GDP Trivia

Bearing in mind Arnold Kling’s reservations (and my own) about aggregate economic data, I will nevertheless entertain you with some trivial factoids on the occasion of the release of the 3rd quarter 2019 GDP estimate (advance estimate).

First, the post-World War II business-cycle record:

Graphically (with short cycles omitted):

The current cycle is the second-longest since the end of World War II, but also the least robust.

Note the large gap between the (low) peak growth rates experienced in recent cycles (purple, pale green, and red lines) and the (higher ones) experienced in earlier cycles. The peak for the current cycle (if you can call it a peak) occurred early (in the 5th quarter after the bottom of the Great Recession). Such a low peak so early in the cycle broke a pattern that had held since the end of World War II:

The red diamond represents the current cycle. Earlier cycles are represented by black dots, and the robust regression equation applies to those cycles.

I won’t be surprised if economists discover that the weakness of the current business cycle is due to Obama’s economic policies (and rhetoric), just as economists (unsurprisingly) discovered that FDR’s policies deepened and prolonged the Great Depression.

The Real Burden of Government (II)

The proprietor of Political Calculations, harkening back to Irving Fisher, makes a case for personal consumption as the proper measure of national output. Robert Higgs argues that personal consumption is the proper benchmark against which to measure the burden of government spending:

How big is government in the United States? The answer depends on the concept used to define its size. Although many such concepts are available, and several are used from time to time, by far the most common measure, especially in studies by economists, is total government spending (G) as a percentage of the gross domestic product (GDP)….

On reflection, however, one might well wonder why G has been “normalized” so often by measuring it relative to GDP. One reason this practice is questionable is that GDP includes a large part—equal in recent years to about 10 percent of the total—known as the capital consumption allowance. This is an estimate of the amount of spending that was required simply to maintain the value of the nation’s capital stock as it depreciated because of wear and tear and obsolescence. Given that GDP is defined to include only “final” goods and services, it is questionable that expenditures made solely to maintain the capital stock should be included at all, rather than excluded as “intermediate goods,” as a large volume of the economy’s total output is already excluded (e.g., steel sold the manufacturers of machinery, wheat sold to flour mills).

One way around this difficulty is to measure G not relative to GDP, but relative to net national product, which, except for a statistical discrepancy, is the same as the accounting concept known as national income (NI). Using NI as the denominator, for the same period 2010-14, we find that size of government in the United States was 41.4 percent. This figure, however, may still give a misleading impression of the relative size of government because NI includes elements that are more or less remote from the economic affairs of individual households.

After some adjustments to NI, including several deductions (e.g., for contributions to government social insurance) and several additions (e.g., for personal income receipts on assets), we arrive at the accounting concept designated personal income (PI), which, because the foregoing deductions and additions have been almost offsetting, has been approximately the same as NI in recent years. From the total PI, individuals pay taxes, spend a portion (designated personal consumption, C), and save the rest. PI is the income concept that accords most closely with ordinary people’s notion of their income.

Personal consumption outlays, which currently amount to about 95 percent of disposable (that is, after-tax) personal income, are an arguably superior denominator for the measurement of the relative size of government. If we use it as such, we find, for the same period 2010-14, a figure of 52.2 percent. Thus, by a more meaningful measure, total government spending is equivalent not to a little more than a third of the economy (G/GDP) nor to a little more than four-tenths of it (G/NI), but rather to a little more than half of the part of the economy that affords immediate satisfaction to consumers (C/PI).

I would argue that something like PI, rather than C, is the proper benchmark for measuring the burden of government spending. As Higgs says, “PI is the income concept that accords most closely with ordinary people’s notion of their income.”

But I would go a step further and say that the relevant measure of personal income is that part of it which derives from private economic activity: private personal income (PPI). I would therefore exclude from PPI any income derived directly from government employment and government transfer payments (Social Security, etc.).

PPI is a measure of “real” economic activity, in that it reflects the aggregate value of voluntary, mutually beneficial exchanges of goods and services. Government, on the other hand, crowds out and hinders real economic activity, in three ways: spending on government programs, redistributive spending, and regulatory activity. In other words, there is more to government spending than G, the formal definition of which excludes transfer payments. I therefore compare PPI to $Ga, which

represents the observable cost of [governmental activities], including [actual transfer payments and de facto transfer payments disguised as compensation of government employees and contractors], even though they flow into private-sector consumption and investment…. $Ga does not include indirect costs, such as those that are imposed by the regulatory burden….

Without further ado, here’s a graphical comparison of PPI and $Ga*:

PPI vs $Ga

That’s not the end of the story. Regulations impose a huge burden on the U.S. economy. Higgs cites the work of Wayne Crews, “who makes an annual estimate of the cost of compliance with federal regulations alone.” According to Crews, “Costs for Americans to comply with federal regulations reached $1.863 trillion in 2013.” (That’s remarkably close to an estimate for 2008 obtained by a different study, which I’ve cited elsewhere.)

Let’s focus on 2013. In then-year dollars, PPI was $11.4 trillion, $Ga was $6.3 trillion, and the regulatory burden imposed by federal regulations was $1.9 trillion. The sum of these three (mutually exclusive) quantities is $19.6 trillion. PPI accounts for only 58 percent of the sum. And it is safe to say that if State and local regulations were taken into account, PPI would account for no more than one-half of the dollar value of the nation’s potential economic output.

That is a reasonable estimate of the real (economic) burden of government — at the moment. But the cumulative burden is greater than that; decades of government spending and regulatory activity have cut the rate of economic growth almost in half since the end of World War II:

Real GDP by post-WW2 business cycle

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* I estimated PPI from Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 2.1, Personal Income and Its Disposition, by adding line 4 (wages and salaries paid by private industries); the portion of line 6 (supplements to wages and salaries) attributable to private employment (line 4 divided by line 3 — total salaries and wages, including government — times line 6); line 9 (proprietors’ income); line 12 (rental income); and line 13 (interest and dividend income).

I estimated $Ga from Table 3.1, Government Current Receipts and Expenditures, by adding lines 35-38: current expenditures, gross government investment, capital transfer payments, and net purchases on non-produced assets.

In both cases, I estimated per capita values by applying the population figures given at MeasuringWorth. I converted all estimates to 2014 dollars by applying CPI-U values obtained from BLS.gov.

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Related posts:
Lay My (Regulatory) Burden Down
Government in Macroeconomic Perspective
The Rahn Curve Revisited
The Slow-Motion Collapse of the Economy

Signature

Every Silver Lining Has a Cloud

Today’s big economic news is the decline in real GDP reported by the Department of Commerce’s Bureau of Economic Analysis (BEA): an annualized rate of minus 2.9 percent from the fourth quarter of 2013 to the first quarter of 2014. Except for times when the economy was in or near recession, that’s the largest decline recorded since the advent of quarterly GDP estimates:

Quarterly vs annual changes in real GDP - 1948-2014
Derived from the “Current dollar and real GDP series” issued by BEA. See this post for my definition of a recession.

What’s the silver lining? Quarter-to-quarter changes in real GDP are more volatile than year-over-year and long-run changes. Some will take solace in the fact that real GDP rose by (a measly) 1.5 percent between the first quarter or 2013 and the first quarter of 2014. (Though they will conveniently ignore the long-run trend, marked by the dashed line in the graph.)

What’s the cloud? Well, as I pointed out above, the quarter-to-quarter decline in the first quarter of 2014 is unprecedented in the post-World War II era. Unless the sharp drop in the first quarter of 2014 is a one-off phenomenon (as suggested by some cheerleaders for Obamanomics), it points two possibilities:

  • The economy is in recession, as will become evident when the BEA reports on GDP for the second quarter of 2014.
  • The economy isn’t in recession — strictly speaking — but the dismal performance in the first quarter presages an acceleration of the downward trend marked by the dashed line in the graph. (For those of you who care about such things, the chance that the trend line reflects random “noise” in GDP statistics is less than 1 in 1 million.)

Even if there’s a rebound in the second quarter of 2014, the big picture is clear: The economy is in long-term decline, for reasons that I’ve discussed in the following posts:

The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
The Causes of Economic Growth
In the Long Run We Are All Poorer
A Short Course in Economics
Addendum to a Short Course in Economics
The Price of Government
The Price of Government Redux
The Mega-Depression
As Goes Greece
Ricardian Equivalence Reconsidered
The Real Burden of Government
The Illusion of Prosperity and Stability
Taxing the Rich
More about Taxing the Rich
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Unemployment and Economic Growth
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
The Real Multiplier
The Commandeered Economy
We Owe It to Ourselves
In Defense of the 1%
Lay My (Regulatory) Burden Down
The Burden of Government
Economic Growth Since World War II
The Economy Slogs Along
Government in Macroeconomic Perspective
Keynesianism: Upside-Down Economics in the Collectivist Cause
The Price of Government, Once More
Economic Horror Stories: The Great “Demancipation” and Economic Stagnation
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
The Keynesian Multiplier: Phony Math
The True Multiplier
The Obama Effect: Disguised Unemployment
Obamanomics: A Report Card

See especially “Regime Uncertainty and the Great Recession,” “Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth,” and “The True Multiplier.”