The More Government Spends, The Worse It Gets

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Includes: DIA, QQQ, SPY
by: Calafia Beach Pundit


The federal budget numbers for September, released Friday, didn't show anything encouraging. Revenues came in on the weak side, and the fiscal 2011 deficit was almost exactly $1.3 trillion, second only to the record-setting $1.4 trillion in fiscal '09. Using my estimates for Q3/11 GDP growth, I figure that federal spending is currently running at almost 24% of GDP. If we don't slow the growth in discretionary spending and reform entitlement programs, then the blue line is almost sure to go higher in the future.

What struck me most while updating my numbers and charts was the chart above (click to enlarge), which compares spending as a % of GDP to the unemployment rate. There are things like automatic stabilizers (e.g., unemployment insurance) that push spending up when the economy weakens, thus automatically boosting spending relative to GDP, but the extremely close correlation between the two lines since 2008 begs for a better explanation.

With no proof, unfortunately, I'm sorely tempted to say that huge increases in government spending only serve to weaken the economy, and that's why a big increase in the relative size of government correlates so well to an exceptionally high unemployment rate. Corollary: cutting back on the size of government would boost the economy and lower the unemployment rate. If the big boost in spending only weakened the economy, then cutting back on spending should help.