## Saturday, November 24, 2012

### Exponential Trends in Real GDP (3): Simulacron

On Thanksgiving day I wrote

Thornton says there was "a marked increase in [Federal] expenditures relative to GDP" beginning in the early 1970s. Fine. But economic performance dropped in the early 1970s. The marked increase in expenditures relative to GDP was a result of the decline in GDP growth.

I'd like to test that hypothesis. And now I know how to do it. This graph is from mine of the 20th:

 Graph #1: Early Trend (green), Actual Trends (red), RGDP Values (blue)

In green, the latter years of the graph show a continuation of the early years' real GDP trend. In red is the more laggard latter years' actual trend. In blue you see the RGDP values from which the trends arise.

For the latter years I want to take the RGDP number, divide out the red trend value, and multiply by the green trend value. This will simulate higher values for real GDP in the latter years, based on the performance of the early years.

Then we can look at Federal spending and Federal revenue and such, relative to this simulated improvement of economic performance. We will be able to see what would have happened if -- if the inflation of the 1970s didn't lead to the suppression of economic growth since the 1980s. Would Federal spending still have increased, relative to the bigger GDP? How much would Federal revenue have increased, if we maintained the superior growth of the early period? And then with increased revenue, with less call for social spending because economic performance was better, and with a bigger denominator, what would have happened to Federal debt, relative to GDP?

Interesting questions.

Back in July I looked at the economy's performance in a series of graphs on RGDP growth. Here is Graph #3 along with remarks from that post:
 Graph #3: Growth Rate from 1947 to Plotted Year (blue) and Growth Rate from Plotted Year to 2011 (red)
The higher line here, the blue line, shows compound annual growth rates of Real GDP, the compound rate being figured from 1947 to each year plotted. The first three points on the blue line of Graph #3 show the compound annual growth rates for the periods 1947-48, and 1947-49, and 1947-50. Each subsequent point shows the compound growth rate of a longer period. The general trend shows decline.

At the right, the last blue point shows the rate for the full 1947-2011 period.

The general trend shows decline. The early years are "splashy" because few years are considered. But the blue line shows a peak right around 1967, and all downhill thereafter.

That's where I want to make my trend break, right around 1967. I want to look at the trend up to that point, and compare it to the trend since that point. It would be nice to push the date back a couple years, to 1965 maybe. That would get the whole of the "Great Inflation" out of the early trend and into the late trend.

I have to break this up into a series of posts. I need to go slow and check my work. Tomorrow I'll take a better look at where to put the break in the exponential trend.