Pethokoukis, Economics, U.S. Economy

The Unpossible Chart: Is government spending really at an all-time low?

042613gdvt

I was momentarily taken aback when I read the following bit (in bold) from RDQ Economics:

The private economy continues to expand at a solid pace as manufactured output growth averaged 5.2% over the last two quarters, and private-sector job creation has averaged 202,000 per month.  For the year as a whole, we are projecting 2½% real GDP growth and, with the share of real government spending in real GDP at a recorded low, we believe much of the measured fiscal ‘drag’ is behind us and we expect the stronger private-sector growth rate to show through in the overall GDP data over the balance of the year.

Wait, what? Is it true that the “share of real government spending in real GDP” is at a “recorded low?”

Well, as the above chart shows, it is true. Real GDP, you might recall from high-school econ class, is Government + Investment + Consumption + Net exports.

Now the government part is actually “Real Government Consumption Expenditures & Gross Investment.” It includes federal, state, and local government spending. On the federal side, you can think of it as discretionary spending. Government buying stuff.

But transfer payments are a different breed of cat. Federal bookkeepers describe transfer payments as “income payments to persons for whom no current services are performed. They are payments by government and business to individuals and nonprofit institutions.”

But should, say, Medicare and Medicaid payments, be counted as personal consumption (C) or government consumption (G)? Garret Jones argues for the latter:

Here’s one big area where I think we should change what we call one type of government spending: Medicare and Medicaid.  Currently, these types of spending are counted as transfer payments  and so when we measure GDP they show up in C, consumer purchases.  I think they should show up in G, government purchases.  These medical purchases are so tightly controlled by the government that doctors–oops, “medical service providers”–have become and should be considered government contractors just like defense contractors or construction firms.

Indeed, here is what really goes into the personal consumption category:

071112pce2

This is why economist Michael Mandel argues that the rule of thumb that says the consumer makes up 70% of the economy is misleading:

In fact, by my very rough calculations, the money that people actually pull out of their paychecks and bank accounts to pay for domestically-produced goods and services drives about 40% of economic activity in this country. That’s still large—but the U.S. is nowhere near as dependent on consumer spending as people think.

Total federal outlays are currently around 23% of GDP, several points above the post-WWII historical average, though down from a recent peak of over 25% in 2009.  Discretionary spending is falling, though transfer payments and entitlements are rising. So there is some “fiscal drag” as economists would term it, though government spending overall is atypically high.

13 thoughts on “The Unpossible Chart: Is government spending really at an all-time low?

  1. re: “Total federal outlays are currently around 23% of GDP”

    No. Unfortunately you are repeating the usual misleading figures, they hide the real total but you can find it in 1 place in the budget. From the FY2014 Obama budget:

    http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/receipts.pdf
    “For 2012, gross outlays to the public were $4,027 billion, or 25.9 percent of gross domestic product (GDP). Offsetting collections and offsetting receipts from the public are subtracted from gross outlays to the public to yield “net outlays,” which is the most common measure of outlays cited and generally referred to as simply “outlays.” For 2012 net outlays were $3,537 or 22.8 percent of GDP.”

    All their historical tables are “net outlays”, and the BEA data also hides spending in a similar way.

    The GAO has in the past complained about the way they hide spending. If you look closely you can also find in Treasury documents an explanation of the $trillions in intra-governmental debt (pensions, etc) left off the official national debt figures. This page has links to the various government documents detailing the ways they try to hide spending and debt.

    http://www.politicsdebunked.com/article-list/goverment-hides-spending

  2. In addition free market advocates unfortunately play right into the hands of big government advocates when they talk in terms of government as a % of GDP when there is no apriori reason that it should maintain a particular % of GDP. The share of GDP going to agriculture declined drastically over the last couple of centuries. As entities become more efficient, their share of GDP shrinks.

    It is useful in economics at times to talk about it as a share of GDP, but letting it maintain a particular % of GDP is giving them an automatic built in expectation of spending increases. It is like “baseline budgets” where they claim slower growth is a “cut”.

    As this page points out, if you focus on real $ spending per capita:

    http://www.politicsdebunked.com/article-list/federal-spending
    ” The Federal government spent 3.7 times as much per person in 2011 as it did 50 years ago in 1961 when Democratic hero JFK was in office (adjusted for inflation). If Kennedy were around to propose his level of spending today he’d be denounced by the mainstream media as a radical extremist.”

  3. So how about closing the loop here instead of dangling a misleading perceptiion. Medicare was about $600 billion last year, or about 11 percent of GDP’s govt expenditures of $5.5 trillion. (Your bar chart above includes medical care that actually was paid for by consumers and their insurers.)

    What would the govt/gdp chart look like if you added the GDP figure and Medicare expenses? Or more specificallly, how much healthcare inflation would you need for the 11 percent tail to wag the 89 percent dog over the seven years since 2005?

  4. Gov’t spending is at an all time high, and using an inflated baseline and pointing at small percentage increases as the left dishonestly does won’t change that fact.

    It is at an all time high due to entitlement spending.

    http://www.downsizinggovernment.org/sites/downsizinggovernment.org/files/charts/dfg-fed_spending_gdp-big.png

    Further, it should be mentioned that Obama was far more involved in the 2009 budgetary and spending program than any other incoming president, so that is attributable to him as well. Ignorant leftists (redundant) refuse to acknowledge this.

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