Government vs. The Economy

By Tyler Watts
Score Update: Government beating economy 21-3 late in 4th quarter…I hate to use sports metaphors when talking about the economy because, while the two realms share some basic themes (like competition), their outcomes are radically different. For instance, sporting events are inherently win-lose, or “zero-sum games.” When the Colts play the Steelers, only one team can win. Sure, both teams can watch game film, fix mistakes, and work to improve their skills and strategies, but whatever they do, one side of this “transaction” always loses. However, in economic transactions, both sides usually come out ahead. Indeed, this tendency is so strong that it is an axiom of economics that “voluntary exchange is mutually beneficial.” Yes, there is competition between individuals and between companies, with some people “winning” and some people “losing” business or jobs. But the losers do not go home empty-handed; if Joe the plumber is out-competed by Roto Rooter, he is free to move on to work for which he is better suited. Most importantly, the end result of this market-based competition is a general boon for consumers, who enjoy continuously more and better goods at lower prices. So with economic competition, even the losers win. That being said, I think there is a sports-like conflict at play these days. It’s not within the economy, but between the economy and the government. You see, there are people out there who aren’t interested in the mutual gains from voluntary work, production, and trade. They don’t like market-based competition, where if you can’t hang in, you have to find another line of work. So instead of trying their best in the competitive economy, “win or lose,” they seek to gain at the expense of those who have succeeded in the market of competitive commerce. In modern times there is one proven tool for self-aggrandizement outside of the market economy, and that is government. Unlike the results of “voluntary competition” in the free market, government activities are not necessarily mutually beneficial. For the government to spend money on any project, it must first tax, borrow, or print money, all of which remove resources from the hands of citizens. So when the government “does more” to fix some problem, subsidize some crony, or placate some interest group (no matter how worthy the particular government program may be in its beneficiaries’ eyes), citizens out there in “the economy” must make do with less. To put it bluntly, when the bureaucrats “win” by expanding their programs, their laws, and their spending, the economy loses. So let’s keep score. For the past 10 years, the economy has been growing at an average rate of about 1.6% per year, measured in terms of real GDP (it’s a crude measure, but we’ll run with it). This includes the “great recession” of 2008-2009, of course, which brings the number down, but recessions have recurred at least every 10 years, so it’s fair to include it in the average. During the same period, real federal government spending increased at an average rate of about 6.5% per year.  
YearReal Federal Spending (Billions, 2005 $)Annual Growth RateReal GDP (Billions, 2005 $)Annual Growth Rate

2001

$2,055

1.59%

$11,362

1.00%

2002

$2,187

6.42%

$11,528

1.46%

2003

$2,303

5.29%

$11,738

1.82%

2004

$2,377

3.25%

$12,196

3.91%

2005

$2,486

4.58%

$12,571

3.07%

2006

$2,579

3.75%

$12,949

3.01%

2007

$2,572

-0.28%

$13,174

1.74%

2008

$2,754

7.07%

$13,310

1.04%

2009

$3,210

16.55%

$12,641

-5.03%

2010

$3,120

-2.81%

$13,058

3.30%

2011

$3,376

8.22%

$13,272

1.63%

Total Change

$1,321

 

$1,910

Total % change

64.28%

 

16.81%

Average % change

6.43%

 

1.68%

Source: www.governmentspending.com, Federal Reserve Bank of St. Louis   What does this mean? Quite simply, the federal government is increasing its consumption of resources at 4 times the rate at which the economy is increasing its output of them. In a contest of consumption vs. production, the government is “winning” in a blowout. If these growth rates were to continue indefinitely, the federal government alone would swallow up 100% of economic output within 30 years, or about one generation from now.  

2011

2015

2020

2025

2030

2035

2040

GDP

$13.27

$14.14

$15.31

$16.57

$17.94

$19.42

$21.03

Federal Spending

$3.38

$4.33

$5.91

$8.08

$11.03

$15.06

$20.57

Govt. % of GDP

25%

31%

39%

49%

61%

78%

98%

(note: all figures in trillions, 2005 $. Projection assumes constant real GDP growth of 1.6%, Federal spending growth of 6.43%) Of course this won’t happen. The federal government currently consumes 25% of the economy, well above the historical norm. With the government currently borrowing 43 cents of every dollar it spends, the deficit and debt are growing even faster than government spending itself, and are well into unsustainable territory. Any week/ month/ year now, something’s gotta give. The clock is ticking fast, and we’ve no time outs remaining. We can go the Greek route: continue on the trajectory we’re on, and inevitably suffer a debt crisis, higher taxes, lower growth, massive public discontent (Occupy Wall Street, anyone?), and ultimately, default, and perhaps even revolution. Or we cut deeply and painfully now, get the current recession over with, balance our budget, reform our tax code, and set the stage within a few years for unbridled growth and a return of prosperity. I hate to be a pessimist, but with the score the way it is, it’s going to take a 4th quarter miracle for the economy to pull this one out.   Image credit: Vyolett www.sxc.hu

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