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I spent the afternoon debating, among others, Rick Perlstein,
on the economy. The debate was being taped for Aljazeera TV (set to
air tonight some time in the 7 pm hour EST). Rick claimed that since
both government and the economy were getting bigger between World War II
and the 1970, then growing federal expenditures couldn’t be bad for the
economy. The economist in me, was thinking, well what does the data
say? Obviously we didn’t have the data at hand, so the issue was not
explored any further.
I’ve tried to reproduce the core of the question in the graph below,
which shows on the left axis federal spending as a share of GNP and on
the right axis the real increase in GDP, both measures on a quarterly
basis. If the visual trend is not enough for you, the correlation
between the two is a negative 0.4. Keeping in mind that
correlation isn’t causality, it does appear that as the federal
government increased as a percentage of the economy, the growth rate of
the economy slowed.
During most of this period federal spending to GNP averaged around
16% (can’t we at least get back to the magical 1960s level of
government?), while the annual growth rate in GDP averaged 3.9 percent.
I find the pattern starting around 1966 to be particularly interesting
as we witnessed both a sharp increase in the size of government and a
dramatic fall in the growth rate of the economy. Of course I don’t
expect those wedded blindly to a faith in big government to find any of
this convincing, but for those of us with an empirical fact-based bent,
it does suggest to me that had we restrained the late 1960s growth in
government, our economy would be a lot bigger today (but then who cares
about the size of the pie when you can fight over the pieces?).
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