Thursday, December 2, 2010

Beyond Echoes

From mine of 30 November:

Reagan had the right goal: to increase economic growth. Restoring growth is the only way to solve our economic problems. But Reagan's strategy -- reducing the growth of government -- did not work. It didn't work because the growth of government was not the original problem. Like almost everything else, the growth of government was a result of the problem.

The growth of government relative to GDP was a direct result of the inadequacy of GDP growth. It's sixth grade arithmetic.

From Billy Blog of 25 November:

The Irish Prime Minister yesterday unveiled the [sic] The National Recovery Plan...

On page 55, Section 3.2 the heading is “3.2 Why We Must Reduce Expenditure”. A Table (3.2) accompanies the text and shows that public spending in nominal terms has risen strongly between 2000 and 2008.

But remember the 2008 data is contaminated by the recession for Ireland...

The text accompanying the table says:

These significant increases in public expenditure were broadly in line with the strong nominal growth rate of the Irish economy with expenditure as a proportion of GNP remaining at around 28% for most of that period. However, with the sharp fall off in growth since 2008, that ratio has risen markedly to around 44% of GNP...

The point is that proportionally the Irish government spending merely kept pace with the nominal growth in the size of Irish economy until the growth collapsed...

I would look at the same data and say that denominator rather than the numerator has to be restored to its previous acceptable levels. What sort of logic is it that the numerator of the ratio should collapse to the value of the (collapsed) denominator?

(Emphasis added.)

Maybe Bilbo says it better. But we're sayin' the same thing here. The problem is not excessive growth of government. The problem is inadequate economic growth.

It is time to emphasize a different argument: We gave Reaganomics 30 years, and Reaganomics gave us the Great Recession.

Reagan's solution, reducing the growth of government, did not work because the growth of government was not the original problem. The original problem was -- and remains -- the excessive accumulation of debt. The cost of this excessive debt results in inadequate GDP growth. All other problems arise from this.

Reaganomics failed because it failed to reduce the accumulation of debt.


Greg said...

Good post. Getting these ratios wrong is a big part of the problem in our world right now. The one you highlight here is interesting because how can anyone argue that the way to restore growth when GDP falls is to decrease the Govt contribution to GDP. Its incredible that anyone with a sixth grade math aptitude doesnt just laugh at this.

Another one is the govt debt to GDP ratio. How can one compare a stock relative to a flow and think you have anything worth reporting. This is like looking at the miles of highway in the US relative to the miles driven by US drivers and thinking if the miles driven falls off it must mean we have to reduce the miles of roads????


The Arthurian said...

And they're breakin'out the bulldozers to reduce the miles of government.

Hey, Greg. I'm pretty good with "levels" and "rates" but not comfortable yet with the words "stocks" and "flows." But a while ago I did say: "Debt is cumulative. Income is calculated annually." So I *can* see it, sometimes...

Still, I am willing to say that the high *level* of accumulated private debt is a drag on the *rate* of GDP growth. Because some portion of GDP must be taken out of the consumption-and-production stream, and used to make payments to the finance stream. And then, finance grows like gangbusters... until the consumption-and-production stream can no longer support it.

And then it becomes "worth reporting."

Greg said...

You are exactly correct about private debt it is a drag on GDP growth. The people squawking about the debt ratios are ALWAYS referring to our govt debt. Especially that which is owed to China. This is the debt that the bond markets are going to revolt against supposedly.