Tag Archives: government debt

What Heritage does not make clear about federal spending

A popular chart by the conservative think tank The Heritage Foundation is shared by thousands of people on Facebook every now and then. The chart is titled “Federal Spending Grew Nearly 12 Times Faster than Median Income.” The problem with this chart is that it does not paint a nuanced picture of how much the federal spending in the United States actually has grown. This is because one of the two plots is an aggregate number (total federal spending in dollars) and the other plot is a median value (median household income).

The fact that total federal spending has grown twelve times faster than median household income since 1970 is quite irrelevant if we do not take into account the growth in the number of households. If the number of households had grown faster than federal spending, the size of the federal government would actually have shrunk (Sweden has one of the largest public expenditures per capita in the world, but imagine how small the American federal government would be if its total federal spending equaled that of Sweden). So what did the household growth in America look like?

more people, more spending

As can be seen, federal spending grew faster than the number of households. But the number of households grew substantially, and this need to be deducted from the federal spending curve in the Heritage chart if a sensible comparison is to be made.

A caveat to be mentioned before showing the next graph is that it has not been possible to exactly replicate the numbers used by The Heritage Foundation. The calculations used here reaches the same number for federal spending of $3.6 trillion for 2010, but while Heritage estimates that the inflation-adjusted federal spending in 1970 was $926 billion, the number used here is $1.1 trillion. Similarly, both estimate median household income to be about $51,000 in 2010, but this blog (which copied numbers straight from the referred U.S Census Bureau report) uses a much greater number ($45,146 compared to $41,358) for 1970. So The Heritage Foundation finds that both federal spending and median income has grown at a faster rate than what this blog estimates. It is not clear from their chart which inflation-adjusted numbers they used or what price index they used to adjust for inflation, but overall this should not make too much of a difference. The general tendencies will still be the same. Especially since they find greater growth both in federal spending and in income.

When using federal spending per household instead of total federal spending, the graph looks very different. Here is a comparison to mean household income (which might better illustrates tax-paying abilities than median income). It turns out that federal spending still has grown considerably – but much less than what the Heritage chart shows.

growing government

So while The Heritage Foundation is correct that federal spending has grown quite rapidly – also in per-capita terms – the magnitude is much smaller than what their chart shows. And this would be the same case if one used their exact numbers as well, simply because the number of households has grown at a fast pace. Another measure of federal spending that might add some perspective to the debate on this issue is federal spending as a fraction of GDP.

big government

The chart made by The Heritage Foundation is often referred to as a long-term trend, and one of the main reasons why the United States has piled up so much debt. But this argument seems too simplified. In terms of share of GDP, there is no trend. Federal spending was actually lower in 2008 than in 1975, and lower in 2001 than in 1970.

Now, there are still good reasons to cut federal spending, but it is hard to make an argument that federal spending has grown at an explosive rate compared to income.

Simon Hedlin

Climate matters or austerity kills?

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Simon Hedlin

Peak workforce: How should Europe afford the future? Part 2

It strikes this blogger that the projections in the figure posted earlier today might not seem like a big deal. From sixty-something to fifty-something in share of total population in working-age. Why would it matter? Well, it does matter. A lot. The fifty-something needs to be put in relation to the sixty-something.

If there are six persons working in a company and one quits without being replaced the company loses one-sixth of its total workforce. That is a lot. And if the company in question needs to provide pension and other benefits to the sixth person, this will lead to great pressure on the remaining five workers. This is what happens when the workforce vanishes simultaneously as the ratio of people who do work divided by the people who do not work diminishes. Now multiply this problem by one hundred million and you have a rough idea of where Europe is expected to be heading in the coming decades.

So here is another version of the figure that shows the projections in percent relative to year 2010. It shows the pressures demography will put on the working-age population as they will in the future be 15% fewer in relation to the total population. Much fewer workers per non-working person, harshly speaking. And the size of the total workforce will decline by more than 20%. Is there anybody who thinks that the debts caused by 500 million people in working-age will be easier to repay when that number falls to 400 million?

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson

Best of the (European) class

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson