Friday, June 27, 2014

A Convenient Context

FRED Blog asks How big is the federal government? They show a graph of "Federal Government Current Expenditures" relative to GDP:

Graph #1: Federal Spending relative to GDP (from the FRED Blog 23 June 2014)
They write:

The graph shows the huge government buildup during WWII, almost doubling in 1942, and its equally impressive contraction thereafter. Since then, the size of the government has fluctuated between 17 percent and 23 percent of GDP...

Not my idea of fluctuation. For fluctuation see Graph #4 in yesterday's post.

Their question doesn't sit right with me. The question "How big is the Federal government?" is what you would ask if you were arguing that government is too big. It's a popular question. I suppose that's why FRED Blog addresses it. But it's not a good question. Myself, I'd rather try to get people asking better questions.

"One way to determine the size of the U.S. Federal government is to look at its expenditures," they write. "Of course, population and the economy have grown, so it’s a good idea to use a ratio to measure expenditures. For example, you can divide expenditures by GDP, and this is exactly what is shown here."

Reminds me. A few months back I remarked

why they always show debt relative to GDP is beyond me.

Two people, whose knowledge and thoughtfulness I respect, replied. Geerussell wrote:

I assume it's because looking at anything relative to GDP is convenient shorthand to get a sense of scale...

Jazzbumpa seconded that remark:

geerussell is right. It provides context.

I think those were knee-jerk reactions. I mean, I know it provides context. And if you think of GDP as "the size of the economy", it would seem to provide a very good context indeed.

But what if our economy is having troubles? I mean, what if economic growth has been slowing for three or four decades? Is "the size of the economy" still a good context in the face of secular stagnation? I don't think so. A slowing economy, as context, makes other things that are similarly slow appear perfectly normal. A slowing economy, as context, makes things appear to be growing that are slowing, but slowing somewhat less quickly than GDP.

One could argue it is the slowing growth of GDP that makes Federal spending appear to be growing too fast. It would be an easy argument to make.

Anyway, the FRED Blog graph uses the one data series that economists always use as a basis of comparison: GDP.

Oh ye of little imagination!


Jazzbumpa said...

OK. Placing an economic variable in the context of the economy might smack of failure of imagination. So propose an alternative.

Otherwise, you just have this.

Is that curve to steep, or not steep enough? Why is it flat [and without precedent] for almost 4 years, and what does that mean?

$3800 Billion is a BIG SCARY NUMBER. Should I be alarmed?

Dividing by population doesn't do much.

What's a mother to do?


Jazzbumpa said...

Here's a divergence.

I looked at YoY change in GDP/Pop. This should be a proxy for change in aggregate mean standard of living. [Saying NOTHING about distribution]

Big change since about 1980.


The Arthurian said...

Yeah, big change: Volcker did it. Here's your graph with NGDP swapped out and RGDP swapped in:

Looks like it still trends down, but it's much less clear.