Chart of the Day #24

Update: Giving this chart "double power"
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Wish I could give this chart "double power".

Many of our nation's economic policies (both fiscal and monetary) are predicated on some assumed growth rate. The growth rate, if properly calculated, allows us to plan, to set future spending, and to prepare the right sized infrastructure for the resulting economic times.

You don't hear the number out loud very often. It does vary a little, depending on who is doing the calculating. Most politicians say they can keep us growing at 4-5%. If you set it too high, you run into gross overspending and overinvesting. If you set it too low, you get restriction of the very growth you want to achieve.  Sometimes the numbers are pure fantasy. For example, Detroit had consistent negative growth of 1.5% per year for 60  years (suggesting a planned slowing of city expenditures), but instead, the city used 8% growth in their calculations for revenue growth. I'm not holding Detroit as a microcosm of US trends except for this: You have to get the math right.

From time to time, it's necessary to get realistic about things, and Robert Gordon has done this with the analysis conducted for the National Bureau of Economic Research, titled  Is US Economic Growth Over?: Faltering Innovation confronts the 6 Headwinds

It may not be pleasant to contemplate a 0.2% growth scenario in a 2.5% Fed inflation target environment. Gordon points out that the path to higher growth will require much more than our leaders are thinking.

When Keynes will work

Jeffrey Dorfman posts an insightful piece in Forbes.com that should encourage the Keynesians out there...even though it renders their cause obsolete. Keynes was right about the stimulative effects of deficit spending...assuming we existed in an alternate universe.

It might have had a positive effect when there was a budget surplus, but the last one was squandered away quickly,  12 years ago. The next one isn't coming any time soon. Dorfman writes:

When government spends money at best they can manage to perfectly anticipate what we want, thereby matching the benefit we would have gotten from our own spending, or they can do worse. Government cannot do better unless it knows what we want better than we know ourselves.

Sadly, the government does typically pose as an entity that can anticipate our every need. This ruse gives the politicians just enough cover to plunder the system.

Economic literacy is taking a horrible beating these days. It's not something government schools will teach, either. Educate your children. I just sent mine a copy of Henry Hazlitt's Economics in One Lesson. I urge all parents to do the same.