Most people aren’t mathematically conversant. It’s pretty easy to make a graph visually show a point of view while conveniently leaving out an important point. A point like fractions have denominators.
From Econobrowser, a blogsite that pays attention to the math.
“Normalizing government consumption and investment illustrates that overall spending by the government in purchases of goods and services is not particularly high. Even dividing by nominal GDP indicates that we are only (almost) back to the levels of 1990. Normalizing by potential GDP indicates that we are still only back to the levels of the early 1990′s (this spending includes defense).
Figure 2: Total government consumption and investment divided by nominal GDP (blue), and divided by nominal potential GDP. NBER defined recessions shaded gray. Source: BEA, 2010Q2 3rd release, and CBO, Historical Statistics, and author’s calculations.
Note that these are nominal ratios; if one looked at the log of real consumption divided by real GDP (straight division is not appropriate since these are chain-weighted series), one would see that the log ratio to potential GDP is at an all time low).
What about the overall Federal budget balance? One can examine the actual budget balance divided by nominal GDP, and the cyclically adjusted budget balance (which better summarizes the fiscal stance) divided by potential GDP. This results in Figure 3.
Figure 3: Federal budget balance (CBO measure) divided by nominal GDP (blue), and cyclically adjusted Federal budget balance divided by nominal potential GDP (red). Respective projections in dark blue, orange. Tan shaded portion is projected. NBER defined recessions shaded gray. Source: BEA, 2010Q2 3rd release for GDP, and CBO, The Effects of Automatic Stabilizers on the Federal Budget, May 2010 for historical budget series, and projected cyclically adjusted budget balance; CBO, The Budget and Economic Outlook: An Update, August 2010 for projected budget figures by fiscal year; CBO Historical Statistics, and author’s calculations.
Finally, because the sum of Federal consumption and investment does not exhibit much counter-cyclicality, it doesn’t make much difference which series one normalizes by. However, it is of interest to note that the movements in overall Federal spending on goods and services is dominated by the defense component.
Figure 4:Federal nondefense spending on goods and services divided by nominal GDP (light blue), and Federal defense spending on goods and services divided by GDP (salmon). NBER defined recessions shaded gray. Source: BEA, 2010Q2 3rd release, and author’s calculations.
So, it is true that the Federal government’s role in terms of spending and transfers has increased against the backdrop of a massive decline in output starting in 2008Q4 — but some of the movements in various indicators are distorted by the large negative output gap that has opened up.”
Beezer here. Normalizing basically takes into account fluctuations in GDP, which is the denominator in these calculations. Paul Krugman makes pretty much the same point here.
“Special Bulletin: Fractions Have Denominators
I’ve been getting some mail over yesterday’s column, with angry correspondents posting charts like this, showing government spending as a percentage of GDP, to claim that government spending has too surged:
Bureau of Economic Analysis
But if you look at the raw numbers on government spending, here’s what you see:
Bureau of Economic Analysis
Feel the surge!
What’s going on? Yes, that’s right: it’s what happens when you divide by GDP in a time of terrible economic performance. Spending hasn’t surged; in fact, it grew more slowly in the two years after Lehman collapsed than in the two previous years, despite a sharp rise in spending on safety-net programs. Instead, GDP growth has plunged.”
Beezer again. Of course none of this is part of the public political discussion–even though it involves basic math. You’ll see it on the internet all the time. But that’s because the internet is chock full of experts in various areas who write blogposts explaining how the real world looks and works. That and the rare example of Paul Krugman, an economist who writes for the New York Times. And because none of this gets much traction in public political discourse, we careen into the dark future without our lights on, sitting in the back seat while the invisible, invisible hand drives the vehicle. No wonder we’re in the ditch.
Thanks again to economist’s view. And also thanks to Merrill Lynch, which taught me how to apply basic math, particularly as it applies to things financial.