Thursday, January 5, 2012

This is NOT What Socialism Looks Like

One of the thing that really infuriates me about our political dialog is how politicians throw words around which have absolutely no basis in fact.  Over the last few years, I've heard the word "socialism" used like a comma.  However, consider the following chart:

The above chart shows the percentage contribution of overall government spending to overall GDP growth since the first quarter of 2008.  For 6 of the last 8 quarters, government spending has subtracted from overall growth.  In the preceding months, we see that government spending did contribute to overall growth, but that effect has now worn off.

Let's look in more detail at the above data:

The above chart gives us more detail of government contributions to overall GDP growth.  First, notice the blue line, which is defense spending.  This number has been a powerful contributor to economic growth over the last three years; it has only contracted in four quarters.  Secondly, notice federal non-defense spending -- the red line.  Its contribution at the beginning of the chart was actually far weaker than defense spending.  In other words, it was the war efforts that really added to overall growth.  More importantly, in the 4Q09-2Q10 period we see non-defense spending at higher levels than defense spending -- a situation we also see in 1Q09 and 2Q10.  Put another way, out of the last 15 quarters, federal non-defense spending has contributed more economic growth than defense spending in 5 quarters -- or 33% of the time.  Finally, notice the green line, which shows the percentage contribution of state and local spending to GDP growth.  This number has subtracted from growth 11 of the last 15 quarters -- or 73% of the time.  For the quarters it did contribute, it did so at very low rates.

What to these two charts tell us?

1.) Defense spending is actually far more important to overall GDP growth over the last 15 quarters than federal non-defense spending.

2.) State and local governments fiscal issues are hurting overall economic growth.

3.) An economic policy that is contractionary, in fact, leads to slower growth.

Put another way: this ain't socialism.