More Fodder for No Labelers

See the letter to the Washington Post on Mon., Dec 19 here: http://www.washingtonpost.com/wp-dyn/content/article/2010/12/19/AR2010121903461.html

Twin Fiscal Problems

The WSJ posts two enlightening articles today. The first is by Gov. Tim Pawlenty about the inappropriateness of government unions and how generous States and the federal government have been in raising the pay and the benefits of many government workers. The extent of this problem is new to me in the past year and it represents a huge growing burden on the health of the economy. Pawlenty is right, there is no good rationale for a government union. The effect of the union seems to be to exploit the democratic process, in a legal way, that results in more transfers from taxpayers to fund higher salaries and benefits. This is great if you are a government worker and in this case you have every incentive to support the union. If this resulted in better government services at the same time it might make sense. However, instead it funds an industry that faces no competitive pressures to improve outcomes, and offers generous guarantees for employment, salaries and benefits all at taxpayers expense.

Although it is true that taxpayers could, in principle, throw the excess spenders out of office, even then it is likely to have little effect as shown by the second interesting article in the WSJ today. This one shows the unrelenting influence of special interests in the ethanol industry. Even though science now seems to refute the positive environmental effects of ethanol in lieu of gasoline, the ethanol industry and all who stand to gain from it continue to influence legislation in their favor. Even though the election seemed to send a message that voters are fed up with the ways of Washington, Washington continues as it always did. The voters can only vote into office a slightly modified legislature, all of whom will face the same distorted incentives as the previous legislatures. So why should we expect the new crop of people to change decidedly, especially when old-timers run the show?

It is like we are playing a game of rock, paper, scissors, with special interests always trumping the general interests. It would seem the only way to change the behavior is to change what legislatures are allowed to do. And that can only come through a change in the Constitution, or perhaps, adherence to the rules put forth in our Constitution. For example, the US Constitution is supposed to limit the capacity of the Federal government to do anything in special group interests: they are only to spend money on things that satisfy the national or general interest. National defense clearly satisfies this condition. Subsidies to the ethanol industry clearly do not.

Fiscal Stimulus Effects II

Following up on yesterday's post there is another way to look at the extent of the fiscal stimulus effects during the economic downturn and recovery. Remember that stimulus spending over two years or so was about $800 billion in total, which is about 6% of annual GDP.

The BEA publishes a table each quarter highlighting the contributions to growth of each component of our GDP. For example, in 2010 QIII, GDP grew by 2.5% and the portion of that growth caused by government consumption and investment demand was just 0.81%. The majority of the growth (1.97%) was caused by the increase in personal consumption.

Now of course this is just a "back of the envelope" kind of calculation since the fiscal stimulus did increase transfer payments as well and that could have affected consumption a or investment spending as well. Nonetheless we might have expected a bigger share of government contribution to growth especially when all the shovel ready projects were apparently under way. Below is a table showing GDP growth, Government's contribution to GDP growth and then what growth would have been without the government's contribution going back to the third quarter 2008.

	US real GDP growth (%)	Contribution of G (%)	US GDP growth minus G (%)
2008 III	- 4.0	+ 1.04	- 5.04
2008 IV	- 6.8	+ 0.31	- 7.11
2009 I	- 4.9	- 0.61	- 4.29
2009 II	- 0.7	+ 1.24	- 1.94
2009 III	+ 1.6	+ 0.33	+ 1.27
2009 IV	+ 5.0	- 0.28	+ 5.28
2010 I	+ 3.7	- 0.32	+ 4.02
2010 II	+ 1.7	+ 0.80	+ 0.90
2010 III	+ 2.5	+ 0.81	+ 1.69

The point to be made is the same as yesterday. The fiscal stimulus appears to have had at best just a minor impact on GDP growth. Perhaps if it were twice as big as Paul Krugman would have preferred, more of it would have been spent stimulating job creating demand. However, economic decisions tend to be made by the politicians rather than by following the guidance of their economic advisors. Larry Summers advocated at the time that any stimulus package should be timely, targeted and temporary. The final package looked anything but that.

The Fiscal Stimulus Effects

The WSJ posts a very informative description of the government spending effects of the stimulus package today. The overall size of the stimulative effect ... virtually, nada, nothing!

Allow me to elaborate by offering a few additional stats from BEA's NIPA data.

Between 2008 Q3 and 2010 Q3 (in annualized levels)

Total Gov Consumption (Fed + State & Local) rose $75 billion
Fed Gov Consumption rose $107 billion while S&L consumption fell by $32 billion!

Over the same period, the total Govt. deficit rose by $605 billion to $1.529 trillion
The Fed Gov Deficit rose $749 billion while the S&L deficit fell by $144 billion to reach an overall S&L deficit of only $32 billion.

The obvious question from the data is what accounts for the extra $530 billion deficit increase if it isn't from more government spending. The answer of course is in reduced tax revenues and increases in transfers.

Total Gov Revenues (Fed + State & Local) fell just $62 billion over the period.
Fed Gov Revenues fell $84 billion while S&L revenues actually rose by $167 billion!
(167-84 should equal -62; I can't explain why it doesn't but this is what BEA reports!)

Transfers, Interest payments and a few other things accounted for the remainder.

Total Gov Transfers (Fed + State & Local) rose $530 billion over the period.
Fed Gov Transfers rose $642 billion while S&L transfers fell by $112 billion!

The net result as reported in the article is that most of the increase in the deficit has comes from an increase in transfer payments and interest and very little in the form of increased consumption. Furthermore, borrowing to finance these growing deficits have been shifted from the States to the Federal government. In other words the States have been bailed out by the Feds with the repayment burden being shifted from the American taxpayer to the American taxpayer.