Monday, November 26, 2012

Simulacron: Federal Revenue and Spending

Yesterday we explored the trends of economic growth in the years between World War Two and the financial crisis of 2008. Two trends: a little faster before 1980, and a little slower since. How would things have looked, if the faster trend continued? Here's what I have so far:

Graph #1: If GDP growth since 1980 continued at a pre-1980 pace...

Graph #2: ... Federal revenue would have been higher...

Graph #3: ... and Federal spending would have been a smaller share of GDP.

Federal spending fell relative to GDP between 1980 and 2000. If excessive Federal spending was the reason GDP growth was slow, then economic performance should have improved when Federal spending fell.

As economic performance improved, the actual (blue) line would have moved closer and closer to the simulated (red) line on Graph #3. The fact that this did not happen is evidence that excessive Federal spending is *NOT* the reason GDP growth is slow.

Federal spending bottomed out at 18.8% of NGDP-actual in 2000, then rose to between 20 and 21% for the 2001-2007 period. But spending fell to 16.7% of NGDP-simulated in 2000, and remained below 18% until 2008. That's as low as it was in the golden years of the 1960s!

Yet economic performance after 2000 was miserable. Even before the financial crisis, economic performance after 2000 was miserable. Why did economic performance not improve while Federal spending remained so remarkably low?

The answer is obvious: It is not Federal spending that hinders economic growth.

The Excel file containing these graphs and the numbers behind them is available to view and download.

No comments: