If It Ain’t Broke What Are We Fixing? There is a spending problem, just not the GOP version

Labor paintingWe know the YOY reduction in filings for unemployment insurance benefit claims dropped by 13.5% from last year to this, [DETR]and we now know this bit of happier news from DETR (pdf) about the current employment situation in Nevada:

“Annual adjustments to Nevada’s labor market show the state’s unemployment rate for 2012 dropped from a preliminary estimate of 11.6 percent to 11.1 percent and that Nevada gained 18,100 in employment over the year, up from the previous estimate of 9,300.”

We can combine this with the following national report this morning from the Bureau of Labor Statistics:

“Total nonfarm payroll employment increased by 236,000 in February, and the unemployment rate edged down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, construction, and health care.”

More people with more money to spend should spell a less bumpy recovery for Main Street, but wait — the Bureau of Economic Analysis is less enthusiastic about the Q4 2012 reports:

“The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, decreased.”  (emphasis added)

Yes, personal consumption increased, non-residential fixed investments were up, as were residential fixed investments — what wasn’t moving up? Private inventory investments and federal government spending.  Two quick points should be made here.

First, little wonder the U.S. GDP [C+I+G + (X-M)] isn’t moving up as positively as we’d like when one factor in the equation drops — federal spending.  Secondly, there is a spending problem during this recovery period, but it’s NOT the “Spending Is The Problem” of recent Republican banners.  Here’s why:

The hoary Supply Side economics hoax only emphasizes one element of the GDP formula, assuming that all reductions in government (public sector) spending will have a positive effect on the others (consumer and business spending).   Harken back to those days in Algebra I — the days when both sides of an equation had to balance — in order to see why the Supply Side Hoax is little more than an excuse for lowing corporate taxes and minimizing the taxes on the upper 0.1% of American income earners.

Since both sides of the equation must balance,  if we reduce one element, such as government spending on the right side of the equal sign, then we have to decrease the value on the left side of the equation.  Most 8th graders have a reasonably good grip on this concept, which makes it all the more alarming that some presumably mature business advocates do not.

If we understand this premise, then the next statement from the Bureau of Economic Analysis makes perfect sense:

“The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.”  (emphasis added)

Now we come to another formula, Private Inventory Investment, or “The difference between goods produced (production) and goods sold (sales) in a given year is called inventory investment.”   More simply stated as: PII = Production – Sales.   In other words, in a given period of time if the company has produced more than it has sold then the inventory is “positive.” If the firm has produced less, then it’s negative.  Those who wish to get down in the weeds about how private inventory investments are computed by the BEA should click on this link to their (pdf) explanation.

Inventory to sales ratios

Note that during the Recession (shaded gray) inventories were high, sales were down, and the ratio of inventory to sales moved up alarmingly.

Another element discussed by the Bureau of Economic Analysis, was the down turn in federal government expenditures.  But, Gee if we look at another FRED graph this certainly doesn’t seem to be the problem?

Federal General Expenditures 2000-2014

#1. Note, however that the graph is structured such that there are two year intervals between major points — and we’ve been talking about quarterly reports of GDP levels.   #2. The second problem with looking at the graph and believing that “federal spending” has skyrocketed since 2000, is that we have to factor in the costs of two wars between October 7, 2001 when the U.S. invaded Afghanistan, and March 3, 2003 when the U.S. invaded Iraq.  We had a major presence in Iraq for nine years and toted up an approximately $4 trillion bill for it. [MarketWatch] That would be about $80 B for the next fifty years.  There’s another big tab looming for our military operations in Afghanistan:

“The fact remains, however, that if the CRS and OMB figures for FY2001-FY2013 that follow are totaled for all direct spending on the war, they reach $641.7 billion, of which $198.2 billion – or over 30% – will be spent in FY2012 and FY2013.” [CSIS]

Add to this the unfunded changes made to the Medicare Program when Part D was added in the Medicare Modernization Act of 2003.  While nothing like the costs of military operations in Iraq and Afghanistan, the MMAct added a $9.4 trillion unfunded liability to the Medicare program [CMS report] over the next 75 years. [NYT]  And, then our banks fell apart in 2008…

To paraphrase the late Illinois Senator Everett Dirksen, “A trillion here, a trillion there, and pretty soon we’re talking about major money.”   As we wind down military assistance to Iraq, and bring troops home from Afghanistan, the spending trends should slacken.  This brings us to the third problem with taking the graph at face value.

#3.  It is misleading to show a federal spending graph, speak of “out of control Federal spending,” while NOT mentioning that non-defense discretionary spending — the kind of spending the GOP wants to cut has barely moved, if at all since 1991.   If we look at all discretionary spending as a percentage of our GDP, it looks like this [CBO pdf]:

Fed Exp Discretionary percent

What portion of federal discretionary spending is for Defense?  The CBO illustrates that too:

Defense Spending Discretionary

If we drill down into the numbers even further, we find that in 2011, we allocated $699 billion of our discretionary spending on the U.S. military, and $647 billion on everything else. [CBO] The bar graph illustrates the point: (click on the graph for the original size)

Discretionary Spending Fed

What has been happening to the lower bar on the graph?  Non-Defense discretionary spending has been trending downward:

Non defense discretionary spending trends

All the information on the graphs and charts leaves more questions than answers about the Congressional GOP insistence on screeching “The Debt Is Coming, The Debt Is Coming…”  They wish to maintain current level of discretionary military spending, even in light of the fact that it makes up a bit more than 50% of ALL our discretionary spending.  They wish to imply that “Federal Spending Is Out Of Control,” in spite of the fact that federal discretionary non-defense  spending is trending downward, and has been since 2011.

There is a formula for addressing the “spending problem” — just not the GOP incited version in which legions of the Great Unwashed are pocketing the bounty of hard working Americans — (1) Wind down military expenses in Iraq and Afghanistan; (2) Cut discretionary programs the Department of Defense has already said it doesn’t want; (3) Allow the savings accrued under the terms of the Affordable Care Act to take effect — as the most recent incarnation of the Ryan Budget proposal already does; and  (4) Make adjustments to Medicare Part D, such as allowing the Department of Health and Human Services to negotiate for prescription drug prices.

On the other hand, there are federal expenditures which will actually assist in increasing our national wealth — such an investments in infrastructure, research,  and education.  In the mean time we could look seriously at our revenue structure and perhaps even address former FDIC Chairwoman Bair’s question: Why should the manager of a hedge fund pay a low tax rate than the manager of a shoe store?

Why don’t we fix what’s broken and not break what’s working?


Filed under Economy, Federal budget

2 responses to “If It Ain’t Broke What Are We Fixing? There is a spending problem, just not the GOP version

  1. I fully agree with you on some counts, yet others I feel we see things differently. The tax code DOES need revamping, I actually just posted about that; however, just look to Europe to see what happens when one tries to increase revenue while simultaneously cutting federal spending. What we need is a fair tax code, but not through simplification rather than increases. Tax increases are debatably the reason European austerity efforts aren’t as successful as they should be…here’s a really interesting paper if you’re interested! http://mercatus.org/sites/default/files/deRugy_RelativeEffects_v1.pdf

  2. The point really is debatable, however, austerity measures in se aren’t the stuff of which growth is made. In order to make that argument one has to believe that tax reductions result in economic growth, a point that statistically is demonstrably very questionable.