Carried Away

U.S. Government Spending As a Percentage of GDP -- Updated

Updates and supersedes October, 2003 entry.  (This entry still consistently receives the most hits of any entry on this blog.)

I have found that one of the most useful ways of looking at the government's role in society is by examining how much the government spends as a relation to the economy, measured most often by the Gross Domestic Product (GDP). For the United States, we calculate this on either or both the national and state/local levels using Table 1.1.5 and Tables 3.1 through 3.3 in the National Income and Product Accounts (NIPA) published by the Bureau of Economic Analysis (BEA). Here is the historical information. Federal subsidies for state/local programs (e.g. block grants for welfare programs) are counted as spending at the federal level.

Click on the following thumbnail for a clearer view.

Here is the underlying Excel file, released under the Creative Commons Share and Share Alike License.  I will try to update this file from time to time as the data is released.

It appears that the government has turned the corner on spending and the deficit is now shrinking as a percentage of the economy.  I would like to see a continual gradual reduction in federal spending to pre-Cold War  levels.

Note:  Currently, my calculations run off of total receipts and total expenditures, whereas my previous expenditures ran off of current receipts and current expenditures.  The instances where this makes a big difference is during war time.  See, for instance, World War II and Vietnam.

India's population will pass China's by 2030

In a November entry, I presented a chart showing the prospective population growth of the India, China, Nigeria, and the United States through 2050, as projected in the U.S. Census Bureau International Database.  According to the database, India's population was expected to pass China's by about 2032.  However, new projections from the United Nations Population Division show this crossover occurring by 2030.

Projections for China's population continue to be revised downward rather quickly.  But what should we make of these changes and the impact on the Chinese economy and society?  Some have quipped that China will become old before it becomes rich.  Indeed, the UN projects the 2050 median age of China to be 44.8 years, while in comparison it projects the media age of the U.S. to be 41.1 years and India to be 38.7 years.

By 2050, the UN expects China's population to be falling by 0.35% per annum, and we can assume that the potential workforce will be falling faster than that rate.  Quite simply, this rate of population decline will feed directly into China's rate of economic growth.  This might not be a concern for China now, when its economy is expanding at a furious clip.  But we know that the kind of economic growth that China is experiencing now will not continue forever.  Eventually, the 1% per annum (or whatever) drag on China's economy relative to nowadays will be very painful.

Electric-gasoline hybrids gaining critical mass

In the past, I wondered whether electric-gasoline hybrid vehicles would ever gain critical mass.  However, as a Christian Science Monitor article points out, the car companies expect to sell some 200,000 hybrid vehicles this year.  This seems like critical mass.

It occurs to me that electric-gasoline hybrids are starting to make economic sense.  The hybrid add-on costs some $3,000 for cars, trucks, and SUVs -- a 1,500 gallon break-even point at $2/gallon.

In addition, the Christian Science Monitor article talks of the move to "plug-in hybrids," which have a battery that you can use for relatively short trips.  Plug in your car to the wall socket and the first 10 miles at 35 miles per hour is from your electrical grid rather than from gasoline.

Taken together, the move toward higher fuel efficiency and the move toward grid electrical power as opposed to gasoline seems to make economic sense.  But there are other reasons to buy plug-in hybrids.  I'm not much of a believer in the environmental benefits of the hybrids, but I can easily see the geopolitical benefits.   Venezuela, the Middle East, and Russia are all potential hot spots.

US economy grows at 4.4% real rate

This morning, the Bureau of Economic Analysis (BEA) released its advance 4th quarter and 2004 year-long economic production totals.  The production for the year was $11.7 trillion.  For the quarter, the economy grew at a 3.1% real rate and for the year, the economy grew at a 4.4% real rate.  The nominal growth rate -- the rate that the federal government needs to watch in relation to increases in spending -- was 6.6%.

While the year wasn't an economic barnburner, it was solid -- better than all but two of the past 20 years.  Productivity growth is high, but declining.  Profits grew quickly, but the pace of profit growth is now moderating.  2 million more people have jobs this year compared to last year.  Inflation is under control, even though there was a steep run-up in energy prices.

Next month, the BEA publishes most of the national accounts.  At that time, I will update my charts to reflect information from 2004.

Q3 GDP Growth 3.7% Annualized

Q3 economic growth came in at 3.7%, which was slightly lower than expected.  This was driven by less than expected growth in business inventories, despite strong growth in personal consumption.  It is important to note that even though this rate is slightly disappointing, it is above the long-term US trend growth rate.

It is also interesting to note that the Personal Consumption Expenditure deflator (i.e., the inflation rate for consumers as a whole) -- the number that the Federal Reserve relies on most heavily to set interest rates -- came in at a very low and decelerating 1.1% annualized rate.  This gives the Federal Reserve ample room to pause before raising interest rates beyond the .25% already planned.  Inflation just is not a problem in the economy, even with the recent rise in gasoline/oil prices.  I guess that is why the rise in gasoline prices has not become a political issue.

Oil at $53/bbl, But It's Not a Big Political Issue In US

In absolute terms, the price of oil is at its highest ever:  $53/bbl.  Despite the fact that in the past, such high prices were thought to doom a president's popularity, and that John Kerry has a long litany of complaints, surprisingly the price of gasoline hasn't been brought up by him.  Has something changed in the body politic in the US, or was the conventional wisdom about the currency of this issue overblown?  I note that President Clinton opened the strategic oil reserves at the slightest hint of high oil prices.

As a threshhold matter, even though $53/bbl is the highest ever in absolute terms, it is not the highest inflation-adjusted price.  But beyond that fact, our economy is much less oil-intensive than it once was -- i.e., the consumption of oil and other energy products has not kept pace with economic growth.

Perhaps it is wishful thinking to imagine that oil price politics will cease to have any more currency than the politics for other commodities, such as copper.  But the lack of urgency on the issue in politics today is telling.

Q2 Growth Revised Upwards; IMF US Forecasts Lowered

The Bureau of Economic Analysis (BEA) released the "final" estimates of Q2 real economic growth, revising the growth upward to 3.3% annualized.  Meanwhile, labor growth has proven anemic for this part of the economic cycle (the worst in the post-World War II era) and productivity growth has proven much more resilient.  I don't know the reason for this odd economic behavior, but note that unemployment isn't that high after all and that productivity growth is what makes us better off in the long run.

Also, the International Monetary Fund (IMF) has published it's September update to its World Economic Outlook.  The IMF's forecast of US real growth was revised downward to 4.3% from 4.6% for 2004.  This might be a little low, given the BEA upward revisions mentioned above.  It's amazing that the labor market isn't sizzling, even though we are expecting 4.3% growth.  For 2005, the IMF expects real growth of 3.5%, revised downward from 3.8%.

The IMF forecast for German 2004 real growth is the most encouraging we have seen in several years -- 2%.  The IMF expects 1.8% growth for 2005.  Can we welcome the German economy back from the land of the living dead?  Overall, the European Union is expected to grow 2.6% in 2004 and 2.5% in 2005.

Perhaps the continued disparity between US and EU growth will cause some wringing of hands in Europe, but the difference can be put down almost entirely to continued population growth in the US.  In the long run, annual US population growth is about 1 percentage point more than that of the EU, which should translate more or less into a 1 percentage point disparity in economic growth.

Economically Recoverable Oil Reserves Still Increasing

British Petroleum recently published its energy statistical yearbook. The table of reserves recoverable under current economic conditions is the interesting part, showing that reserves have steadily increased over the last 2 decades. This doesn't include much of the reserves available in the Canadian oil sands.

Speaking of the Canadian oil sands, Wired had an interesting article about extraction methods. The article describes the process to a good degree. The operators of the sands claim that they can extract the oil for $10/bbl and that they have $8.50/bbl in sight with technology still to be rolled out.

Q1 Economic Growth Revised Upward Slightly

Today, the BEA revised real economic growth in the first quarter of 2004 upward from an annualized 4.2% to 4.4%.  This revision was in line with estimates.

Economic growth for the rest of 2004 looks good.  The concensus puts 2004 growth at somewhere around 4.7%.  The inventory/sales ratio is at historic lows, meaning that businesses will need to refresh their inventories of goods from the factories.  Employment is looking good, although an elevated weekly initial unemployment claim reading indicates that the employment market is not yet roaring.  Payrolls have been up by over 300,000 people each of the last two months, but that figure will likely moderate over the next few months.  If the growth of payrolls doesn't moderate, then the Federal Reserve will raise rates sooner rather than later.

The presidential campaign will be driven by the health of the employment market, perhaps the war in Iraq, and the administration's efforts to thwart terrorism.  Likely, the economy will provide a boost during the campaign.  A strong economy is not yet reflected in Bush's poll numbers, however.

Be Careful What You Vote For

Today, in response to fears about the Congress Party's economic policies, the Indian stock market crashed.  The Sensex index was down 11% after two trading suspensions.  This is in addition to a 6% fall on Friday.

This fall really shouldn't surprise anyone.  It is a rational investor response.  As discussed in the past, stock prices are merely the Net Present Value of a future profit stream, discounted appropriately.  The value is directly tied to economic growth.  It's the same in India and the United States or any other country.  The Congress Party government should follow the wishes of its voters and put in policies that moderate growth in favor of more equitable economic distribution.  The downside for the voters is that your stock market will crash.

Foreign investors and speculators are being blamed for the crash, but to me that's like blaming somebody for acting rationally.