjusted numbers.

Don't focus on the jittery blue line. It shows year-to-year changes, which don't tell us much. The red line shows the trend. You can see, in each little section you look at, the red line is pretty well centered between the blue extremes in that region of the graph.

This surprised me: The red line shows a long-term downward trend from about 1968 to about 1996. That's close to thirty years, during which time the growth of Federal spending slowed significantly. That's not to say Federal spending got smaller. It got bigger, but it did so slowly... and then more slowly.

According to the numbers in the spreadsheet, inflation-adjusted Federal spending growth fell from a rate of 7.34% (in 1966) to less than one percent (0.98%) in 1995. That's pretty remarkable.

I wouldn't read too much into this; my calculations are simple and crude. Still, along with simplicity and crudeness comes an honesty that is not always evident in more complex calculations.

<- Part 1 Part 3 ->

You can access the Google Docs spreadsheet used to create these graphs. (Sheet 2)

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