Friday, April 26, 2013

A second look

Marcus takes a second look at government spending relative to GDP, and its relation to economic growth.

It may be easier to see the circularity in Marcus's analysis if I say he is looking at government spending relative to GDP, and its relation to changes in GDP. For if we're looking at changes in GDP, those changes will have to have an impact on the ratio called "government spending relative to GDP".

Marcus has an interesting approach. He considers a long period (1960-2007) and looks at government expenditure as a percent of GDP at the start and end of the period. He then looks at RGDP growth near the start and near the end of the period.

He looks at data for a dozen countries. I will look at just one of them. The US was at the top of his list of twelve, as this clip shows:

Part Screen Capture of Marcus's Table

I took Marcus's Gov. Expenditures (GX) numbers along with start- and end-year RGDP values from FRED, put them into a Zoho spreadsheet, and calculated US government expenditures in inflation-adjusted dollars.

// UPDATE: After a recent Zoho update, their spreadsheet now "takes the focus" when the page loads, and the screen jumps to make the Zoho sheet visible on-screen. Took me a few days to figure out a fix for this. I put the Zoho sheet into a "spoiler" that remains hidden until you click this text to make the Zoho sheet visible... (I'm disabling the spoiler.)

//UPDATE: But now it never loads... I'm about to give up on Zoho.

//UPDATE 7 May 2013: IT WORKS!!!!! Thank you, Zoho Support.

Then I took Marcus's Real GDP Growth numbers and put them on row 8. And I said to myself: I wonder how things would have looked if RGDP growth stayed at the high rate of the early years, 4.3% annual, rather than dropping off so much...

So I took the start-year RGDP value and Marcus's annual growth rate and put them into a compound-interest formula from Chron to see what the end-year value of RGDP would be in 2007, after 47 years. (Cell E10.)

You can check my math. I think it's good.

Anyway, after 47 years of 4.3% growth RGDP would have been 20 460 point 6. With the less impressive growth that we actually had, RGDP was 13 206 point 4. So, 20 versus 13, a pretty big difference.

So now we can take the government expenditure number for 2007 from cell C5 and look at it as a percent of the impressive RGDP number, and compare that to Marcus's GX/GDP number in cell C3.

Okay. Back in 1960 GX was 28.4% of GDP. Then, given the suck-ass GDP growth that we had for the last 40 years, in 2007 GX was way up high, at 36.7% of GDP. But if growth had continued at the early-years rate, US government expenditures would have fallen from 28.4% to 23.7% of GDP.

And I'm not fiddling with the government spending numbers. Just looking at what-if growth. So what I'm saying is that US government expenditure growth slowed since 1960, just not as much as GDP growth slowed.

How we get from that, to the idea that increasing government expenditure is the cause of slow GDP growth, the logic escapes me.


The Arthurian said...

I put this on Reddit this morning because I think it's really good economics and really good analysis.

For Reddit I used the title Two cowboys ride off into the sunset, one fast, the other slow. The slow rider appears to grow larger than the fast one, because the fast one is quicker to shrink from view, which I thought might grab the attention and make people think. Maybe that was the problem.

After 11 hours I got 25 pageviews of this post, which includes about a dozen I would have got without Reddit.

No matter. It is a good post.

The Arthurian said...

Reddit can bring you a thousand pageviews in a day, on a good day.