Out of America: Farewell to Private Industry and Property

Were you surprised to read why David Moffet resigned from Freddie Mac (FRE)? According to Freddie, its CEO resigned this week because:

...he wants to return to a role in the financial services sector.

Forgive me, but I thought that Freddie Mac was a key part of the financial sector, financing more than 50 million American homes since 1970, or one out of every six homes.

Well, what if Freddie’s CEO IS right, and Freddie Mac is NOT part of the financial services sector? It shouldn’t be too hard to figure out where Freddie belongs. Let’s take a look.

Below is a chart of the standard industry sectors for a broad-based index ETF – the Powershares FTSE – RAFI US 1000 (PRF). It holds stocks of 1000 US companies, and weights these holdings so that they reflect the fundamental impact that these companies have upon the US economy. Where does Freddie belong?

Figure 1: PRF ETF’s Sector Allocations, 03 Mar 2009.

Source: Invesco Powershares

As near as I can determine, “Financials” – representing just under 15% of the ETF’s holdings, are the best fit. Freddie certainly ISN’T a healthcare stock, nor is it a telecommunications company. If Freddie is NOT a financial company, then I don’t know WHAT it is.

Perhaps the CEO’s resignation letter is his way of suggesting that Freddie Mac, since its “virtual” takeover by the US government last fall, is ACTUALLY a part of the government, and is no longer a private company.

If he’s right, let’s see what happens if we apply this reasoning to Freddie Mac, similar financial firms, and others that are just as dependent upon the US Government for their livelihood and existence.

Below are two figures. Figure 2 is a pie chart of the 2009 Budget, by major program, and Figure 3 is basically the same information, presented in tabular form.

Figure 2: 2009 US Budget – Major Programs, 26 Feb 2009.

Figure 3: 2009 Government Spending Programs

The folks at the OMB [Office of Management and Budget] expect that Federal spending will make up about 27.7% of the US Gross Domestic Product [“GDP’] in 2009. So let’s assume that they’re correct, and that private spending will make up the difference. If we do that, we can revise Figure 3 to come up with Figure 4, which appears below.

Figure 4: Government Spending and Private Industry, 2009.

All that I’ve done is rescale the private sector weightings so that they equal, in total, the non-government, or private, share, of GDP.

Now let’s take a cold, hard look at these industries. Which of them are like Freddie, and “at risk” for leaving the private sector and becoming part of the government? I’ve sketched out a “first cut” below, in Figure 5.

Figure 5: Government & Private Economy, 2009

Highlighting Sectors “At Risk”

Clearly, most of the other financial stocks are “at risk.” For that matter, so are all of the healthcare companies in America – for reasons I don’t need to go into here. Healthcare stocks are clearly at risk in 21st century America.

So what’s left? Can’t forget the automotive companies, OR their suppliers. Autos are included in the “Consumer Discretionary” sector, so let’s break that out into its “Auto” and “Non-Auto” components. If we do that, I believe that we’ll get something like Figure 6, below.

Figure 6: Government & Private Economy, 2009

Highlighting Sectors “At Risk”, Including Autos

As before, I’ve colored industries in red if they’re “At Risk” for government ownership or control. Let’s tidy up a bit, and group all of the red “private stuff” together.

Figure 7: Government & Private Economy, 2009

Highlighting Sectors “At Risk”, Including Autos, Sorted

As you can see, I’ve grouped all of the “Government Directed” sectors of the private economy – Auto, Financials, and Healthcare – together.

What I’m calling the “Government Directed” sector (ignoring the private defense contractors that have always worked closely with Uncle Sam) roughly represents about 21.4% of GDP.

Now it’s time to group ALL of the “red stuff” (i.e., Government Spending and Government Directed Private Economy) together. I’ve done that in Figure 8, below.

Figure 8: Somewhat Private & Gov’t Economy, 2009

Somewhat Private, Gov’t Controlled, Gov’t Spending

Believe that the table makes it pretty clear that if:

• Freddie Mac is NOT a financial company; then
• About one-half of the US economy is under government control.

That is, the “Somewhat Private Economy” is about 50.9% of GDP, and the “Government Spending or Controlled Economy” is about 49.1% of GDP.

It’s a little easier to see if I turn the above into a pie chart. See Figure 9, below.

Figure 9: Private/Public Sector Split of US Economy, 2009.

Wow! There’s about 49.1% of the US economy under government control, ignoring the defense contractors. For a minute there, I was afraid that I was going to end up with a majority of the economy under government control. No wonder the current administration won’t say “Nationalization” as they march into bank and insurance company boardrooms.

That leaves me with one question.

What government official blessed the wording in the Freddie Mac CEO’s resignation letter?

He or she better get with the program. They must not have read the memo.

Comments

[russ:]

what an idiot, he does not know how to read data that might be different from his preconceived biais so he manituplates it to support his goofy theories. A political fool acting like an economist, he misses on both fronts.

Mar 05 08:33 AM

[kelm:]

Interesting analysis. We need to keep in mind though that the government taking a stake in something does not mean they are controlling it. heck, the way they are going about it they are not even placing their people on boards - just throwing money and letting the failed management continue.

That said, it is highly disturbing if government participation in the economy reached these levels. They won't of course. First, the automotive sector is far more than the big three an their suppliers and I don't think US Nissan plants are being bailed out (or need to be). As for health care, if the health care reform process moves in the direction the administration wants then many companies will take a hit but that is different than saying they have become government controlled.

Mar 05 09:18 AM

[Ferdinand E...:]

"Farewell to private industry and property". Sounds like some of my humorless students when I started teaching economics in Sweden a couple of centuries ago, but like you Ira, they missed the point. But even so you get a good grade from me just on the basis of the way this article is constucted/organized. Get the right bottom line and you should have a real good career in this business.

Mar 05 09:24 AM

[NP Refugee:]

Russ, I'm sure you must be a REAL economist, qualified, and educated from a top-notch university. Otherwise, you wouldn't be qualified to deem whether the analysis is good or not. You obviously need to be writing and publishing information so as to enlighten the rest of us who just aren't as comfortable with the whole notion of socialism.

For me, I just wonder what the employment sector would look like, applying the same logic. In other words, just how many people in the US economy will be employed by some facet of the government?

Mar 05 10:37 AM

[aware:]

Get the guns,and get ready,can you handle the real world?

Mar 05 12:00 PM

[PainfullyAware:]

Lament The Constitution And Its Lack Of Application.

Mar 05 01:07 PM

[Leftfield:]

I think you left out the state and local governments when you imputed all nonfederal activity as private. That helps your case.

I don't understand Kelm suggesting that government having a stake in something does not mean they control it. They control far more of the economy than the nearly 50% total government is approaching now. Just a foot in the door, with their incremental dollars tends to control any private entity towards government agendas. And they make laws and regulations.

We have crony capitalism and that is getting worse fast. Government rewards and punishes with this huge power. I don't see the thriving areas of the economy to match the past although there will be opportunities of course.

There is increased concentration of power, including the media, with the government at the center. Failure is not allowed for the politically favored no matter how deserved. This article gives some idea how that looks.

Mar 05 02:27 PM

[Ira Artman:]

Thanks all for comments.

re: Ferdinand Banks':

"Get the right bottom line and you should have a real good career in this business..."

What -business- is that exactly? Not sure if it's apparent, but I am between jobs and careers these days, and doing this to keep mine sharp, or at least active.

Any suggestions that don;t begin "go jump in..." or the equivalent would be most appreciated.

Thanks again! - Ira

Mar 05 03:33 PM

[terryg8:]

I think the estimates are actually low! It is sad to see this all happen but then we were warned by those who loved liberty...

"Government big enough to supply everything you need is big enough to take everything you have ... The course of history shows that as a government grows, liberty decreases." Thomas Jefferson

And we were warned by those who would strip us of our freedom..

"The American people will never knowingly adopt Socialism. But, under the name of 'liberalism', they will adopt every fragment of the Socialist program, until one day America will be a socialist nation, without knowing how it happened." --Norman Thomas, former U.S. Socialist Party Presidential Candidate

I am glad I will be dead before this all truely comes to pass and I fear for the lives of my children.

Mar 05 11:24 PM

[TeresaE:]

Here is reality. The government (state, local & federal-soon to add world) is sucking every dime out of our economy, every ounce of credit from the world and gifting it to the idiots that created this mess.

Here will be the results: shared poverty for the non-government, reduced innovation, excellence and opportunity for the masses and more and more government which will continue to waste more and more money and grow and grow.

70% of our population favors socialist policies.

30% of our population will be forced to pay for them.

Sucks to be us.

Mar 05 11:55 PM