Monday, December 7, 2009

On the Growth of Government (Part 3 of 3)

So your business got 6% bigger, but 4% was inflation and only 2% was growth. You're not doing as well as you hoped. So then, how are you doing? How does your business growth compare to your competition? How does it compare with the economy, overall? ...And can we ask similar questions of government spending?

If the population in your neck of the woods increased by one percent, then you did pretty well by growing two percent. You probably took market share from your competitors. But if population grew by 5%, your business didn't keep up. You could have done better.

I want to look at government spending by this standard: adjusted for population growth.

This looks very much like the "inflation-adjusted" graph we saw earlier. Same jittery blue line; same long-term down-trend in the growth of Federal spending (as shown by the red line).

Actually, everything is just a little bit lower on this graph. The first few years are below the five percent line, rather than almost centered on it. The two tall spikes are nearer to 12 or 13 than to 14 or 15. The rounded "bowl" of the Clinton (Gingrich) years actually touches the zero-percent level.

Taking the growing U.S. population into account did not make this graph much different from the previous one. What that suggests is that the growth of population (over the past half-century and more) has been fairly stable. There are no kinks in the population trend that make this graph look different.

But because the lines on this graph are generally lower than the other, we can say that the population itself was not stable; there definitely was a growing population.

Perhaps the population where you do business increased not at all. But maybe living standards doubled: People are buying twice as much stuff. If you're not selling twice as much, your business is not keeping up.

I want to look at government spending by this standard: relative to the standard of living.

For my estimate of "living standards" I'll use GDP growth. But I have to be careful here. Price increases are one of the reasons that GDP goes up. And we've already made an adjustment for prices. Another reason is that the population grows. (More people, more workers, more stuff produced.) And we've already made an adjustment for population growth, too.

When I adjust for GDP growth, I'll use GDP per capita. This way I won't be correcting for population growth again. No, I'd better make it real GDP per capita. This way I won't be correcting for inflation again, either. We'll look at the growth of "real GDP per capita" as a measure of living standards.

Is this valid analysis? Do we expect government spending  to vary with living standards? I think so, yes. If people are buying twice as much beef, we need twice as many inspectors to stamp "Grade A" on it. If we're importing twice as much stuff from China, we need twice as many inspectors and twice as many truckers and twice as many Wal-Marts and twice as many shopping-bags. Yeah. And if the population doesn't change, but we consume twice as much, maybe we're twice as cluttered and twice as fat, but twice as much government oversight is still a reasonable expectation.

Chill. I'm not saying we need more government oversight. Maybe we have more than we need right now, maybe we have less. I'm just sayin' that the need for government oversight varies with the standard of living.

Now this graph is interesting! Again, focus on the red line, the trend. Maybe you can see a downtrend from 1980 to the late '90s. If so, it's only half the downtrend we saw in the two previous graphs. Remember how population shifted the lines down a bit, but didn't really change them? Well, living standards changed 'em.

Look at the red line: The overall trend is flat. Sure it's a wavy line. But it wanders back-and-forth across a horizontal line. And horizontal means constant. After the adjustments we've considered in this series of posts, Federal spending can be seen varying around a constant rate of growth.

And what is that constant rate? Look at the number at the left end of that horizontal line. The constant about which federal spending growth varies, after our adjustments, is zero.

What I'm saying here is something you've probably not heard before: Take Federal spending. Make an allowance for inflation. Make an allowance for population growth. And make an allowance for the increase of output, or living standards. After those adjustments, it looks like Federal spending has not grown excessively. Despite everything you've heard for the past thirty years.

So my question to you is: These adjustments that I make  --  Are they reasonable? If your answer is "Yes, the adjustments are reasonable," then you are going to have to disagree with everyone who complains of excessive government spending. On the other hand if the adjustments are unreasonable, well, I guess I'm just an idiot.

Your call.

<- Part 2 Part 4 ->

You can access the Google Docs spreadsheet used to create these graphs. (Sheet 3.)

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