Tuesday, February 19, 2013

Sequester versus the rising benchmark


From usgovernmentspending.com:
US Federal Spending Since 1900


Federal spending began the 20th century at less than 3 percent of GDP per year. It jerked above 24 percent as a result of World War I and then declined in the 1920s to 3 to 4 percent by 1929. Federal spending started to increase after the Crash of 1929, and rose above 10 percent in the depths of the Great Depression.

Federal spending exploded during World War II to nearly 48 percent of GDP, and then declined to about 15 percent in the late 1940s.

In the Korean War of the early 1950s federal spending increased to over 20 percent of GDP, and then declined to about 17 to 18 percent by the end of the 1950s. In the 1960s federal spending began a slow increase to about 22 percent of GDP in the early 1980s, and then declined modestly to about 18 percent by 2000.

In the 2000s federal spending increased modestly to about 20 percent of GDP before exploding to 24 to 25 percent in the Crash of 2008.

I would say something a little different. I'd say Federal spending started out very low, and I won't even try to explain why that may have worked out okay. But then after World War One, Federal spending fell to "3 to 4 percent by 1929" -- and it was too little to prevent the Great Depression.

After World War Two, Federal spending fell to 15 percent. There was a recession or two soon after, but no big depression. 15 percent was not too little, in the late 1940s.

After the Korean war, Federal spending fell to 17 or 18 percent. Again, there was a recession or two soon after, but no big depression. 18 percent was not too little, in the 1950s.

After climbing to 22 percent in the 1980s, Federal spending fell to 18 percent by 2000. Then it rose to 20 percent, but that was too little to prevent the Great Recession.

In the 1920s and '30s, four percent was too little to prevent a crisis. Now, 20 percent is too little to prevent a crisis. Why the change? Why is this benchmark so high?

"How much is the government spending?" -- This is not the right question. The question is: Why is 20% too little? What changed, that Federal spending at 20% is not enough to keep the economy going?

A lot of people say the growth of Federal spending is the problem. But that's a circular argument. The growth of Federal spending -- and the rising benchmark for how much Federal spending it takes to avoid a crisis -- is evidence of some other problem. Our task is to understand this other problem. The right questions are the ones that help us understand.

My understanding is that the growth of private debt hinders the growth of the economy, and our other problems arise from slow growth.

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