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EGGS: Excessive Growth of Government Spending

Two horses head for the horizon--one at a gallop, one at a trot. A simple glance tells you both horses appear to be getting smaller. But the fast horse shrinks more quickly from view than the slow horse. Using the size of the fast horse as a benchmark, one could argue that the slow horse is getting bigger. But surely no one would say such a foolish thing....

The Wall Street Journal's editorial of 3 March 1995 [page A10] concerned the Senate's failure to pass the Balanced Budget Amendment. The editorial provided a little graph showing government receipts and outlays as a percent of GDP. The graph showed relatively stable receipts. It showed outlays and deficits increasing significantly since the early 1970s.

The Journal had a nearly identical graph on its editorial page of 4 January 1995.

Others were fascinated with the growth of government as well. In his 1992 book United We Stand, Ross Perot wrote, "The Federal government's share of our gross national product increased from 19 percent to 25 percent over the past twenty years" (page 34). And the Investor's Business Daily examined "federal spending as a share of GDP" (7 February 1995, page B1). The IBD compared the data over two twenty-year periods, noting an increase in the latter period.

Everyone was interested in those numbers. The time has come to evaluate them.

Over time, the government sector as a share of the economy has grown. Between 1950 and 1970, federal spending as a share of GDP averaged 18.6%. That figure grew to 22.9% between 1970 and 1990. "We have been stuffing the unsuccessful part of our economy, and starving the successful part," [economist Milton] Friedman said.

Economic performance seems to support Friedman. Real economic growth averaged 4.1% a year in the two decades following World War II. Between 1970 and 1990, economic growth limped along at 2.7%.
from the Investor's Business Daily, 7 Feb 1995, page B1

Key points:

  1. The Daily observes that "over time, the government sector as a share of the economy has grown."
  2. It quotes Milton Friedman on "stuffing the unsuccessful part of our economy, and starving the successful part."
  3. Presenting data on growth, the Daily says "economic performance seems to support Friedman."

Indeed, economic performance seems to support Friedman; but it does not. What seems to be evidence is nothing but mathematical foolishness. The numbers do not support the claim that we have been "stuffing the unsuccessful part." They do not support the claim that government spending has grown excessively.

Maybe the government spending has grown excessively. Everyone seems to think so. I'm just saying, the evidence provided by the Investor's Business Daily does not support the claim.

The calculation used by the Investor's Business Daily to show the growth of government is "federal spending as a share of GDP." This ratio is a valid and useful economic tool. It is suited to the purpose for which the Daily uses it. And the paper is correct in pointing out that the ratio went up: Federal Spending did increase relative to the GDP.

The number used by the Daily to show decline of economic growth is "real economic growth." Growth of the economy is measured by increases in the GDP. "Real" growth adjusts the figure to remove inflation, giving a more honest ("real") picture of actual growth. This is another valid and useful economic tool. And again, the paper interprets the data correctly: GDP growth has declined.

Where the Investor's Business Daily fails is in the conclusions it draws from its facts. The conclusions are not supported by those facts. There can be no doubt about this, no ambiguity, and nothing left in question. The relationships are purely mathematical. The Investor's Business Daily has it wrong.

A ratio is a way to simplify and improve information. It lets us turn two numbers into one fact. It also allows us to go backwards and see two numbers again. Not the originals, but equally valid numbers.

Rather than trying to guess the original numbers used by the IBD, I just made up a starting point. I used a value of 100 for the GDP in 1950. After that I could get GDP and federal spending numbers for every relevant year. Again, not the original numbers, but proportional to the numbers the IBD was using. Based on their figures.

Here, based on the IBD percentages, are the numbers I came up with:

 Year   GDP   Federal Spending 
1950
100
18.6
1970
223.4
41.5
1990
380.6
87.1

Between 1950 and 1970 Real GDP grew by 123.4 units, or 123%. And Federal Spending grew by 22.9 units or 123%. Between 1970 and 1990 Real GDP grew by 157.2 units, or 70%. And Federal Spending grew by 45.6 units or 101%.

Now I could take these overall growth percentages and work out average annual rates of growth. The average annual growth rates would look like more realistic growth rates and you might like them better. But these are not real numbers. They are made-up numbers, made up from my base of 100 and IBD's growth-rate numbers. Anyway the overall growth percentages (for the twenty-year periods) are just as valid as annual growth rates, and maybe more appropriate.

You can see from the overall growth percentages that Real GDP growth fell (from 123% to 70%) from the first period to the second. And you can see that Federal spending growth also fell (from 123% to 101%). The growth rate of federal spending fell. The numbers--the Investor's Business Daily's numbers--do not support the claim that we have been "stuffing the unsuccessful part." The numbers do not support the claim that government spending has grown excessively. Based on the Daily's numbers, the growth of federal spending declined.

So, what's up with that? I am pointing out a bit of mathematical tomfoolery, that's all.

A ratio is one number created from two. But a ratio is a new number, different from its parents. And, if numbers have meaning, then a ratio has different meaning than its parents. For example, "federal spending as a share of GDP" is not the same as "federal spending." The federal-spending number is just raw data. The "federal spending as a share of GDP" is a ratio that gives context to federal spending. The ratio is different from its parents. It shows federal spending relative to the GDP. That means it doesn't only show changes in federal spending. It also reflects changes in GDP. And that may be a source of confusion.

Federal spending increased relative to GDP, but GDP growth declined. The GDP decline makes the federal spending look bigger than it really was. In fact, both growth rates declined. Despite what the Investor's Business Daily was saying, the Investor's Business Daily's data shows that federal spending growth declined. But GDP growth declined faster than federal spending growth. And the fast horse shrinks more quickly from view. The IBD is arguing that the slow horse is getting bigger.

The Investor's Business Daily article presents two facts:

  • "Government sector as a share of the economy" increased.
  • "Real economic growth" declined.

Given only these facts, all we can say for sure is that the government sector as a share of the economy increased because real economic growth declined. We get to use the word "because" there, because of the way ratios work. The ratio increased because GDP failed to sustain growth at its former level. Federal spending increased relative to GDP, because GDP growth declined. Given the data provided by the Daily, this is the only conclusion that may be drawn. There can be no doubt about this. The relationship is mathematical.

The conclusion most people reach from the Daily's observations is that federal spending has grown excessively. But the Daily offers no data at all on federal spending. Moreover, that conclusion is contradicted by numbers the Daily does present. The numbers show neither increase nor stability in the growth of federal spending. They show that the growth of federal spending declined.

(more...)

(c) 1995, 2009 by Arthur Shipman

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Art Shipman,
Mar 29, 2009, 2:40 PM