PIX: Why America Isn't Growing

 

 

 

Economy Contracts - DOW TOPS 14K Briefly

The insanity continues, economy contracts, and the DOW, which hasn't been a good indicator of the American economy in quite some time, went up!  In other news, unemployment was up as well, despite adding over 150,000 jobs. Now why would unemployment rise if we increased the number of jobs in our economy? Well, for those of you who don't know, our unemployment statistic is pretty much worthless as an indicator of how many in this country or involuntarily unemployed.

Our government uses government math and statistics to magicly make someone who is unemployed, but has given up actively looking because they are discouraged, disappear from the unemployment rate! Real unemployment, measured by the statistic known as the U6 by the BLS, is 16% Hey that is the same as it was during the Great Depression, but we aren't in a depression are we?

Economy Contracted Lasted Quarter of 2012

Well it looks like the last quarter of 2012 saw the contraction we all expected. Does this mean the economic dice have finally fallen into place? Not likely, I imagine that the release of this news will spur ever more priming and pumping, however, while the contraction was small, just .1 percent annual rate, this is a marked decline given that the quarter before saw 3.1% annualized growth.

However, even if this contraction is just a minor blip, and it's hard to say given how much government distorts actual economic production today, the news is still not good. Economists predict that we need the economy to grow at least at the rate it did during the third quarter of 2012 if we want to lower unemployment. Economic growth in 2012 was officially 2.2 percent.  My question though, is how much of that was self sustained private sector growth, versus growth spurred on by the government.

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.



Should the US Be More Like Canada?

Now this article does ignore the Canadian real estate bubble but there are some things that Canada has done that the US should do as well.