Chart of the Day: Govt Spending vs. Unemployment
The chart above is from Scott Grannis, who explains:
"This chart (inspired by Brian Wesbury) again bears repeating, since it lends support to claims by the anti-Keynesians (of which I am one) that the biggest factor that has worked to slow economic growth in recent years is the huge increase in federal spending. Instead of "stimulating" the economy, enormous increases—in both nominal and relative terms—in federal spending have ended up "stimulating" the unemployment rate more than anything else.
The reason? The public sector spends money much less efficiently than the private sector. And when you consider that over 70% of federal spending takes the form of "payments to individuals" (i.e., transfer payments), and that this has been the most rapidly growing portion of total spending, and you understand Milton Friedman's assertion that you don't spend other people's money on yourself nearly as carefully and efficiently as you spend your own money on yourself, then it becomes easier to understand. The vast bulk of government spending these days boils down to transferring money from those who are working and producing the most, to those that are working and producing the least, and that is not a prescription for a strongly growing economy."
47 Comments:
while i heartily agree with the anti-keynsians, i'm not so sure about this analysis.
it's always a little tricky to eyeball these things, but ti looks to me like there is a little bit of a time lag with unemployment going up, then spending.
so what does this prove? that with higher unemployment, more people get benefits? that seems obvious. that politicians tend to look for stimulus projects when U goes up? that's also obvious.
what i don't really see here is anything causal (apart from unemployment making politicians act.). what evidence is there that spending ups unemployment?
is suspect it does (and drops gdp growth) but i don;t really see how this analysis demonstrates that.
what evidence is there that shows
This is an example of "spurious correlation."
The "unemployment rate" is not determined by "federal spending as a percent of GDP" or vice versa.
The "unemployment rate" or "federal spending as a percent of GDP" are determined by GDP growth.
I mostly agree with morganovich: this seems to show unemployment begets spending. It doesn't show spending "fixing" unemployment, but I don't see how this chart can be used to argue it makes it worse in the short run either.
Don't forget the denominator.
1. GDP goes down.
1a. We say there is a recession.
2. People get fired, so unemployment goes up.
2a. since GDP is down, Gov't spending as a percent of GDP is up.
Effect, meet cause.
Morganovich and Sawyer were reading my mind on this one.
I'm not sure that any useful conclusions could be drawn from this particular chart (other than that both government spending as a percentage of GDP and unemployment go up and down as an inverse function of the nation's GDP, which is not exactly news).
However, the U.S. government overspends, in part, because of income redistribution, including redistributing income from the future to the present.
We wouldn't allow an international government to redistribute income from the U.S. to a poor country.
Yet, we allow the federal government to redistribute income from a rich state to a poor state.
It would help if the time frame wasn't so broad... you can't see the detail as to which graph is leading the other.
agree with the previous comments...I actually saw this on Scott's blog yesterday and already commented on the lack of any real take-away from this chart...can't believe CARPE DIEM is falling into the confirmation bias trap as well!
I agree with you folks, but it is interesting what this chart doesn't show - it doesn't show government spending "improving" unemployment. To hear the pseudo kensians out there you would think all this spending would create more employment. I don't think it shows that either.
The government spending vs GDP is always nice to see just on its own, to remind us how spending went insane when the dems came to full power.
chrissake...the govt spending is up because of the unemployment, not vise-versa...
"the govt spending is up because of the unemployment, not vise-versa"...
Extorted tax dollars wasted on parasitic bureaucratics drives up unemployment...
On December 2nd Scott Grannis had a post that showed Private vs. Public jobs for 2000 - 2011. If we discuss jobs and not unemployment, then clearly without continuing growth in public jobs, joblessness would be much higher. Local and state jobs have declined recently but not federal, as far as is known.
So, public jobs could be said to crowd out private jobs, if we take a long term perspective -- such as 2000 - 2011. At this point, federal jobs may be even crowding out state and local jobs.
BTW, the Census Bureau has statistics on 2010 state and local public employment but not 2010Federal employment. Gee, maybe they can have the 2010 numbers sometime in 2012.
Regarding the correlation versus cause and effect concern here I asked Brian Wesbury about this back in July.
He had previously addressed it in a post that plots the Congressional
Budget Office’s (CBO) estimates of the NAIRU (The Non-Accelerating Inflation Rate of Unemployment) and the change in Structural Federal Government Spending. This
is a comparison of the natural rate of unemployment and the annual change in non-cyclical, or the underlying level of, government spending.
In this case the correlation is not as dramatic as in Scott Grannis post, but it still there suggesting (not proving) cause and effect.
See: http://www.ftportfolios.com/Commentary/EconomicResearch/2009/2/9/unemployment_and_stimulus_ii
Full link here.
http://www.ftportfolios.com/Commentary/EconomicResearch/2009/2/9/unemployment_and_stimulus_ii
Third try. The full link is not showing up when I post it.
http://www.ftportfolios.com/Commentary/EconomicResearch
/2009/2/9/unemployment_and_stimulus_ii
Maybe 4 times is a charm. If not I give up.
http://www.ftportfolios.com/Commentary/
EconomicResearch/2009
/2/9/unemployment_and_stimulus_ii
This comment has been removed by the author.
Brian Westbury's Unemployment and Stimulus II commmentary.
Extorted tax dollars wasted on parasitic bureaucratics drives up unemployment...
==============================
It is a nice theory.....
Thanks Todd,
Here's another way to get to the
piece that adjusts for cyclical issues.
http://www.ftportfolios.com/Retail
/Research/EconomicResearch.aspx
Click on Research Reports (more postings). Correct piece was published 2/9/2009
...lends support to claims by the anti-Keynesians (of which I am one)....
-----------------------------
Such a preamble is a confession of non-scientific analysis.
My working assumption is that partisans of any kind are predisposed to certain assumptions which make them less likely to stumble upon the truth and to ignore it if they have.
Therefore they are more likely to be wrong.
and that this has been the most rapidly growing portion of total spending,
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They ramped up the whole war in Iraq in a few months. It is hard to believe that kind of increase in spending would not rank pretty high as far as rapid growth is concerned.
The vast bulk of government spending these days boils down to transferring money from those who are working and producing the most, to those that are working and producing the least,......
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Well yes, but those working the least, by and large, are those who are least capable. To the extent they are capable they will earn the least in any case.
Nothing you do with them is a prescription for building a strong economy.\
Either they will not be supported, or they will be supported at some minimum level. That minimum level might be by government or by private enterprise. Private enterprise is not going to support them unless they can make a profit at it.
Do we really want private enterprise wasting valuable CEO resources trying to figure out how to squeeze a few shekels out of a low margin operation dependent on low skill labor?
That hardly sounds like a prescription for a strongly growing economy.
Do you really want that 80,000 pound truck next to you driven by someone with an 82 IQ, just because the trucking company can hire him cheaper? At what point do you decide it is to your benefit and cheaper, to have government keep him out of your way?
rjs says: "...the govt spending is up because of the unemployment, not vise-versa..."
That's true to an extent. However, it doesn't fully explain the increase.
A large tax cut is more effective in stimulating growth, which worked under Kennedy in '61, Reagan in '81, and Bush in '01.
Normally, "federal spending as a percent of GDP" rises when GDP growth slows or contracts, because private sector growth slows or shrinks, while government sector growth remains stable or continues to grow through deficit spending.
WOuldn't it be possible for this graph to imply that when federal revenues decrease due to recessions that unemployment also increases due to recessions?
I would like to see the a graph of the derivatives.
I would like to see the derivatives graphs, to really see which is leading.
I think the Milton Friedman line, good as it is, doesn't quite capture this situation. For govt, it should be (even worse): 'we don't spend other people's money for them nearly as carefully and efficiently as they spend their money on themselves.'
There is also a common sense argument against the interpretation of the chart offered. Government spending could reasonably be expected to cause more unemployment if the money spent was immediately taken from the economy. Lately, though, it is borrowed, so while it may still do its damage, it should be delayed until the taxes are being collected in future years to pay for the borrowing. And the borrowing is not noticeably driving up interest rates either (the other way that spending could have more immediate negative impacts). Government spending of borrowed money almost has to create jobs to some extent in the near term, even if it destroys more in the long run.
Yikes! I thought economic professors had a strong grounding in statistical analysis; this analysis reveals gross ignorance of the subject. I expect misleading analysis from mainstream media because they have an agenda, but this-----I just don't understand!
the huge increase in federal spending.
=================================
The chart shows that over the last forty some years federal spending has remained in the range of 18 to 24% of gdp. For most of that time it was in the range of 18 to 22% of gdp. The recent spike to 24% means that it is outside of its historical range by one third. In terms of an absolut increase this "huge increase" is only 9.1% to 10% and up to a third of that may be due to a decline in GDP from 2007 to 2009, because the chart does not show govt spending but govt spending as related to GDP.
I am also, at heart, skeptical of Keynsian economics, however correlation is not causation.
To infer causation from correlation without further supporting evidence, other than some theory (which is entirely correct) regarding the multipliers of government spending, is not in any way, shape or form rigorous analysis.
I am also, at heart, skeptical of Keynsian economics, however correlation is not causation.
To infer causation from correlation without further supporting evidence, other than some theory (which is entirely correct) regarding the multipliers of government spending, is not in any way, shape or form rigorous analysis.
what i don't really see here is anything causal (apart from unemployment making politicians act.). what evidence is there that spending ups unemployment?
It is hard to show what you ask because government is usually responding to events. The economy is too complex and there are too many factors to imply a clear causal connection without access to a lot more clean data than is available.
That said, the theoretical argument and the logic are sound. The economy is not a bunch of buttons to be pushed or levers to be pulled. The government does not have the knowledge necessary to deal with real world changing conditions in ways that individuals and corporations do and certainly no feedback mechanism that punishes lousy judgment and rewards good decisions. We also know that government cannot create wealth or obtain earned income. It can only take from some to transfer to others or devalue the currency by creating purchasing power out of thin air.
This country is in the process of self-destruction. For nearly a century we have been living increasingly in a fantasy world, where everyone is wealthy and can afford anything their credit cards will allow. We are coming to the end of that process now and our descendants will pay the high price for our profligacy for centuries to come.
History is cyclical and goes through four stages (development, stagnation, destruction and rebirth). I believe we could make the future better if we would wake up now and make some drastic changes, like paying all our debts, both public and private. A similar experience took place during the Roman Empire. Read chapter 3 of Michael Grant’s The Climax of Rome. Rome also devalued its coinage carrying on one non-productive and pointless war after another, just as the U.S. has been doing for a half century or more. Add to that the depredations of the banksters on our economy and you can understand what the endpoint will be, namely the destruction of the Western culture and all of the good things it has produced. If you wan to know what the future could be like if we do not act soon and very decisively, read From Citadel to City-State by Carol Thomas and Craig Conant (end of first cycle) and The Middle Ages by Morris Bishop (the end of the second cycle and what happened to the Roman Empire). It is solving problems like this that could be the most productive use of history. It is like the sign on a highway which warns us that there is a dangerous curve ahead.
We need to completely overhaul our government, which should begin with an overhaul of the economy, done gradually and without upsetting our society too much at one time. Otherwise, we face an uncertain and really nasty future. The first step in this process is to have a government which governs from the center.
This country is in the process of self-destruction. For nearly a century we have been living increasingly in a fantasy world, where everyone is wealthy and can afford anything their credit cards will allow. We are coming to the end of that process now and our descendants will pay the high price for our profligacy for centuries to come.
History is cyclical and goes through four stages (development, stagnation, destruction and rebirth). I believe we could make the future better if we would wake up now and make some drastic changes, like paying all our debts, both public and private. A similar experience took place during the Roman Empire. Read chapter 3 of Michael Grant’s The Climax of Rome. Rome also devalued its coinage carrying on one non-productive and pointless war after another, just as the U.S. has been doing for a half century or more. Add to that the depredations of the banksters on our economy and you can understand what the endpoint will be, namely the destruction of the Western culture and all of the good things it has produced. If you wan to know what the future could be like if we do not act soon and very decisively, read From Citadel to City-State by Carol Thomas and Craig Conant (end of first cycle) and The Middle Ages by Morris Bishop (the end of the second cycle and what happened to the Roman Empire). It is solving problems like this that could be the most productive use of history. It is like the sign on a highway which warns us that there is a dangerous curve ahead.
We need to completely overhaul our government, which should begin with an overhaul of the economy, done gradually and without upsetting our society too much at one time. Otherwise, we face an uncertain and really nasty future. The first step in this process is to have a government which governs from the center.
I'm pretty confident that over the past two years unemployment has been higher than it otherwise would have been because of two government actions:
1. recent minimum wage hikes;
2. extended unemployment benefit periods.
It's really very simple economics. Government prevented the market clearing price for labor, and government provided an substitute for the wages workers would have earned.
oldgeezer,
I see nothing wrong with private debt. Borrowing to invest in an income producing business ... borrowing to invest in training which enhances one's market value ... why would you view such borrowing as self-destructive?
The problem - as always - is government. That would include both government direct borrowing and government interference which distorts markets.
The economy is too complex and there are too many factors to imply a clear causal connection without access to a lot more clean data than is available.
That said, the theoretical argument and the logic are sound.
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How can you know it is sound, without the data?
For decades it seemed logical and sound that heavy objects fall faster than light ones, but the data proved otherwise.
After all, the fact that we are facing a globl economy slump, suggests taht "the economy" is independent of government policy.
The problem - as always - is government.
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What makes government borrowing any more destructive than private borrowing?
Why pay for anything all at once, that you will use up little by little?
When government is borrowing to pay its operating expenses, it has a problem, but government borrowing for capital investments is no different from private borrowing.
Hydra: "What makes government borrowing any more destructive than private borrowing?"
Absent government intervention, private borrowers and private lenders bear the risk of loss. That forces both parties to be prudent in their borrowing and lending activity.
Public borrowers may eventually lose their jobs, but the financial risk of poor borrowing decisions is spread across the entire nation of taxpayers. Furthermore, unlike private borrowers, federal borrowers can reduce their obligation by inflating the currency.
We need to completely overhaul our government, which should begin with an overhaul of the economy, done gradually and without upsetting our society too much at one time. Otherwise, we face an uncertain and really nasty future. The first step in this process is to have a government which governs from the center.
All you need is to get government out of the way by making it a lot smaller and limiting its power to meddle. The progressives have had their run. It is time for the old classical liberal tradition to reassert itself.
I see nothing wrong with private debt.
I do. When the central bank meddles with the interest rates and sends false signals private individuals make the wrong decisions.
Borrowing to invest in an income producing business ... borrowing to invest in training which enhances one's market value ... why would you view such borrowing as self-destructive?
I would when the artificially low rates lead to malinvestments.
VangeIV,
In both my comments, I noted that government intervention in markets - including lending markets - was the problem. Private debt without government interference is not a problem, IMO.
In both my comments, I noted that government intervention in markets - including lending markets - was the problem. Private debt without government interference is not a problem, IMO.
I read what you wrote but thought that you were not subtle enough. As long as the Fed exists and keeps manipulating rates private debt can be very bad because of false signals.
The chart shows correlation.
Thats' not the same as causation. There may infact be a causal link, but if you consider why the indicies rose or fell, probalby a big part is that in the case of % GDP, it's that the economy expanded faster than the rate of government expenditure. That would also lower the unemployment rate.
A more detail analysis of how both of these indices or the rate of change of the indicies or the raw numbers versus the rate of economic expansion of the economy would be more convincing.
Fact!
The higher the unemployment payments and the longer the unemployment payment coverage.....the higher the unemployment rate
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