Wednesday, December 26, 2012

Total Government Spending And GDP

A post I wrote a while back covered America's GDP and Federal spending.  If federal spending were taken out of the US economy then it would be a rather large drop in productive GDP. The adjusted GDP, taking out federal government spending, the US economy hovered a little over 10 trillion dollars rather than 14 to 15 trillion reported by the government today. At the time I did not include state and local spending in the mix.  Well, after a trip to the website government spending com, I was able to gather more data to add to my previous GDP chart.

Here is the now updated chart that shows what our GDP would be if we subtracted state and local government spending. And as we can see, private sector GDP shrinks down to 7.9 trillion dollars.

To reiterate my earlier point, while it appears that the US has recovered from the 2008 recession with a 2010 GDP of 14.2 trillion dollars compared to a 2008 GDP of 14.3 trillion.  However, when factoring government spending private sector GDP still has yet to match its 2008 levels. Here is a bar chart showing the dollar amount of of GDP that is private sector versus government sector.

In 2008 private sector GDP reached its zenith of 8.5 trillion dollars, down from a high of 8.6 trillion the year before. In 2010 private sector GDP is 610.30 billion dollars less than it was in 2008 even though our GDP is ostensibly larger by 139 billion dollars. Funny how our news correspondents talk about the recovery, yet fail to mention this fact.  Perhaps because it points out the fact that there is no recovery. You can argue all you want that government is needed to pump the economy, but when the share of private sector GDP shrinks relative to GDP as a whole, then it is hard to argue the efficacy of such a policy.  At best it becomes a holding action.

However the growth of government spending has long been the hidden white elephant that the media, economists, and the masses could choose to ignore if they deigned not to look for it. Below is a chart showing the yearly share that of GDP that he private sector, federal, state, and local spending account for.

The chart shows two items. The first is that it shows the growing share that government spending accounts for GDP. Just eyeballing the chart you can see that in 1948 government spending at all levels accounted for only around 20% of GDP. In 2010 it appears to have almost doubled doubled. 

Below is a chart showing the yearly split between private sector and government spending that accounts for GDP since 1940 and the yearly economic growth rates of the economy.

This chart alone doesn't prove definitively that government spending is the cause for our downward trending economic growth rates. Correspondents and economists would have you believe, not without some merit, that our reduced growth rate is due to demographic and global economic changes.  But, in my opinion, to not even consider that our decreasing economic growth rates may be contributed by growing government spending is like a doctor simply attributing growing weight gain, bone loss, and heart troubles to old age and not acknowledge that the patient went from a 150 to 250 pounds.

The second item that you will also notice is that it isn't just government spending that has ballooned, state and local spending have also grown considerably as shown in the chart below.

Since 1950, outside of local spending, all levels of government spending now increased dramatically. I have a guess as to why local government spending was so high in 1950, and that is that most of that local spending is probably spending by the mega cities of Los Angeles, New York, Chicago and a few of the rust belt cities using the postwar boom to fuel their rapid expansion. Whatever the reason, government spending has undoubtedly increased and it begs the question: How can economists insist that the government is not spending enough money to goose the economy when all levels of government have been on a 60 year binge? At what point will they finally acknowledge that America, throughout our government, has a spending addiction?  

The other aspect that hasn't been covered is that not all of the government spending is backed by actual dollars. Some of it is backed by debt, and as the chart shows, since 1960, outside of the technology infused bubble economy of the 1990's and one year in the next decade, government has run at a deficit. 

This deficit results in government debt which has to be paid for at some point, there is no ignoring this simple fact. When we have to pay this debt and how much of a detrimental effect it will have on the economy remains unclear. But the debt will be paid, and it will have a detrimental effect.  I would hope that anyone reading this post will now acknowledge that government spending could very well have a detrimental affect on our economy; but I doubt I have presented enough evidence to convince those who aren't already convinced. What I do think I have done rather convincingly is show that the GDP figures do not reflect the reality of the ground in any way. Americas economy is on the ropes, not recovering.


  1. Good analysis, but I do have one nit to pick on your last chart. The chart backs up the claim often made that "during the Clinton years we had a surplus". However, that is not true. I define a surplus as shown by the total federal debt. If the debt did not increase and was the same as the previous year, then no borrowing was done that year - the government stayed within its means and spent only the amount it took in and not more (since the debt did not increase). Of course, if the debt went down, then the government spent a total amount below what it took in and used the extra to pay down the debt.

    If you look at the Treasury web site "federal debt to the penny" you will see the total federal debt going back decades. The federal debt has gone up EVERY year since the 1950's. That means, the federal government had to borrow some amount every year to cover its spending. There has not been a surplus since the 1950's (debt total either staying the same or decreasing).

  2. I agree with you whole heartily I've mentioned that same fact before in previous posts but did not in this post.

  3. Sadly, there are economic schools of thought that are going to continue to deny this fact and claim that there's no real concern here. Look up Modern Monetary Theory and you'll see what I mean. Besides the Austrian school, market monetarism is suddenly looking somewhat promising with their idea of NGDP targeting.

    Austrian economist Bob Murphy had a different take on this idea, and proposed gold targeting instead in an American Conservative article. If we're going to still have a central bank, then I believe the latter solution sounds appropriate. Otherwise, a free banking system backed up by gold sounds like the way to go in the end.


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Seattle resident whose real name is Kevin Daniels. This blog covers the following topics, libertarian philosophy, realpolitik, western culture, history and the pursuit of truth from the perspective of a libertarian traditionalist.