The above chart is of total GDP growth, along with the contributions of each sector of the economy to growth. Notice that for each quarter of 1951, government spending (the blue line) is very high. In fact, the only other column as high are PCEs in the first quarter. This chart shows that government spending can indeed drive economic growth.
1951 saw three quarters of very strong growth, with a very large slowdown in the fourth quarter. Consumer spending was strong in the first quarter, contracted in the second and then returned to more normal rates of growth in the third and fourth quarter. Investment was a remarkably huge drag for all but the second quarter. Exports contributed some to growth, but the real story is the huge input of government spending, which basically drove growth for the entire year.
We'll start to look in detail at the various sub-components of growth over the coming week or so.
1 comment:
Haven't been to the blog for a while. I see reporting continues to improve. I like it.
About this, "Moving forward from 1950 and into 1951, we'll see the government spending -- in the form of war spending for the Korean War -- can indeed create economic growth. In fact, it can be the primary driver for overall economic growth."
No one disputes that, at least no one I'm aware of. But what is (highly) disputable is what happens afterwards, after the increase in govt spending decelerates, plateaus, or declines.
Back then we were in the beginning of a 50+ year long credit cycle. Balance sheets were clean. There also had been few homes built over the previous 20 years back then, auto sales had also been low, and consumer goods of all types were scarce during the war. There was also very favorable demographics with a rapidly growing population.
Today, in contrast, we have ugly balance sheets, a glut of homes, multiple cars per household, and consumer goods are common and retail stores are in a glut.
Another differnce between the two periods is that back in 1950 almost all US demand was supplied domestically. Today most US consumer demand is supplied via imports.
So back then govt spending kicked off a virtuous cycle of growth, yet it's doubtful that the same thing could happen today for the reasons I outlined above. This is why IMO govt spending could not only be minimally effective, but counter-productive, as it could simply magnify our current problems of malinvestment (in housing and financial sectors) and a huge trade deficit, while creating far more debt in the process (which only in the long term can be paid back with printed money).
IMO, govt spending could be effective if it went toward solving the trade imbalance and lack of investment (which continues mostly to go abroad. The best way IMO to deal with the trade imbalance is to focus on reducing oil imports. That could be done by investing huge amounts into natural gas vehicles and associated infrastructure. The best way to tackle the investment problem is to lower the corporate tax on domestic operations as low as possible. ideally we could lower the rate for manufacturers and technology companies to zero, though 20% might be possible, and even more effective if companies who kept money abroad were penalized.
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