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Saturday, January 29, 2011

Government Spending and the Great Stagnation

At Asymptosis, Steve critiques the section of Tyler Cowan's book, The Great Stagnation that deals with government spending.   He also posts a graph rather like this one, stacking up various slices of Government spending. The green line indicates Defense spending; the purple line is Federal Non-defense spending, and the blue line is State and Local spending, each expressed as a percentage of GDP. 

Expenditures: NIPA table 3.9.5, lines 12, 17, and 22; GDP: NIPA GDP (annual)

Stacked graphs are hard to parse (at least for an old man in bifocals) so in a follow-up post Steve disambiguates these lines.   Thanks Steve!

Meanwhile, I went at it another way, looking at each of these spending elements on its own.  These next charts are based on the actual values, not percentages of GDP, and are presented on a log scale, from 1950 through 2010.  The purpose of a log scale, of course, is to indicated constant growth, at any growth rate, as a straight line.  A higher growth rate causes a steeper slope.

Here is Federal Defense Spending since 1950, log scale, with a trend line added.

Just for kicks, I've designated Republican and Democratic presidential administrations with Red and Blue segments, respectively.  Though the actual spending line snakes around the trend line, it never strays too far (though one may dispute that assertion for Reagan) and the past several years have been exactly on trend.  Most significantly, a single trend line fits the entire series quite nicely.  Please remember that.

Here is Federal Non-defense Spending, again, on a log scale, same time period.

Here the red and blue segments don't denote different party administrations; rather, they denote different eras of history.  I chose a break point of 1980.  This is arbitrary, of course, but near the inflection point by my aging eyes.  The pair of trend lines, for before and after 1980, fits the bifurcated data close to perfectly.

Here is State and Local Spending, log scale.

Same song, different verse.

Very clearly, some time circa 1980 there was a major turning point in government spending growth, for categories other than defense.

In an e-mail, Chris, another commenter at Asymptosis, pointed me to this post about Cowan's book.  I'll get into it in another post, lest this one become over-long and lose focus.  For now, the point raised is that the post WW II "Golden Age was the outlier, not our present era; it just doesn't make sense to talk about the present period as stagnant after centuries of easy growth."   I think this is partly correct, but majorly off target.  Yes, the period 1950 through 1980 is the outlier.  But that doesn't negate the present stagnation.  And easy growth in the more distant past might not have been so easy.

Without having actually read Cowan, I take his subtitle literally as the main thesis of his narrative:  We have picked the low-hanging fruit, and future growth will either be more difficult or require raiding some fresh orchard.

Some of Cowan's view is probably valid. But does it confirm his take on the underlying cause?  Here is an alternative view:  The post WW II Golden Age was golden because of robust growth in government spending, at the Federal, State, and Local Levels.  Since about 1980, non-defense spending has grown at a lower rate at all levels, and the economy has slowed significantly.

Hand-in-hand with this, of course is tax policy.   Deficits never got out of line in the Golden Age, because there was sufficient taxation to cover the outlays.

In a nutshell:
1) Taxation was reduced since 1980.
2) Spending growth was reduced since 1980.
3) Spending with adequate taxation (e.g. before 1980) never led to a deficit problem.
4) Since 1980, spending (specifically on destructive enterprises) without adequate taxation has lead to faltering GDP growth, the current staggering unemployment, social instability (Tea Party, I'm looking at you) due to grotesque wealth inequality, and misapplication of resources from productive enterprises to speculative churning and rent-seeking, specifically enabled by grotesque wealth inequality.
5) Therefore, deficits result from a) military (not social-program) spending and b) inadequate revenues caused by i) insufficient tax rate percentage on high wealth, and ii) current recession-depressed taxable earnings.

If there is a flaw in my reasoning, you could do me a big favor by pointing it out.

BTW - I'm neither simple-minded nor dogmatic enough to think this is the total answer.  I have a suspicion that there is something else other than taxing-and-spending policy going on beneath the surface that might have changed a few years before 1980, and Cowan might be on to something. 

Meanwhile, we're still screwed.

Update:  Menzie Chinn looked at some of this back in October

Ditto: Calculated Risk.


Steve Roth said...

I think your nutshell (with the ensuing caveat) pretty much says it.

nanute said...

I don't know if it is a factor, but wasn't 1980 or shortly thereafter, when the Federal government stopped revenue sharing with the states?

Jazzbumpa said...

nanute -

Good question. According to this ref, Rev sharing was in effect for 14 years from '72 - '86.

But, as Steve points out here, Federal grants in aide are still with us. I'll have to admit, I don't know what the similarities and differences are between the two programs.

Maybe another homework assignment?

And I still think this looks like the Loch Ness Monster.


nanute said...

I thought it looked like Pinocchio's nose after not telling the truth. (From a horizontal perspective.)

I think the biggest difference between the old system of revenue sharing and the grant program is how the money is allocated. There seems to be a pattern of taking funds from more productive states and sending the money to poorer states. I think this might be the Republican version of redistribution of wealth. If I remember correctly, poor "red" states seem to benefit most from this "formula."

Steve Roth said...

>And I still think this looks like the Loch Ness Monster.

Since you pointed out my egregious error, should point to the corrected graph instead:


Jazzbumpa said...

Steve -

Not egregious - just a clerical error. Anyone can do that.

Let's take it right to the source: The Loch Ness Monster's Evil Twin.


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