Austerity Brings Unemployment to New Highs in Spain and France

[Swiper]

APRIL 30, 2013 4:25PM
Government Spending Up, Private GDP Down

By CHRIS EDWARDS

It drives a lot of us at Cato nuts to read news stories almost every day which simply assume that government spending is good for the economy. Any defense or nondefense spending restraint will hurt economic growth, it is assumed. Even a recent AEI studyseemed to accept this Keynesian concept.
Government spending certainly helps the government-dependent parts of the U.S. economy. But most Americans live in the private economy, and so they might like to know how government budget actions affect the economy that they live in.
So let?s explore the spending-to-growth relationship with national income accounts data. I ran a simple regression with 60 years of data, 1953 to 2012. The variable I was trying to explain was real private GDP growth. Private GDP is total GDP less the government portion of GDP from Table 1.1.5. The explanatory variable was total (federal/state/local) government spending from Table 3.1. Both variables were converted to constant dollars using the GDP deflator.
The chart below shows the Excel plot of the results. The downward slope of Excel?s fitted trend line means that higher government spending growth in a year corresponds to reduced private GDP growth that year. For example, if real government spending growth was zero, private GDP would be expected to grow at 4.2 percent. If real government spending growth was 5 percent, private GDP growth would be expected to fall to 2.8 percent.

The F-statistic for the regression was 4.1 indicating overall significance at the 95 percent level, which is the usual level economists look for to be confident of a solid relationship. The T-statistic on the government spending variable was 2.0, which indicates significance at over 95 percent. (Note that the statistical results were even stronger when I included data back to 1946 because post-war government cuts coincided with robust economic growth.)
The R-square of the regression was low, indicating that changes in government spending only explained a small portion of current-year GDP growth. That makes sense because a myriad of other factors affect GDP growth, including economic growth in other countries, regulatory factors, oil industry shocks, technology shocks, etc.
Note that my explanatory variable was total government spending, which includes government production and government transfers. I think that both types of government spending harm the private economy. If the government increases UI payments or food stamps, for example, it induces fewer people to work.
Personally, I?m suspicious of statistical ?proofs? of economic relationships. But I do think that even broad-brush results such as this should give pause to the reporters and policy wonks who often write articles with hidden Keynesian assumptions. I think that the harm from increasing government spending affects the economy over a longer period of time. But even these single-year regression results suggest that people should be skeptical of the widely held notion that the economy is like a car and the government can speed things up by simply stepping down on the spending gas peddle.

Government Spending Up, Private GDP Down | Cato Institute

 

[clemson357]

LAM is true believer. A first class Obamazombie.

 

[clemson357]

FYI, for anyone who has an open mind and isn't completely devoted to the church of the Obamessiah, the actions taken in Europe are more similar to what Obama has recommended than anything else. The so-called "austerity" practiced by Europe in most countries involves a tax hike to spending cut ratio of about 2-1 or 1-1. By contrast, the Simpson Bowles commission (appointed by Obama) recommended a ratio of 1-3, and Obama completely ignored them. Most conservatives would recommend a ratio of closer to 1-5. In January of this year Obama got tax hikes of about $70 billion/year, but he stringently opposes spending cuts of about $85 billion/year without more tax hikes (opposed to a ratio of even approximately 1-1).

 

[LAM]

LAM is true believer. A first class Obamazombie.

no it's called doing about 8-10k hours of research of global history and economics over the past 15-20 years. you see I actually read papers and briefs and books from economists and not the political economics of politicians.

If you ever bothered to read any of my posts on the subject I post papers and briefs from economists and global financial institutions. obviously you haven't read any of my posts over the years and apparently you were to lazy to read any on your own, which is why you know absolutely nothing about the topic. global history and the use of comparative economics of the other country's in the OECD clearly show which policies work and which ones do not.

 

[LAM]

FYI, for anyone who has an open mind and isn't completely devoted to the church of the Obamessiah, the actions taken in Europe are more similar to what Obama has recommended than anything else. The so-called "austerity" practiced by Europe in most countries involves a tax hike to spending cut ratio of about 2-1 or 1-1. By contrast, the Simpson Bowles commission (appointed by Obama) recommended a ratio of 1-3, and Obama completely ignored them. Most conservatives would recommend a ratio of closer to 1-5. In January of this year Obama got tax hikes of about $70 billion/year, but he stringently opposes spending cuts of about $85 billion/year without more tax hikes (opposed to a ratio of even approximately 1-1).

you obviously don't have an open mind because all you talk about is the left and the right. where are the reports from economists that support your rhetoric? where is the historical data that supports your "beliefs"?

because there is only one situation in which austerity in the form of decreased government spending increases GDP. which in itself is meaningless because an increase of GDP does not necessarily equate to more jobs and certainly not an increase in real income growth. if you had been paying attention to the media the "one" solitary report on austerity was totally discredited by a grad student several weeks ago.

*When does decreased government spending increase growth?

Past instances of rapid fiscal contraction actually
aiding overall growth have almost without exception been
undertaken in very different circumstances than what the
U.S. economy faces today.

Specifically, these so-called ?expansionary contractions? have happened when:

(a) countries were already growing strongly in the period before the fiscal contraction took effect;

(b) interest rates were very high and deficit reductions had room to reduce them; and/or

(c) nations matched the fiscal contraction with large exchange-rate depreciations and boosted exports.

Simply put, none of these apply to or are in the offing for the U.S. economy.

 

[DOMS]

you obviously don't have an open mind because all you talk about is the left and the right.

 

[LAM]

so the economic reports I post in the dozens do they talk about political party's? oh but you don't read them so you wouldn't know. so who's the joke on? the one that does or doesn't understand economics?

so who's laughing now...me

 

[DOMS]

so the economic reports I post in the dozens do they talk about political party's? oh but you don't read them so you wouldn't know. so who's the joke on? the one that does or doesn't understand economics?

so who's laughing now...me

And you still don't see it.

 

[troubador]

The R-square of the regression was low, indicating that changes in government spending only explained a small portion...

no kidding. I did a double take when I saw that trend line but I'm not an economist. I always expect R^2 values of >.9 in the lab.

 

[LAM]

And you still don't see it.

what do you think your clever or something because your not. your about as transparent as they get.

I see a hell of a lot more than you do, hence my "beliefs" that are based on known world economic history and empirical data and not the revisionist history or right wing radicals hell bent on destroying labor in the US once and for all.

yes I may thought left leaning economic ideology but then what educated person wouldn't?