## December 27, 2012

### Metrics for the “Ever Expanding Government”

The latest in a series examining persistent macroeconomic myths [1]

total gov't spending in the US, including personal transfers, is equivalent to 54% of private GDP

This is merely the latest installment in demonstrations of innumeracy in defense of reducing the size of government. Time to look at some data. First, even if we believed outlays as a share of non-government GDP was a reasonable measure, could we replicate the 54% number cited? No.

Figure 1: Ratio of government current expenditures (all levels) divided by non-government GDP (GDP minus government consumption spending) (blue) and divided by GDP (red). NBER defined recession dates shaded gray. Source: BEA, 2012Q3 third release, Table 3.1 for expenditures, NBER and author’s calculations.

So, total current government expenditures (on goods, transfers) is less than 44% of “private GDP”; whether that is a denominator that makes sense is a relevant question. More importantly, I just cannot understand why people assert things as facts without checking them (or even providing a link to a source; didn't they teach this sort of thing in high school?).

Notice that 2012Q3 levels of outlays to non-government GDP are less than in 1982Q4.

Second, note that government spending in real terms has been increasing at a slower pace than real GDP.

Figure 2: Log real government consumption and investment to real GDP ratio (blue), and log nondefense government consumption and investment to GDP ratio (red), all in Ch.2005\$. Real nondefense government calculated using Tornqvist approximation. NBER defined recession dates shaded gray. Source: BEA, 2012Q3 third release, NBER and author’s calculations.

Note that because the real variables are measured in Chain weighted dollars, one cannot simply take a ratio and compare levels. Rather one can look at how fast real aggregates have grown relative to other real aggregates by examining the slope of the curves.

Total government spending on goods and services has trended more slowly than GDP since 1987, and has been growing more slowly since 2009Q3. Nondefense government spending has exhibited similar behavior. One might suspect it’s employment, not output, that is most visible, thereby driving the “expanding government meme”. Below is the ratio of government employment to total nonfarm employment.

Figure 3: Ratio of government employment to total nonfarm payroll employment, s.a. NBER defined recession dates shaded gray. Source: BLS, November 2012 release, NBER, and author’s calculations.

While employment peaked at a ratio comparable to that recorded in 1992M08 (after taking into account temporary Census workers), it is now even below the previous peak recorded in 2003M07.

Finally, while current expenditures as a ratio to potential GDP did rise to high levels during the recession and immediate aftermath (as one would expect from a counter-cyclical stabilization policy), they are now below the ratio recorded in 2002Q3. What is remarkable is how much below average total current revenues are.

Figure 4: Ratio of government current expenditures (all levels) divided by potential GDP (blue), government current expenditures minus Federal defense consumption and investment (light blue), and total current receipts (red). NBER defined recession dates shaded gray. Source: BEA, 2012Q3 third release, Table 3.1 for expenditures and receipts, CBO Budget and Economics Outlook (August 2012) for potential GDP, NBER and author’s calculations.

Note that defense spending accounts for 5 percentage points of potential GDP worth of total expenditures (spending on goods and services, transfers, at all levels of government), as of 2012Q3.

Posted by Menzie Chinn at December 27, 2012 07:50 AM

digg this | reddit

The potential GDP number itself is highly suspect. The official number is too high. It is based on historical trends and pie-in-the-sky views of returning to those trends.
It ain't going to happen. The potential GDP number must be more realistic because many people are basing their predictions on this number.
In short, people are going to be harshly surprised and upset when they find out that the number for potential GDP is an illusion.
The whole paradigm that the current number of potential GDP represents has changed. At some point, it must be adjusted to reality.

Posted by: Edward Lambert at December 27, 2012 10:47 AM

Romney wanted Federal spending at 20% of GDP; Obama wants it at 22.5% of GDP (and that's assuming 4% average GDP growth in the 2013-2017 period).

If Obama wants it back at 20%, he need only say so, and I believe this whole fiscal cliff thing could be solved in short order.

But he hasn't said that. He hasn't said, "You know, the last time this country was in really good shape, Federal spending was at 18.5% of GDP and the books were balanced. And that was under the last Democrat before me, Bill Clinton. That worked as a better model of prosperity than anything since Eisenhower, and we intend to go back to it."

He hasn't said that. If he did, I would fall to my knees, claim "All hail Obama!", and pony up whatever taxes he might want of me. I would believe this country has a future again.

Posted by: Steven Kopits at December 27, 2012 10:56 AM

Alternatively, I would accept any level of taxes and spending the Democrats might desire if they established compensation for every member of Congress as follows:

Bonus equals =

(GDP growth (in dollars)- increase in government debt and obligations in dollars) x 0.25% / 535 members of Congress

Example:

\$450 bn (3% GDP growth) - \$250 bn increase in debt =

\$200 bn * 0.25% = cc \$500 million / 535 members =

cc \$1 million bonus per member

Yup, if Harry Reid gave me that, I'd cave on every spending and taxing plan he has.

Posted by: Steven Kopits at December 27, 2012 11:13 AM

Steven, that might be a useful comparison if the U.S. were demographically the same as it was in the mid-late 1990's. The country is different now. Our population is much older than it was, and our largest federal programs deal mostly with old people. Unless you, and more importantly the American electorate, are ready to really cut into Medicare, then we will have to live with federal spending at closer to 22% GDP.

Posted by: mike v at December 27, 2012 12:00 PM

You too are making the mistake of using past data as a guide for future policy. We cannot go back and repeat any condition in the past.
There are internal mechanisms that will block the economy from moving back to past conditions.
For instance, capacity utilization is now capped below 80%. Unemployment has a natural rate above 7%. Do you know how much labor share of income has fallen? and what impact that will have?

The economy has changed in ways you don't realize yet.

Posted by: Edward Lambert at December 27, 2012 01:11 PM

Steven, the balanced budget during the Clinton era was a result of capital gains receipts from the dot.com stock market bubble, which was a once-in-a-lifetime occurrence.

Menzie, without "gov't spending" (mostly attributable to the growth of war-related spending since '01 and transfers since '08) and private "health care" spending growing combined at much faster than the rate of trend nominal GDP since '00, the trend rate of real GDP to date would be near 0% instead of the reported 1.6%, and negative real per capita.

In nominal terms, total local, state, and federal gov't spending, including transfers, is an equivalent of nearly 100% of private wages. Is this sustainable? No.

Why is the rate of change of growth of real gov't spending decelerating as you present? Might it be because of decelerating private uneconomic growth, falling receipts, and deficits since '01?

Might it also be because there has not been a net new full-time private sector job created in 29-33 years per capita? Why is that? (Gov't employment per capita has fallen commensurately back to the level of the late '70s to early '80s.)

Might it be because US crude oil extraction peaked about that time and has fallen 50% per capita since (60% per capita since '70), prohibiting the US from sustaining a growing domestic industrial economy, including jobs for engineers, technicians, accountants, managers, etc.? (How many nations or empires have prospered when the primary energy source declines 50-60% per capita domestically over 27-42 years?)

Might it be because financial capital's share of GDP is at a record high and labor's share of GDP as a consequence has fallen to a post-WW II record low?

Might it be because debt and debt service costs to wages and salaries of the bottom 90% have exacerbated the effects of deindustrialization and price effects?

Gov't and debt have grown along with (as a result of) worsening wealth and income concentration to the top 1-10%, and within that stratum to the top 0.1%.

http://research.stlouisfed.org/fredgraph.png?g=e4O

Also, note that the decline in gov't employment to total employment of late is primarily a result of recent losses of jobs at the local level from declining income, sales, and property tax receipts. But local gov't employment growth has been the part of gov't employment that has grown by far the most, owing to employment in "education", including teachers and administration, which in turn benefited from the monetization of land values via mortgage debt and rising property tax assessments and receipts (not sustainable hereafter because of lack of growth of employment, wages, and unreal estate prices).

http://research.stlouisfed.org/fredgraph.png?g=e4U

State and local (primarily local) gov't expenditures is at or near a post-WW II high, despite the decline since '10.

http://research.stlouisfed.org/fredgraph.png?g=e4S

As of last year, the reported annual total nominal local, state, and federal gov't current expenditures to nominal GDP was above the level of WW II and averaging around the level of WW II since the early '80s.

To Edward's point about potential GDP, the US is tracking the 1830s-40s, 1890s, 1930s-40s, and Japan since '98 in terms of real GDP per capita, implying that the potential real GDP estimate of 2.2% through '22 is much too high. Given debt/GDP, Boomer demographic drag effects, Peak Oil, looming fiscal constraints, and slowing growth in China-Asia, the potential real GDP trend is closer to 0-0.6% than 2.2%, and ~0% real GDP per capita.

http://research.stlouisfed.org/fredgraph.png?g=e53

http://research.stlouisfed.org/fredgraph.png?g=e4W

http://research.stlouisfed.org/fredgraph.png?g=e4Y

The US has added over \$8 trillion in local, state, and federal debt since '01, which is a doubling time of 10-11 years (to a doubling time of post-'00 nominal GDP of 18-19 years) and an order of exponential magnitude to GDP since '82.

The federal gov't has run cumulative deficits since '08 at an equivalent of more than private wages today.

The larger point is that energy constraints, demographic drag effects, wealth and income concentration to the top 1-10% of households, and unprecedented levels of debt to GDP and wages will not permit growth of real GDP per capita. Therefore, growth of gov't receipts and spending per capita at all levels has peaked and will contract hereafter, especially at the local level, and to a lesser extent at the state level.

http://research.stlouisfed.org/fredgraph.png?g=e4Y

Taxing rentier incomes of the top 1% and labor for medical insurance with total local, state, and federal receipts to GDP already above 30% and trend real GDP per capita decelerating to 0% since '01 will not increase revenues and permit current levels of gov't spending; rather, private consumption of the top 1-10% will fall more than it was otherwise going to from demographic effects, resulting in an incrementally larger negative multiplier effect on private uneconomic activity.

Posted by: Bruce Carman at December 27, 2012 05:50 PM

Aim of this post is well taken into account, for few countries the direct and visible government’s share of GDP expenditures is decreasing.
Everything is for the best in the best the possible world, but how and where in this post is an estimate of the share of the government’s support to the financial, banking commodities private sectors. The explicit or implicit government’s guarantees on private debts, an estimate of the cost of central banks support to the National Debts.
Shoring up AIG stock market share price has a social cost (Econbrowser post on the subject). Subsidizing the cost of money at the expenses of savings, subsidizing the real estates prices, the equities markets are direct government expenses requiring analytical costs and apportionment of the social contribution through government’s share of the private sector.
The real issues and problems,are in the shadow government’s and Central Banks participations in the financial sectors, the gigantic share of the financial sector in GDP's.

Posted by: ppcm at December 27, 2012 08:11 PM

Assuming the government can get more taxes, which they may not get even with a rate increase, Spending remains out of control. Debt continues upward which keeps zero interest rates which kills growth. There’s no way out of this.

Posted by: dominic at December 28, 2012 01:52 AM

Chart 1: It would be interesting to see a linear regression comparing '67-'83 with '84-'12. Certainly there is a strong case for "ever increasing government in the earlier series, and the effect is MUCH less pronounced in the second series of years.
Chart 3: I'm guessing that this is not so much counter cyclical as non cyclical. I'd bet that most of this is due to lower non-governmental employment, rather than increased government employment during and after recessions.

Posted by: Jim A. at December 28, 2012 06:39 AM

My view is that the Tea Party folks are largely right (about our need to control government spending), but for the wrong reasons. Their view appears to be that lower taxes and lower government spending will put us on a permanent upward slope of economic prosperity, as we increase our consumption of virtually infinite fossil fuels.

And the conventional wisdom across party lines seems to be that it is not if, but when, that we see abundant global supplies of crude oil driving prices back down below the \$100+ Brent price that we have seen for some time now.

In my opinion, we cannot afford anything like our current level of government spending, due to the oil constrained global economy that we have been in since 2005, with the developing countries, led by China, consuming an increasing share of a declining volume of Global Net Exports of oil (GNE*).

The 2002 to 2011 rate of GNE to Chindia's Net Imports (CNI):

http://i1095.photobucket.com/albums/i475/westexas/Slide03.jpg

Chindia = China + India

At the 2005 to 2011 rate of decline in this ratio (and the rate of decline in the ratio has accelerated in recent years), in only 18 years the Chindia region alone would consume 100% of GNE, theoretically leaving zero net oil exports for about 153 net oil importing countries.

*Top 33 net exporters in 2005, BP + Minor EIA data, total petroleum liquids

Posted by: Jeffrey J. Brown at December 28, 2012 06:44 AM

Spending is not the pernicious "Ever Expanding Government". I'll be the first to admit that no small part of the deficit is due to counter-cyclical welfare programs and reduced tax revenue because of the slower economy.

The "Ever Expanding Government" refers to the ever-expanding list of onerous regulations that impede growth. Just look at the actions of the EPA over the course of Lisa Jackson's reign of terror. Manufacturers are being tormented, coal-fired power plants are facing death sentences, the regulatory review process has been changed such that parties no longer have sufficient time to comment on proposed changes, etc. And let's not forget the ACA, which imposes all kinds of taxes and burdens on just about everyone.

Posted by: Brian at December 28, 2012 07:46 AM

I figure most legal matters should be considered governement expense.

Posted by: aaron at December 28, 2012 08:03 AM

aaron: Do legal conflicts between two non-governmental parties count? If so, should we include ammo and gun costs in a counterfactual anarchic society, should the judicial system not exist? How about cost-of-life associated with extra-judicial resolution of property disputes?

Posted by: Menzie Chinn at December 28, 2012 08:25 AM

Steven Kopits Romney wanted Federal spending at 20% of GDP; Obama wants it at 22.5% of GDP (and that's assuming 4% average GDP growth in the 2013-2017 period).

This is ludicrous nonsense. Romney proposed what he claimed was no more than a "revenue neutral" tax plan. "Revenue neutral" either means Romney wanted spending at 15.8% (i.e., expenditures equal to revenue) or he wanted to establish a permanent structural deficit equal to 4.2% of GDP (i.e., 20.0% - 15.8% = 4.2%). A permanent structual deficit of 4.2% is not sustainable. Not even close.

And you should take a closer look at the OMB historical tables. For more than 2 decades (1975 through 1997) total federal spending as a percent of GDP was over 20% and quite often it was well over 22.5% of GDP. There was a very brief period around the turn of the millenium when spending as a percent of GDP fell below 20%, but that drop was a special case not likely to be repeated. First, the economy was booming, so you would expect the denominator (GDP) to grow faster than the numberator (government spending). Second, the boom allowed for a countercyclical policy that saw a drop in on-budget spending. Finally, there was a demographic fluke that saw a very sharp and temporary plunge in off-budget (i.e., Social Security) expenditures as pre-boomers died off and baby boomers were not quite yet retiring. That was a demographic outlier.

If you honestly believe federal expenditures going forward can be held to a steady state rate of 20% of GDP, then I don't know what to say. Beliefs like that are simply out of touch with reality. You're just picking a number you like and making a wish. If you want to deal with reality, then you look at the on-budget side and the off-budget side. The on-budget side shows a gradual return to the long-run rate going back to the mid-1970s. The Obama budget forecasts on-budget expenses of roughly 18.3% and off-budget expenses of 4.2%. The off-budget number of 4.2% is pretty well baked in the cake and is a function of demographics. Unless you plan on killing off granny, if you expect to cap spending at 20% of GDP then you have to cap on-budget spending at 20.0% - 4.2% = 15.8%. Good luck with that.

Posted by: 2slugbaits at December 28, 2012 09:23 AM

How about a new year resolution to drop 'metric' for 'measurement' and 'counterfactual' for 'alternative'?

Dropping faculty lounge worblespeak is a useful step towards making academic economists as useful as dentists, thus paying homage to Keynes.

I for one would respect the academic world more if this small step were taken and I'll bet no one would be stripped of their PhD if they adopted it.

I note that the wonderful S. Kopits writes in English.

Posted by: c thomson at December 28, 2012 10:04 AM

aaron: "I figure most legal matters should be considered government expense."

In California, as an example, 73% of all civil cases are corporations suing corporations in contract disputes.

Posted by: Joseph at December 28, 2012 10:04 AM

c thomson: Hmm. So you are proposing to eliminate "econometrics" as well? That would be consistent with your anti-empirical bent. How about you resolve to never to use the words "venal" and "snivel" in your comments?

Posted by: Menzie Chinn at December 28, 2012 10:16 AM

Not empirical? How would you describe Congress if you didn't use venal? Or traditional liberals if snivel were banned?

Snivel is just what liberals do - the exact flip side of gomer Republicans - and why they deserve each other so much.

As for econometrics, why not? It doesn't mislead by giving credibility to guesswork, as does counterfactual.

Happy New Year!

Posted by: c thomson at December 28, 2012 10:35 AM

Not empirical? How would you describe Congress if you didn't use venal? Or traditional liberals if snivel were banned?

Snivel is just what liberals do - the exact flip side of gomer Republicans - and why they deserve each other so much.

As for econometrics, why not? It doesn't mislead by giving credibility to guesswork, as does counterfactual.

Posted by: c thomson at December 28, 2012 10:45 AM

I think graphing logs of things should be banned as well. Castro probably uses logs to make Communism look better.

I'm back! Happy New Year everyone!

Posted by: randomworker at December 28, 2012 11:26 AM

2slugs

If you honestly believe federal expenditures going forward can be held to a steady state rate of 20% of GDP, then I don't know what to say. Beliefs like that are simply out of touch with reality.

If the Obama whitehouse is projecting 22% - 23% spending/GDP over the next 10 years, then I say yes, it is reasonable to expect spending at 20% of GDP, given a non-progressive administration that is willing to reduce the growth rate of entitlement spending. Proposing a 2% VAT is the true ludicrous nonsense.

Here are the whitehouse budget summary tables.
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/tables.pdf

Note the loopholes that are cut/closed. I thought progessives were against capping deductions and closing loopholes. Typical progressive doublespeak. Say one thing and do another.

Posted by: tj at December 28, 2012 12:10 PM

Menzie, perhaps the goal is the elimination of that pesky thing called math.

It's happened before. If you go back to old statute books, you find laws prohibiting the use of numerals. Accounts were required to be written out, so the number 135 would need to be one hundred and thirty-five, except of course in their language. It's amazing to see these laws on the books in commercial centers like Florence and not in the Middle Ages.

Why did these laws exist? Religious beliefs that manipulation of numerals was magic, was the work of the devil, and other similarly idiotic nonsense. Similar to the kind of nonsense of today's believers.

BTW, the argument has been made - don't know how true it is - that the "secret knowledge" so often attributed to the Jews in those centuries was bookkeeping. The Jews, it is known, kept hold of the Roman methods of double-entry bookkeeping that Christian nations rejected. And I mean rejected: it is not that they didn't know these existed but that they believed they were against God's will. As I said, I can't say whether the argument is correct but the common belief that knowledge was simply lost is not true: it was intentionally put aside in favor of what time revealed to be utter ignorance.

So yeah, people would love to ban econometrics. And that pesky math.

Posted by: jonathan at December 28, 2012 12:33 PM

tj I thought progessives were against capping deductions and closing loopholes.

You're confused. Progressives are against bait-and-switch. And in case you didn't know, capping deductions and closing loopholes refers to the revenue side of the ledger. The discussion concerned the expenditure side.

it is reasonable to expect spending at 20% of GDP, given a non-progressive administration that is willing to reduce the growth rate of entitlement spending.

Most entitlement spending is driven by demographics. Do you have a magic asterisk to fix that little problem? Instead of "entitlement spending" why not look at each program? Social Security has a very long run problem, but it's also a problem that is relatively easy to fix. Just capturing the traditional percent of income subject to the FICA would go a very long way towards fixing Social Security's problem. Medicare, Medicaid and interest payments are the three big entitlement programs driving future deficits. Obama has made some pretty big cuts to Medicare, for which the Democrats paid dearly in 2010. The Romney/Ryan plan managed the neat trick of increasing total Medicare spending while at the same time reducing benefits. And Obama's plan increases the deficit when interest rates are low, but brings down the deficit when interest rates return to normal levels. That's exactly the opposite of the GOP plan, which worries about the deficit when interest rates are low and is indifferent about deficits when interest rates are high. (For example, Romney's plan assumed a permanent structural deficit of at least 4% of GDP.)

Proposing a 2% VAT is the true ludicrous nonsense.

Take an economics course. The superiority of a VAT relative to a higher marginal income tax rate on the middle class is one of the very few things about which all economists of just about every political stripe would agree.

Posted by: 2slugbaits at December 28, 2012 02:45 PM

2slugbaits,

I won't go into the expenditures portion of your remarks as I don't consider myself informed. I do want to challenge your claim that revenue neutral means 15% of GDP. Romney proposed a tax plan to raise ~19% of GDP. I.e. the plan was revenue neutral with respect to what the bush rates would have raised if they were made permanent.

Posted by: Jon at December 28, 2012 07:40 PM

Jon That is not my understanding of the Romney plan. What Romney claimed to do was lower marginal tax rates below the Bush marginal rates, but to make up for the lost revenue by closing loopholes and such. Romney never promised to raise more total revenue than would have been raised under the Bush tax rates. In other words, even if you accepted the Romney plan at face value (and you had to be a fool to do that), at best his plan was revenue neutral with respect to the Bush tax rates. And under the Bush rates total revenues were never anything even close to 19%. Even at the peak of the business cycle (FY2007) Bush only got to 18.5%. We've had four consective years with total revenues under 16%. And don't forget that some of that total revenue included off-budget FICA receipts that averaged almost half a percentage point higher than we can expect going forward.

Posted by: 2slugbaits at December 28, 2012 09:17 PM

2slugs

Take an economics course. The superiority of a VAT relative to a higher marginal income tax rate on the middle class is one of the very few things about which all economists of just about every political stripe would agree.

If you want to replace the federal income tax with a VAT, then be my guest. It would be easier and more efficient to cap deductions and eliminate loopholes. Of course, that would mean fewer jobs for lobbiests and fewer campaign contributions from special interests.

I'll take an econ course if you'll ask for a refund from whatever liberal institution of higher education you attended. It seems they taught you that the only way to balance a budget is buy increasing revenue. No where in your ramblings did you even consider a cut to the growth rate of spending.

All you want to do is increase taxes AND spending. Nice plan. You are farther to the left than Obama. At least he campaigned on a balanced approach to deficit reduction. You are well-versed in theory, but lacking in pragmatism.

Posted by: tj at December 29, 2012 06:50 AM

tj If you want to replace the federal income tax with a VAT, then be my guest

That would be stupid because it would be virtually unenforceable at high levels. You want a mix of taxes without relying too much on any single revenue source.

It would be easier and more efficient to cap deductions and eliminate loopholes.

We tried that in 1986 and it got us where we are today. And I supported the 1986 tax reform. Fool me once... Closing loopholes is fine, but your efforts would be better served if you just worried about not creating any new loopholes and deductions. There's an old axiom in public finance that says the best tax is an old tax. The idea is that over time elasticities adjust to any given tax; but when there is a "shock" to the tax system there is also a temporary windfall to those with the most elastic factor. Usually that means rich folks. So "tax reform" is oftentimes just a euphemism for a new opportunity to shift the economic burden of taxes onto those that own the most inelastic factors; i.e., the poor. That's why rich Republicans are always talking about "tax reform" rather than raising marginal rates.

ask for a refund from whatever liberal institution of higher education you attended

Ha! That would be one of the high temples of freshwater economics where the ghost of Frank Knight still haunts the graduate library late at night.

No where in your ramblings did you even consider a cut to the growth rate of spending.

Hmmm. So cutting over \$700B in Medicare doesn't count as cutting the growth rate of spending? If you bothered to check Menzie's data you would see that there has been a slowdown in the growth rate of government spending. That was the main point of his post!!!

You are farther to the left than Obama.

The first true thing you've said in awhile.

You are well-versed in theory, but lacking in pragmatism.

I'm not the one peddling the fairy tale of capping deductions, closing loopholes and entirely replacing the income tax with a VAT.

Posted by: 2slugbaits at December 29, 2012 08:46 AM

What I find amusing is the almost Neo-Marxist type populist rhetoric coming out of Republican partisans these days.

I also find it amusing and somewhat scary this notion that all will be well once US federal expenditures and transfers are reduced. Very scary is this populist anti-European attitude when Europe provides all kinds of lessons on how kill-and-take policies ultimately backfire and lead to decline in both economic power and military reach.

Posted by: westslope at December 29, 2012 10:50 AM

I looked at the chart again. How did the current expenditures to GDP ratio drop so far in the late 1990s when hard-working Americans were struggling under oppressively high income tax rates?

I fully understand the virtues of flat rate income taxes and a tax regime that shifts the burden away from production to consumption. But since the what early 1970s, hasn't the income tax regime flattened out considerably? Aside from the cost-reducing benefits of simplification, are there significant gains on the margin to be made from lower taxes?

Posted by: westslope at December 29, 2012 10:58 AM

2slugs,

The basic point is that tax brackets are indexed for CPI not NGDP. So average rates rise over time despite indexing. So in the next ten years we would have seen revenue in the realm of 18-19% of GDP structurally not merely under good conditions without going to the Obama rates of 15-44.3%.

Posted by: Jon at December 29, 2012 12:55 PM

@TJ

"You are well-versed in theory, but lacking in pragmatism."

Government budgeting is nothing like budgeting for a household or a company, or basically anything most of us would be familiar with, so from where do you derive your pragmatism? All you've shared in your posts is some received wisdom of dubious value. That's more or less the opposite of pragmatism.

@2slugs:

I'm curious why you think a VAT is unenforcable at high levels, and what you think constitutes high levels. Chile has a 19% VAT, and the way it's structured seems to make avoidance fairly difficult.

Posted by: Rodrigo at January 3, 2013 06:14 AM

Must consider fixed costs v. variable costs. With growing GDP, the fixed costs of defense (this does not depend on the population or GDP size) should fall as a percent of GDP. Variable costs, such as transfers, should also fall as rising GDP means fewer folks in poverty. This has not happened. Instead, rising GDP has meant increased transfers, indicating that transfers have a positive income elasticity...the more we make, the more we transfer. Thus, even though the lowest income has had a large increase in income, it has not kept up with the high incomes, and so there is a demand to transfer some of that down.

Essentially we have a nationalistic Rawlsian social welfare function, where redistribution within the U.S. is a good thing. However, it should be noted that whereas \$1 spent on the lowest U.S. income bracket helps out somewhat, \$1 given to somebody in Bangladesh has an entirely different effect.

Posted by: pete at January 8, 2013 10:02 AM

A search brought me here, so even though its late I thought I'd add some information for those misled by it.

First the figures are using government "current expenditures", which is misleading since even though it is what is included in GDP figures, it doesn't include all government spending (which is what is of concern to citizens). The federal Bureau of Economic Analysis which produces the "current expenditures" figures also provides a "total expenditures" figure which it explains here:

http://www.bea.gov/scb/pdf/2008/03%20March/0308_primer.pdf

which includes more things, however even that may be an underestimate since the govt. likes trying to downplay its spending. e.g. you'll find in the OMB's chapter 16 explaining the federal budget
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/spec.pdf that although a figure of \$3,603 billion is listed for "total outlays" for the federal government for FY2011, that in actuality there were \$4152 billion in "gross outlays". Instead of including some revenue under "receipts", like fees, they use it to "offset" spending and pretend there were smaller outlays to confuse the public. I'm unsure at the moment whether the BEA appropriately handles the issue of "offsetting receipts" used to hide expenditures.

Non US-government sources like the IMF and the OECD also provide data for "total government expenditures" which are higher. e.g. for the more recent year the IMF has "total expenditures" figures based on real data (vs. estimates), 2010, it lists US

http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.aspx

total government expenditures of \$6,122 billion. The OECD has a similar figure:

http://http://stats.oecd.org/

of \$6,154 billion for 2010.

In contrast the BEA:

http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Lists "Current Expenditures" for 2010 as \$5,304 billion and "Total Expenditures" for 2010 as \$5,578 billion

I haven't seen a good source outlining the reasons for the differences between the figures. Even the international figures need to use data from US government sources so I'd be curious if even those are underestimates.

Posted by: Politics Debunked at January 22, 2013 12:14 PM

re: "First, even if we believed outlays as a share of non-government GDP was a reasonable measure, could we replicate the 54% number cited? No."

btw, it is trivial to replicate the figure using "current expenditures", its unclear why the concept appears to be so difficult for you to grasp. He refers to government as being "54% of private GDP"

I take that to mean the ratio "GovernmentShareOfGDP/non-GovernmentShareGDP". i.e. The ratio "GovernmentCurrentExpenditures/(GDP - GovernmentCurrentExpendigures)".

which matches his figure, here is a Federal Reserve graph link of it:
https://research.stlouisfed.org/fred2/graph/?graph_id=104168&category_id=0

Posted by: Politics Debunked at January 22, 2013 12:55 PM

Ok, the federal Bureau of Economic Analysis does provide the data to the OECD using the international SNA (System of National Accoutns) standards Here is their page:
http://www.bea.gov/national/sna.htm

Where they come up with more complete figures of total government expenditures, e.g. \$6,153.8 billion for 2010 and \$6,251.4 for 2011, which are higher than their \$5,577 for 2010 and \$5,642.9 figures claimed in their NIPA (National Income and Product Accounts) for "total government expenditures".

Posted by: Politics Debunked at January 22, 2013 01:33 PM

PS.. oops, I should have noted that the graph explains his comments, but its only an approximation, GDP is a complicated figure, they actually use
http://www.bea.gov/faq/index.cfm?faq_id=552
"Government consumption expenditures and gross investment" to calculate GDP, rather than figures that more accurately represent current expenditures or even better total expenditures. There are issues of potential mismatch if you do a simplistic calculation like I did in the graph above, but the concept is "close enough for government work", or at least illustrating a point :-)

Posted by: Politics Debunked at January 22, 2013 03:00 PM

Perhaps I should have explained the issue is that full government spending includes transfer payments, which aren't considered "production" so they aren't part of GDP, even though it is money that passes through government hands. A better way of looking at it is the fraction of GDP that passes through government hands, compared to the "real" wealth production of the private sector, which is the GDP minus the share of government spending included in GDP. That would be "TotalGovernmentSpending/(GDP - GovernmentConsumptionAndGrossInvestment)"

Unfortunately the convenient Fed graph site doesn't seem to include the better measure of total spending (SNA), using the NIPA's measure, here is a graph:
https://research.stlouisfed.org/fred2/graph/?graph_id=104199&category_id=0

It peaked at around 50%. When you consider that the other figures for total government expenditure are around 10% higher, that is in the ballpark of the figure this blog entry was complaining about. In reality even the larger figure may not include all government aspects of the economy. In a description which may or may not be out of date (will check on it another time) of the SNA categories

http://unstats.un.org/unsd/publication/SeriesF/seriesF_85.pdf
it states that: ""9.34. As long as those entities can charge market prices or prices that cover over 50 percent of costs, they are excluded from the government sector.""

i.e. one of many scams government types try to hide the true cost of the government sector.

Posted by: Politics Debunked at January 22, 2013 04:41 PM