The “Ever-Expanding” Government Sector, Illustrated (Part II)

I’ve been lecturing on the government sector in my macro course. In updating my lecture notes, I plotted out some interesting graphs, which link up nicely with this previous post. The following four figures highlight: (1) normalized Federal outlays are not much higher than in 1986; (2) government consumption to GDP is back up to 1991 levels; (3) the cyclically adjusted budget deficit is only 2 ppts larger than that recorded in 1987; and (4) Federal consumption remains far below the previous peak in 2007.

One of the topics stressed in the textbook and lecture notes is the endogeneity of the budget balance, and especially the transfer and tax components. This leads to the first graph, of transfers and purchases [correction 10/20 - mdc] normalized by nominal GDP, and transfers and purchases [correction 10/20 - mdc] normalized by potential GDP.
ever1.gif

Figure 1: Federal outlays (purchases, transfers and interest payments) 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.

Notice that government transfers and purchases [correction 10/20 - mdc] as a share of GDP looks particularly high because of the collapse of GDP in the Great Recession which started in 2007Q4. Normalizing by potential GDP highlights the fact that, while the ratio is the highest over the last forty three years, it is only slightly higher than that recorded in the mid-1980s, during the Reagan administration.

 

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).
ever2.gif

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.
ever3.gif

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.
ever4.gif

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.

 

Paul Krugman has a related observation.

 

Update: 1:40pm Pacific 10/14/10 In response to reader don‘s query, here are series for total government (all levels) outlays, consumption and transfers.
ever5.gif

Figure 5: Total government outlays (purchases and transfers and interest payments) divided by potential GDP (blue), consumption (red) and transfers (green). NBER defined recessions shaded gray. Source: BEA, 2010Q2 3rd release, and CBO, Historical Statistics, and author’s calculations.

I do not think the basic points I made change as a consequence of examining all levels vs. Federal government.

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52 thoughts on “The “Ever-Expanding” Government Sector, Illustrated (Part II)

  1. thepolemarch

    I have to imagine you’ve excluded stimulus spending as temporary, otherwise this seems thoroughly impossible.

  2. Cedric Regula

    So no reason to worry government spending is nearly double tax receipts, and the CBO forcasts around a trillion a year deficits out thru 2020, then beyond 2020 it gets bad.
    Not to mention how state and local governments are doing.
    I did notice Krugman thinks that as well.

  3. Anonymous

    Very interesting analysis.
    Anti-state thinking has been gaining track on the grounds of nosense.
    I also think that if a chunk of defense spending was diverted to infrastructure investment, green-fuel investment and others the output gap would be lesser.

  4. Anon

    Menzie:
    It seems to me that the Federal government has the power to shift its costs onto other entities, such as state governments and businesses, in ways that keep these costs from appearing on the Federal government books, thus appearing smaller than it would if all these costs were accounted for.
    A recent analysis of overall government costs is the following:
    The Impact of Regulatory Costs on Small Firms
    http://www.sba.gov/advo/research/rs371tot.pdf
    Does your conclusion that the federal government is not ever expanding still hold when governmental costs are considered in this way?

  5. Gus Satkowski

    It is interesting that during the last two recessions federal current expenditures to GDP did not drop immediately after the technical end of the recession or in the ensuing years. Hopefully this is not a new trend. Perhaps this is related to the Great Recession being over only as a technicality, but seems like we never left it by a number of measures.

  6. ppcm

    Fine let us not obliterate the numerator government expenditures and let us have a have a look at the denominator ie
    GDP = C+ I + (government expenditures – taxes) + X-M
    This is consumptiom
    PCE, Personal Consumption Expenditures ~11 trillion usd in 2010
    http://research.stlouisfed.org/fred2/series/PCE
    That looks quiet healthy the more a country consumes and the lesser the ratio of Gex/GDP

  7. Menzie Chinn

    Sarath: In economics parlance, “outlays” include purchases of goods and services as well as transfers; the latter includes entitlements. Hence figures 1 and 3 incorporate entitlement outlays.

    thepolemarch: No. Stimulus spending (ARRA) is included. For instance, part of the drop in the 2009-11 cyclically adjusted budget balance in Figure 3 is due to ARRA.

    Cedric Regula: Of course, the budget outlook was worrisome, particularly out years due to looming entitlements. See my posts here, here, and here (I know you’ve seen at least a few of these…). And the near-term outlook is bad if EGTRRA/JGTRRA are extended [1] [2].

    Figure 2 includes state and local government consumption… (hence the adjecttive “Total” in the notes to the figure.

    Anon: I have discussed contingent liabilities here. I agree there has some cost-shifting, but I’m not certain of the relative magnitudes. By the way, regulatory mandates have always been with us.

  8. wc varones

    You actually believe the deficit will be less than 3% of GDP in 2013 (Figure 3)?
    Somebody’s still hopped up on Hopium.
    Neither the robust growth nor the fiscal austerity required to get there are likely. And the combination of the two is even less likely.

  9. Jeff

    The forecasts in Figure 3 are a fantasy. If you didn’t include them, the picture would look much worse.
    And pretending that transfer payments somehow don’t count as spending is baloney.

  10. Menzie Chinn

    Jeff: The projections are CBO’s current law projections. Take your complaints to them (and the law that requires them to make such projections). My only point is that the cyclically adjusted and actual deficits differ, and the variable used to normalize matters.

  11. wc varones

    “The projections are CBO’s current law projections. Take your complaints to them (and the law that requires them to make such projections).”
    Meaning they assume all the Bush tax cuts expire, AMT isn’t fixed, Medicare cuts payments to doctors, UI isn’t extended, the states aren’t bailed out, etc.
    And under that scenario they see robust economic growth.
    Good luck with that.

  12. don

    Why not total government (federal plus state and local) outlays as a percent of GDP, instead of (or as well as) total government consumption as a percent of GDP? Also, might it be appropriate to put state spending on medicare and medicaid at the federal doorstep? Aren’t they federally mandated costs?

  13. goodrich4bk

    Sarath, could it be that you “imagine” these numbers do not include entitlements because you create factual information in your brain to support the feelings in your gut? My conservative pals exhibit this odd behavior every time we discuss the federal deficit and my liberal pals exhibit the same behavior every time we discuss something like civil rights or the environment. Today we all seem to be drawing conclusions first and then just fill in the facts — or make them up — to support our conclusions.
    Ironically, the one government expense that the above information clearly shows has the greatest effect on our deficits is the one expense that nobody seems capable of reducing: military expenditures. In fact, the one group that is most animated about the deficit — the Tea Party — is the most vocal advocate of increasing military expenditures. It’s as if there is no party at all in American politics that stands for a rational allocation of our limited tax base.

  14. tj

    Government consumption expenditures and gross investment does not include current transactions of government enterprises, current transfer payments, interest payments, subsidies, or transactions in financial assets and in nonproduced assets such as land.
    Here are some definitions -
    http://www.bea.gov/national/pdf/nipaguid.pdf
    Menzie,
    How do the charts look if you use net federal outlays? And, what is the difference between government consumption expenditures/investment and net federal outlays? Why such a large difference between the two. If you are arguing that government is not as large as some perceive it to be, then why wouldn’t you use net federal outlays?
    http://research.stlouisfed.org/fred2/series/FYONET?cid=5
    How will the 5 year forecast of federal outlays to gdp look if we allow net federal outlays to continue to rise at ~ 18% annually for the next 5 years, while GDP growth ~ 0%?

  15. Cedric Regula

    How about breaking social security out of the “outlay” or “spending” numbers and treat it like the national pension fund it really is.
    It has a defined revenue source, FICA and payroll taxes. And then revenue meets or exceeds disbursements for a few more years. Then we did accumulate $2.5T in the Trust Fund, which by law was loaned back to the USG. That was so we fund the boomers hitting retirement age. Contrast that with some state pensions plans that let you retire at, say 50(not 67 or 70), and get as much as 90% of peak career pay (not the $1500/month ave for SS).
    We could do the same thing with Medicare because we have a payroll deduction for that too. But we know already that is a big loser. The drug benefit is one reason, but the fact that healthcare in the US consumes twice as much GDP as any other developed country is the broader problem.
    One we start doing a minimal amount of accounting, then we might have some intelligent use for macro data.
    Also Krugman just announced we need 8-10T of QE. Lots of luck. Must be nice to live in the Ivory Tower where you can get paid for saying things like that, and your only downside is 19-25 year olds may argue with you.

  16. Menzie Chinn

    tj: Net Federal Outlays (OMB definition) is essentially Federal Current Expenditures (BEA NIPA definition). Download quarterly data from BEA, shift to account for fiscal years running from Oct-Sep from 1977 onward (and from July-June before that), and compare to the annual OMB data, and you will see that. So…Figure 1 is for you.

    Cedric Regula: If I had infinite time, I could graph your series for you — but you can go the CBO Budget and Economic Outlook and get the off-balance-sheet and on-balance-sheet breakdown.

    don: OK. It’s posted as Figure 5.

  17. Wisdom Seeker

    Prof. Chinn writes “(1) normalized Federal outlays are not much higher than in 1986; (2) government consumption to GDP is back up to 1991 levels (and not yet back to 1987 levels; (3) the cyclically adjusted budget deficit is only 2 ppts larger than that recorded in 1987…”
    You neglect to mention that the high outlays, gov’t consumption and fiscal deficits of the late 1980s (which we are now EXCEEDING) were perceived as a national crisis and led to a tremendous amount of public policy which eventually resolved them. President GHW Bush was forced to eat his 1988 “Read my lips, no new taxes” promise (and tax rates were increased earlier as well), other tax increases went through under both Reagan and Clinton, the tax code was simplified in 1986, the CPI measurement techniques were adjusted downwards in the early 1990s… need we go on?
    There is a long history of deficits of this magnitude leading to substantive action to correct the deficits. Failure to act will reduce market confidence and impede growth, and it is growth that we need. Because the GDP to potential GDP gap that you cite is huge, it represents a lot of hurting families, and it represents a collective failure of the nation to get its act together and correct longstanding economic problems (including abuses of power and of the legal system).

  18. rayllove

    Cedric,
    “Krugman just announced we need 8-10T of QE.” No way, only someone dumb enough to hold-up the VA health-care system as an example of efficiency would make such a foolish recommendation. In all fairness though I should add that Kruggy was right about the efficiency, he just failed to mention the ‘why’. Turns out, the back-log of patients waiting for approval at the VA is so behind that many die while waiting for procedures and care to be approved, or, they find help elsewhere. So in a way, kruggy was right, the VA has found a way to cut costs.
    His thinking on QE seems to be along those same lines. M. Hudson’s recent article on the IMF debacle makes it very obvious that QE at 1T will will almost certainly bring about an end to Bretton Woods 2. Maybe that is kruggy’s plan? Maybe kruggy hates emerging nations because they ignore his demagoguery while paying reverence to the likes of huddy and stiggy?

  19. Robert Bell

    Menzie: How robust and applicable do you think the definition of “potential” GDP is here. I.e. suppose as some say, there needs to be a “great recalculation”, and that what was the previous potential GDP can no longer be achieved. Does that mean that there has been a one time permanent downward shift in the level of the potential GDP trendline, from it which it will grow henceforth?

  20. Jeff

    The projections are CBO’s current law projections. Take your complaints to them (and the law that requires them to make such projections).

    This is not the CBO’s blog, it’s yours. And wc varones has already pointed out several reasons why those projections are, as I said, a fantasy.

    My only point is that the cyclically adjusted and actual deficits differ, and the variable used to normalize matters.

    If that’s your point, you don’t need to show the forecasts to make it. But it’s not much of a point. A positive fraction increases if the numerator increases, the denominator decreases, or both. Is this something you think your readers don’t know already?

    And what if we think the administration is partly to blame for the gap between actual and potential output?

  21. Menzie Chinn

    Jeff Hallman: You could just put your hand over the tan shaded portion of Figure 3, if it so offends. Literate people will know what’s involved in the CBO projections, and this current law issue has been mentioned many times by me in this blog.

    As to the denominator issue, the impact depends on the difference between the variables used to normalize by. I’m just illustrating that.

    Finally, I’m not ascribing blame or credit to the size of the output gap.

  22. Cedric Regula

    Ray,
    I read Hudson’s paper and it pretty much summarizing what I’ve been reading for the past year from the Roubini Global Economics group.
    The BRICS have been talking about an alternative to Bretton woods II for a couple years now. Main problem is they can’t seem to decide if they want the buck to go up, down, or stay the same.
    Until China thinks they can replace US AD elsewhere, I have trouble believing they will move on the issue on their own. They have made some moves towards an international bond market and a greater volume of RMB in FX, which are some preliminary baby steps.
    The latest MBS debacle may make them think harder about things. I think they still own about $500B.
    But Hudson is right about capital controls. If you were Brazil, Thailand, Malaysia, especially Indonesia post Rubin, wouldn’t you love to tax US inflows?
    And more QE creates more distortions and malinvestment, so Stiglitz is right…they drive everyone nuts.

  23. Bruce

    goodrich4bk: be careful. The chart showing defense only shows consumption spending, not transfer spending. Entitlements have the largest effect on deficits, with Medicare, SS and Interest payments set to chew up a very large percentage of the budget in the future.

  24. Phoenix Woman

    Krugman was right: The comments section here is riddled with people so marinated in decades of well-subsidized anti-government groupthink that they can’t see reality when it’s whapping them on the nose.
    This is of course courtesy of the corporate-bigot alliance known as “the Southern Strategy”, wherein well-monied interests seeking to slash their own taxes convinced the racist elites of “the Uptown Klan” (i.e., the various “sovereignty commissions”, “citizens’ councils” and other groups tasked with upholding Jim Crow, and thus the people from whom the KKK took their marching orders) that pushing tax cuts (and thus social-spending cuts) was a great way to hurt blacks and do so without sounding overtly racist, simply by hiding behind the rhetoric of deficit hawkery.

  25. rationalrevolution

    I keep asking conservatives what they mean when they say they want to “take America back”, and “return to the good ole days”.
    What period are you talking about, the 1950s? The 1960s?
    Oh, you mean the “good ole days” of price fixing by the government, of heavily regulated banks and industries, of high taxes on the right and low taxes on the poor, and of when government spending was a higher percentage of GDP even during times of growth…
    When Reagan said in the 1970s that he wanted to “take the country back”, take it back to what? He was campaigning against all of the policies of the 1940s-1970s. Did he want to take the country back to the 1930s? Doubtful. Take it back to the 1920s?
    Seems unlikely…
    Of course we all know what everyone really meant, take the country back to a time when government programs *ONLY HELPED WHITE PEOPLE*
    And FYI, the reason that, despite the past 30 years of anti-government action, government spending hasn’t gone down is because of “privatization” and contracting, especially with the military. All that contracting out jobs previously done by the government has done is create a profit motive for businesses to lobby for increased government spending. The idea was that private businesses were more efficient, but the only thing they are more efficient at is lobbying the government for more money. Privatization is one of the root causes of the total destruction of our political progress and our budgets. Privatization just introduced a profit motive to government spending.
    It reminds me of David Frum’s utterly ironic post on CNN:
    http://www.cnn.com/2010/OPINION/10/04/frum.road.serfdom/index.html?hpt=T2
    “In fact, the story of the past 50 years has been that the American economy has become freer and more dynamic.
    Think back to 1960. The federal government regulated the price of every airfare. It regulated every rail, truck and shipping route. It regulated the price of natural gas. It regulated stockbrokers’ commissions. It regulated the interest rates that could be paid on checking accounts. It told most farmers how much they could grow of what commodity. It regulated what kind of political and religious comment could be expressed on the airwaves. And of course it conscripted millions of young men beginning their careers into the armed forces.
    All of that is gone, gone, gone.”
    Oh yea, its gone, gone, gone, already, and so is the middle class! Oh the irony of it all :p
    http://www.rationalrevolution.net

  26. Buzzcut

    Phoenix Woman has the best Econobrowser post EVER.
    I’m pretty sure that she’s a U of W grad. ;) Okay, she may have gone to Michigan. Same difference.

  27. Jim Carlisle

    In response to posting by: Anon at October 14, 2010 06:51 AM, I would say that it would only make a difference if these factors were changed at some point in time covered by the data. Otherwise, they shouldn’t have any impact.

  28. jay h

    jeff,
    My guess is that Menzie’s note about CBO numbers is to point out that it helps to compare apples to apples, rather than apples to peanuts.

  29. Tao Jonesing

    One thing that I’ve noticed previously is that a lot of people who complain about federal spending confuse federal DEBT with federal SPENDING. Federal debt does not always produce federal spending in the United States.
    For example, the federal government borrowed over a trillion dollars, which the Fed dumped on the balance sheets of the banks, where it remains. This is an example of federal debt that did not result in spending or otherwise affect GDP directly.
    Where else can money borrowed by the federal government go without affecting GDP? How about imports, which are excluded from GDP? How about expenditures made overseas, which never touch our shores, and, therefore, don’t affect GDP?
    It might be kind of fun to dig into where the borrowed money actually goes when it does not get spent in the U.S. GDP.

  30. don

    Hi, Menzie,
    I’m sure you probably saw this, but Krugman just picked up and reposted your last graph on his site “Conscience of a Liberal.”

  31. The Gloves Are Off

    Bruce:
    Social Security and Medicare may have an impact on deficits in the future, but the fact is that neither of them do now. Both of these programs are funded out of dedicated taxes that significantly exceed their current expenditures.
    And expenses on current government operations other than defense have remained relatively constant over the last three decades.
    So what has caused the deficits? Two things – vast increases in defense spending and tax cuts.

  32. Dan Nile

    Note that you can only make federal government expenditure flat if you posit an imaginary potential GDP (the “output gap”). Because if you show it in pure nominal or real terms, it has indeed exploded.

  33. Joe

    “Because if you show it in pure nominal or real terms, it has indeed exploded.”
    It hasn’t “exploded.”
    Federal consumption expenditures and gross investment is 8.3% (annualized) of GDP in Q2 2010, 5.6% defense and 2.7% non-defense.
    Q4 2008, it was 7.9% (annualized), 5.4% defense and 2.5% non-defense.
    In 2000, it was 5.7%, 3.7% defense, 2.1% non-defense.
    The increases in govt spending is defense spending, unemployment benefits and some medicaid and food stamps. The rate of increase in transfer payments was faster in 2008 than in 2010.

  34. tanstaafl

    Fact is, current levels of government expenditures are unsustainable, even if we have large tax increases, and most certainly projected levels of spending are unsustainable even if we all pay 50% average income tax rates. In addition, no mainstream medium/long term forecast of potential GDP has factored the permanent supply shock that we will soon be enduring, caused by peak oil. Your potential GDP is way too high.

  35. Cedric Regula

    Dan Nile,
    HaHaHa. Ya, kind of like saying Bank of America’s earnings potential is way up there, if they could only get Countrywide going full bore again.
    I guess we all have our fantasies.

  36. Edoc

    Cedric, that post 2000 period is marked “Falling taxes”– the same period which saw spending rise substantially (wars, drug benefit, tax cuts). Is there a political message in there?

  37. Cedric Regula

    Edoc,
    Ya, Bush is an idiot. Obama might be too. Need another year or two to decide?
    If we pull fully funded SS out of the picture, we have an unfunded military-healthcare complex.

  38. 2slugbaits

    Dan Nile: “Note that you can only make federal government expenditure flat if you posit an imaginary potential GDP (the “output gap”). Because if you show it in pure nominal or real terms, it has indeed exploded.”
    Which is exactly why it makes sense to show government expenditures relative to potential GDP and not in nominal or real terms. The point is to try and remove the nonstationary cyclical component of the time series, and Menzie did that by normalizing against potential GDP. That tells you government’s long run relative share of GDP, which is what you want to know. If you don’t do it that way, then you’re just chasing cyclical effects.
    Also note that during a robust economic expansion adjusting by potential GDP will have exactly the opposite effect because it shrinks the denominator. During the latter half of the 90s actual GDP was typically above potential GDP. Put another way, if you’re a conservative Clinton hater you might want to use a chart like Menzie’s to argue that Clinton didn’t really cut government spending as much as his supporters like to claim. It cuts both ways.
    Government spending should be countercyclical, and normalizing by potential GDP is one way to capture that. After reading some of your comments I’m not sure that you really understand this.

  39. Anonymous

    I’m no professional economist (heck, I barely made it through econ 101), but to me when a government of a so-called representative democracy forcibly confiscates virtually 20pct of the output of its constituents for Robin Hood-style redistribution to other constituents, well, something has gone horribly wrong. (Figure 5)

    Further, the sticky-upside aspect of this plot is especially disturbine…..

  40. gg

    Professor, Thank you for posting your sources for data. But could you also provide internal links to the data for those of us who aren’t as adept at sorting through the NBER and CBO web sites?

  41. Convert

    “Further, the sticky-upside aspect of this plot is especially disturbine…..”
    Can you say aging population?

  42. Edoc

    2slugbaits: “well, something has gone horribly wrong”
    Impeccable logic. Do you have anything more substantive to share– that is, apart from your sneaking suspicion that 20% taxation is somehow horribly wrong?

  43. 2slugbaits

    Edoc That was “Anonymous” (sounded like a teabagger), and not me. I definitely do not agree with “Anonymous.” FWIW, I don’t think 20% is quite enough; it should probably be more like 23%.

  44. Nemesis

    To fully understand the extent of the public spending and the onerous cost of gov’t to private economic activity (and ultimately gov’t receipts in the long run), one MUST look at total local, state, and federal spending, including transfers, as a share of private GDP, and particular the differential rate of total gov’t spending to private GDP since the early to mid-’80s and early ’90s.
    The inescapable conclusion is that, should the differential rates continue, the US is on course for the faster-than-exponential “jubilee” threshold of insolvency by no later than ’22-’23.
    However, it is worse than that. The peak rate of change of increase in Baby Boomer (“Doomer”) drawdown on elder transfer programs commences in ’08-’11, lasting into the early to mid-’20s and on an absolute peak plateau basis well into the mid- to late ’30s and early ’40s.
    With structurally high unemployment and the peak rate of change of increase in the number of Boomers reaching age 62-65, the growth of gov’t elder transfer payments will absorb virtually all of the incremental gov’t borrowing and spending for “stimulus”, resulting in little or no net incremental growth in infrastructure spending, R&D, etc.; instead, the vasy majority of gov’t incremental spending will be low-multiplier income support for elders, the poor (a growing share of the 80-85% working-class population over time), and unemployed/underemployed.
    And, as in Japan from the late ’90s to date, the bulk of the Fed “QuEasy” digital book-entry fiat freebucks printing action will result primarily in Fed-bank asset swaps with bad bank assets and newly issued (or secondary market) Treasury and agency paper.
    Banks face the need to add at least $2 trillion to their cash and Treasury holdings in the years ahead to make up for their loss of net interest income to term for the bad loans/assets on their books to date. The robo-foreclosure signing fiasco and title ownership situation will force banks to set aside even more cash for the increasing risk to their unreal estate loan holdings and agency/MBS “assets”.
    The Fed will provide a growing share of the digital debt-money freebucks to allow the banksters to shore up their balance sheets by buying a majorty of the new federal gov’t issuance in the years ahead to run deficits to prevent the nominal GDP from contracting.
    But nearly all of the digital freebucks will occur in a circular flow between the Fed, banks, and US gov’t. “QuEasy” II, III, etc., will not be a net “stimulus” to the real US economy because it is not intended to be; as soon as Wall St. figures this out, look out below.

  45. Dan Nile

    2slugbaits: During the latter half of the 90s actual GDP was typically above potential GDP.

    I admire your dedication to academic economics in saying such an absurd thing publicly without bursting out in laughter.
    The point is that “potential GDP” is an imaginary parameter that can be manipulated to make whatever point you want, including that normalized to an imaginary number, government spending has been flat. In observable fact land, such spending has increased 250% vs. 33% for actual GDP.

  46. daveg

    This seems to support the claim that spending at the federal level is at a record high, no? It is the highest ever and there is only one point even close and that falls off quickly.
    And all things point to this level of being sustained over a number of years, unlike the spike of 1986.
    No?

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