Clearly there are many factors that affect the economy outside of the scope of the of government spending.  One would hope a large enough data set and an effective regression analysis should allow you tease out the impact government spending has even with all other factors considered.  While I concede that how the government spent the money might significantly change how it impacts the economy, for this post I am focusing on the aggregate spending of the federal government.  This post will analyze the impact spending has on the two broadest measures of economic health:  GDP and Unemployment.

Notes/ Facts:

• Spending and GDP growth are inflation adjusted.  (IE. If spending increased by 5% and inflation was 3% I use 2% as the spending increase)
• GDP data is from 1923 forward
• Unemployment data is from 1948 forward
• Times government has reduced speding from the previous year: 10
• Times governement has increased speding from previous year: 76
• Times government has increased spending by 5 or more percent: 34

Analysis
My analysis consisted of plotting the inflation adjusted %change in spending by year against GDP and Unemployment respectively.  This makes for nice charts but is not that meaningful from a statistical standpoint.  For that I did a linear regression (thank you stats class and Excel 2007) and determined the R-squared value and produced a histogram.  Essentially the R-squared value tells you have often you can expect your model to produce an accurate result and the associated “Significance F” tells you how confident you can be in your R-squared value.

GDP

GDP vs Spending

GDP and Govt. Spending Histogram

R-squared values:

• Avg of year and following year - .22
• Same year - .21
• Avg of year and next two (3 total)- .14
• Following Year - .12
• Third Year - .0014

Unemployment

GDP vs. Spending Chart

GDP and Spending Histogram

R-squared values:

• Avg of year and following year - .004
• Same year - .05
• Avg of year and next two (3 total)- .009
• Following Year - .02
• Third Year - .002

Conclusion

Historically government spending has almost 0 statistical impact on unemployment and a fairly low predictable impact on GDP.  The GDP histogram shows that the line does have a positive slope, meaning that if you increase government spending generally you are going to increase GDP.  However based on the model above, if you try to predict how changing government spending is going to impact the economy you will only be correct about 1-5 times.  Admittedly this is a crude model and I might refine it in the future to determine if how the government spends money has a stronger correlation to the economic performance.  However, based on the model above it doesn’t appear that government spending can directly and consistently produce predictable results in the two broadest economic measures we have.

Meaning that government spending most likely won’t do much to stimulate the economy.
Here are links to my much labored over worksheets, please feel free to play with the number and let me know what you find:
Cleaned Raw Data
Analysis

Thanks and as always comments are welcome, encouraged and appreciated.

-ep

Sources

1. Unemployment Data- US Dept. of Labor (http://www.dol.gov/)
2. Inflation Numbers- Bureau of Labor Statistics (http://www.bls.gov/CPI/)
3. US Government Spending & GDP- (http://www.usgovernmentspending.com)

If you are interested in learning more about statistics:
http://cameron.econ.ucdavis.edu/excel/ex52bivariateregression.html
http://en.wikipedia.org/wiki/Coefficient_of_determination

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Note if you enjoyed this video I have a more in depth post on the Financial Crisis HERE

http://www.ted.com/index.php/talks/hans_rosling_shows_the_best_stats_you_ve_ever_seen.html

My feeling is the growing financial crisis is largely responsible for the urgency to the process and has placed a premium on known quantities. This premium on known quantities is a large factor leading to Obama’s current nominations being so heavy on Washington experience. Obama’s first four cabinet nominations have more Washington experience than either Clinton’s or George W Bush’s (60, 58, 30 respectively) (3). That is even with Janet Napolitano, his nomination for Secretary of Homeland Security, having no Washington experience.

Change was one of Obama’s primary platforms during the primary and general election his appointment of these seasoned Washington insiders begs the question, “Will the same people who have been running Washington be able to or be willing to change it?” It is a fair question. With these people working for new leadership I still think the answer is yes.

One of Obama’s attribute that I found incredibly appealing during the campaign was his pragmatism. A step away from the ideological zealotry that has come to characterize Washington in recent years and towards a mindset that could start to solve some of the problems currently facing the country. I believe that this pragmatism is what is driving the current cabinet nominations. Here are some of the proposed or projected nominations so far and my thoughts if I have any (an * denotes someone that I am pretty confident the position has at least been offered to)

*Secretary of State- Hillary Clinton
The biggest and most controversial appointment so far by Obama. Personally I’m not sure how she is qualified for this position (although, what should the qualifications for the position be?). I know she was in the White House as First Lady for eight years but saying that is the same as running the White House is like saying that Yoko Ono was one of The Beatles. Ultimately I think this was a political move to keep her close and help bring the Democratic party together even more. Additionally I would be shocked if her Senate confirmation is not only successful but also quick and painless. The biggest pitfall I see in this move is if things don’t work out between Obama and Clinton it will be politically tough for Obama to fire her without significant fallout.

*Secretary of the Treasury- Timothy Geithner
This pick along with all of the economic team has been lauded by both the right and left. Tim has been heavily involved in the process already in his role as the President of the Federal Reserve Bank of New York which should make the transition from Paulson to him smooth. Going with a known quantity that is respected on both sides of the isle should speed his confirmation.

*Secretary of Defense- Robert Gates
I believe this is a great pick for the position and is a realization of Obama’s commitment to try to have a bi-partisan administration. It is also example of an extremely pragmatic choice in that the Obama teams focus needs to be on the economy. Why transition the complexities of the war in Iraq to a new Secretary unless you have to? Additionally, you could skip the Senate confirmation process since he currently holds the position.

*Chief of Staff- Rahm Emanuel
Rahm is known as a bulldog and a fierce Democratic partisan, which is in stark contrast to Obama himself. I believe that is why Obama needed him, or someone like him with a leadership role in his administration. Somebody to play the hardass bad guy to Obama’s peace maker.

*Secretary of Health and Human Services- Tom Daschle
An 18 year veteran of the Senate and former Senate minority leader is well known by most of the sitting members of the Senate. Having been in the public eye as long as he has and serving in such prominent roles has already helped vet him. All of this adds up to a guy who knows all the players and should be easily confirmed.

*Press Secretary- Robert Gibb

*Secretary of Homeland Security- Janet Napolitano
A Washington outsider in that she has never held a position there, even though she has worked there for a time in her career. The only hiccup she might see during her confirmation is because she represented Anita Baker during the Clarence Thomas confirmation and some conservatives believe she may have coached the witness’s testimony (4). I think this is another great pick. A democratic governor from a red border state with extensive experience in border and port of entry issues. This nomination has drawn praise from both sides of the isle.

Secretary of Energy- Al Gore/ Jeff Bingaman

Ambassador to the UN- Bill Clinton/ Lee Hamilton

*National Security Adviser- James Jones
A former Marine general with extensive experience in Afghanistan. The perfect person to couple with Robert Gates.

*Attorney General- Eric Holder Jr.
Somebody who is well respected, was appointed to a judgeship by Regan and a leadership role at the Department of Justice by the Clinton administration. A personal friend of Obama who was by some accounts reluctant to leave his current job at a law firm to go back to the grind of Washington but was convinced he was needed. His only blip in confirmation might be his association with Clinton’s pardon of Marc Rich (4)

*Secretary of Commerce- Bill Richardson
Bill will probably be the toughest confirmation of all of the cabinet members. He was Secretary of Energy under the Clinton administration when some nuclear secrets were stolen from Los Alamos, some Republicans haven’t forgotten nor forgiven him for that happening under his watch(4). That said, I think he will ultimately be confirmed and has the experience and political cache to be successful.

Overall I love how the cabinet is shaping up after doing additional research with the possible exception of Clinton who I am still on the fence over. All the nominations seem like easy confirmations, helping to avoid the risk in not getting people confirmed and the associated embarrassment. The quick confirmations will allow his team to hit the ground running and begin addressing the long list of issues currently facing the country.

(1) Cabinet Members: http://www.cnn.com/interactive/allpolitics/0811/interactive.obama.white.house/index.html

(2)Obama Cabinet vetting historically fast:
http://www.cnn.com/2008/POLITICS/11/25/obama.cabinet/

(3) Obama’s Cabinet Picks Heavy on Washington Experience
http://www.foxnews.com/story/0,2933,455545,00.html

(4) Past Controversies Hang Over Obama’s Cabinet Picks
http://www.foxnews.com/politics/2008/11/22/past-controversies-hang-obamas-cabinet-picks/

The below map uses a range of color from red to blue with multiple shades of purple to indicate the percentage of how people vote in counties across the country.

Here is the same information in the form of a cartogram where the size of the county has been resized to reflect the population located there.

This map uses a color scale that ranges from red for 70% Republican or more, to blue for 70% Democrat or more. This is sort of practical, since there aren’t many counties outside that range anyway, but to some extent it also obscures the true balance of red and blue.

Here are a couple examples below:

Population:

Oil Reserves

Who is winning

The presidential election is decided by a majority of electoral votes. Below left is a plot over time of the estimated number of electoral votes for Obama if the election were held today. Below right is a plot of the popular vote (but note that as demonstrated in 1876, 1888 and 2000, winning the popular vote does not mean winning the election). You might also want to consult electoral-vote.com, Real Clear Politics, 538, pollster.com, or my own election dashboard.

How honest or dishonest are they

Probably the best referee in this game is Factcheck.org, from UPenn’s Annenberg Political Policy Center, a nonpartisan nonprofit consumer advocate for voters. They don’t give out easily classified scores so I can’t summarize briefly, but you can read a comrehensive article from Sept. 25 listing the major whoppers so far.

Other players in this game include CNN’s Fact Check and the St. Petersburg (FL) Times, an independent non-profit paper, which runs PolitiFact. They too check on candidates statements and rate them on a scale from “True” to “Liar, Liar, Pants on Fire.” Here is the scorecard so far. My column “True Pct” means the percentage of statements that were rated True, Mostly True, or Half True; “Lie Pct” means the percentage that were False or Pants on Fire:

Here’s the list of statements that were rated as Pants On Fire:

1. McCain said Obama wanted to teach comprehensive sex education to kindergartners. He doesn’t.
2. McCain said Obama called Sarah Palin a Pig. He didn’t; he used the same expression that McCain has used in the campaign.
3. McCain said Obama wants to increase government by 23%. The numbers don’t add up.
4. McCain said Obama opposes energy innovation. Not true.
5. McCain said the price of a gas tax holiday would be about the same as a “Bridge to Nowhere.” It would actually take 45 times the cost of the bridge.
6. McCain said that Obama suggested bombing Pakistan. Obama was actually talking about attacking al-Qaeda forces that stray into Pakistan.
7. Obama implied that Rush Limbaugh’s anti-immigrant views were endorsed by McCain. They aren’t.

What do special interest groups think

About what you’d expect: conservative groups like McCain, liberal groups like Obama.

One surprise: more veterans groups like Obama better. It seems that when it comes to issues of veteran care, McCain prefers to cut government spending and Obama prefers to support the veterans even if it means increased spending.

Caveat: they’re called special interest groups. That’s because they have special interests. Don’t assume that a group represents your interests because it has the word Family in its title and you belong to a family, or because it has the word Retired and you’re retired. Be sure to check out each group.

I think there are a lot of questions out there centering on why we need a bailout and ‘why can’t we let the market sort all of these things out’? I realize this is an extreme analogy, but that would be similar to letting cancer work itself out. The prime requirement for a capitalist society isn’t having access to every market, low taxes or little regulation. The most important thing in a capitalist society are functioning capital markets and that is what the crisis we are currently facing is about.

There are several reasons why we are currently in this financial crisis and I try to address some of them in an earlier post. The point is we will have plenty of time to assign blame and credit later but for now we need to act. In the future I will make a post detailing how Marx predicted wild market swings would be the impetus to societies becoming communist, something we all want to avoid. Swings like this have largely been avoided throughout our history due to a tradition of government intervention dating back to Alexander Hamilton. The belief that the proposed intervention is an affront to American ideals and traditions is not supported by our history.

Why We Need IT

The reason we need the bailout is because credit markets have “locked up”. What does that mean….

• Nobody wants to loan anybody any money (1)
• Businesses need overnight money to make payroll (short term credit/ lines of credit) and they are having trouble getting them now (1)
• The failure of Lehman has caused banks to be reluctant to lend money to each other (4)
• The $586 Billion in credit losses has banks scrambling to restore their capital (4)
• If banks are unwilling to lend to each other — as surging LIBOR rates suggest — they sure aren’t going to lend to consumers or businesses (7)

Without access to credit business will not be able to make payrolls, fund needed projects, purchase raw materials for manufacturing cover their cash flow while they wait for projects to close, etc. Even if companies are able to get access to credit at higher premiums they will need to cut costs just to maintain their performance. This generally manifests itself in the form of massive layoffs, which in turn hurts the economy since the unemployed tend to spend less. Most companies are leveraged (as they should be) and have some level of revolving debt. If this debt is coming due and they need to issue new debt their operating costs just went up. This again leads to less investment and more layoffs.

I think there is a misconception that this crisis is primarily about helping the financial sector, which it is also intended to do. However every capital intensive organization is being affected by this, especially manufacturing, information technology and municipal / state governments. The credit crisis is coming up on a year old, lets look at some specific example of how it is affecting the economy:

- http://www.capitalspectator.com/092508b.html

http://seekingalpha.com/article/97377-the-perfect-storm-even-with-bailout-economy-is-hurting

• Because of this tightness in the market for tax-free municipal bonds, Kent County, Mich., where Grand Rapids is located, will pay some $750,000 more than it expected in interest on a $15 million, 10-year refinancing bond it sent to market earlier this week, according to county treasurer Kenneth D. Parrish.(11)
• Matt Fabian, managing director of the research firm Municipal Market Advisors, said the problems extend throughout the municipal bond market, where the borrowing rate for seven-day debt spiked from 1.8 percent to 5.15 percent last week. (11)
• Louisiana added $14.3 billion to its budget for fiscal 2007 to account for higher borrowing costs (11)
• For the week through September 20, fresh claims for unemployment benefits jumped sharply to 493,000, the Labor Department reports. (12) The last time initial claims were reaching so close to the 500,000 mark was September 2001. (13)
• Seasonally adjusted new orders for durable goods slumped 4.5% in August, the biggest percentage drop since January.(14)
• Home prices fell about 6% in 2007 and are expected to tumble another 15% in 2008, 10% in 2009 and 5% in 2010 (15)
• The credit markets are seizing up and the uncertainty recently drove up short-term interest rates for municipalities and some rock-solid institutions such as New York’s Metropolitan Museum of Art to 20%.(15)
• Compared to a year ago Caterpillar will pay about $15.6 million more per year to borrow the same amount (17)
• Compared to just six weeks ago Caterpillar is going to be paying an additional 150 basis points for a similar debt instrument(16)
• Caterpillar actually got a great deal because the average premium that A-rated corporate borrowers have been required to pony up has jumped 331 basis points from last year (17)
• Jumbo Mortgages (loans above $420k) now carry an extra 1.2% interest (18)
• Credit card offers are down 17% from the same time last year (18)
• American Express is cutting the credit limit of 10% of their customers (18)
• Since the summer of 2007, 137 lenders have stopped funding federal loans (18)
• Thirty three lenders have suspended private student loan programs (18)
• Student loans made to parents through the Parent PLUS program have plummeted — down 29% in dollar volume year (18)
• Bank of America is declining to increase lending to McDonald’s franchisees even though the two companies have a long-standing partnership (18)
• In August, 67% of small-business owners said they’d been affected by the credit crunch (18)

Who Ultimately is Being Affected

• Investors or anyone who has a 401(k), etc/ Obvious reasons (10)
• Students looking for student loans and parents looking to get them loans(10)
• Anybody with Credit Card debit / Most CC rates are based on LIBOR plus a figure. LIBOR has been soaring (10) (18)
• Anybody looking to buy a car / People are having challenges getting financed unless you have impeccable credit. (10)(18)
• People looking to buy a house (10)(18)
• Anybody looking to start a business
• Anybody running a business who needs money to cover payroll until money comes in
• People with ARMs that will be adjusting / They are often based on LIBOR which is soaring
• Homeowners / additional foreclosures will drive down their home values
• Taxpayers / Higher borrowing costs for local and state government will result in a need to either cut services or raise taxes

Even with the bailout the economy is going to get worse before it gets better. The damage that has been done is probably going to take a couple years to finish working it’s way out.  The next shoe to drop is going to be large dip in consumer spending which should push the economy further down in a recession.  The question do we want to face both problems at once.

I live for comments, feedback and forum posts so please let me know you thoughts on this post. If you think this is a worthwhile post don’t forget to add it your social networking site listed when you click the ‘bookmark’ button.

Thanks,
-ep

Sources
1. The Markets Are Terrified: Should You Be?- http://finance.yahoo.com/tech-ticker/article/79549/The-Markets-Are-Terrified-Should-You-Be?tickers=%5EDJI,%5EGSPC,%5EIXIC,SPY,DIA
2. The Dow’s Worst Days: http://www.forbes.com/2007/02/28/dow-jones-worst-days-biz-cx_daa_0228dow_slide_3.html?thisSpeed=15000
3. Who Really Benefits from the Bailout – Wall Street or Main Street: http://finance.yahoo.com/tech-ticker/article/77810/Who-Really-Benefits-from-the-Bailout—-Wall-Street-or-Main-Street?tickers=%5Edji,%5Egspc,%5Eixic,itw,ir
4. Fed Pumps Further $630 Billion into financial system: http://www.bloomberg.com/apps/news?pid=20601087&sid=a9MTZEgukPLY&refer=home
5. Treasuries Soar as House Rejects $700 Billion bailout http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aDMAlgibsQDw
6. Run on Bank Helped Kill WaMu, But Your Money Is Safe - http://finance.yahoo.com/tech-ticker/article/73415/Run-on-Bank-Helped-Kill-WaMu-But-Your-Money-Is-Safe?tickers=WM,JPM,XLF,WB,%5EDJI,%5EGSPC
7. ‘This Sucker Could Go Down’: Bailout Stalls, Market on Edge - http://finance.yahoo.com/tech-ticker/article/73263/’This-Sucker-Could-Go-Down’-Bailout-Stalls-Market-on-Edge?tickers=RIMM,GE,GT,%5EDJI,%5EGSPC,%5EIXIC,XLF
8. Goodyear to Tap Credit Due to Money-Fund Woes http://online.wsj.com/article/SB122234656358675027.html
9. Citigroup to acquire Wachovia banking operations- http://www.reuters.com/article/marketsNews/idINN2946959920080929?rpc=44&pageNumber=2&virtualBrandChannel=0&sp=true
10. Who wins, who loses under proposed bailout plan?- http://biz.yahoo.com/ap/080929/rescue_winners_losers.html?.&.pf=banking-budgeting
11. Credit crunch makes cities’ borrowing more costly http://biz.yahoo.com/ap/080926/financial_meltdown_public_finance.html
12. US Dept. of Labor: http://www.dol.gov/opa/media/press/eta/ui/current.htm
13. The Perfect Storm: Even with Bailout, Economy Is Hurting- http://seekingalpha.com/article/97377-the-perfect-storm-even-with-bailout-economy-is-hurting
14. Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders/ August 2008- http://www.census.gov/indicator/www/m3/adv/pdf/durgd.pdf
15. How Bad Will the Mortgage Crisis Get?http://www.time.com/time/business/article/0,8599,1714725,00.html?iid=sphere-inline-bottom
16. Caterpillar’s Troubling Bond Issue- http://seekingalpha.com/article/96992-caterpillar-s-troubling-bond-issue
17. Caterpillar bond sale illustrates credit crunch- http://money.aol.ca/article/caterpillar-bond-sale-illustrates-credit-crunch/357594/
18. The Credit Crunch: Where Is It Happening? http://www.time.com/time/business/article/0,8599,1845818,00.html?cnn=yes

Join the forum discussion on this post - (1) Posts

Early polls of the debates rate the candidate performance like this:

CBS/ Knowledge Network Obama - 39% McCain - 24% Draw - 37%Insider Advantage Obama - 42% McCain - 41% Undecided - 17% CNN Obama - 51% McCain -38% MSNBC Online Poll (non-scientific) Obama - 52% McCain - 33%

* Information from http://www.theimproper.com/Template_Article.aspx?IssueId=6&ArticleId=2421

Personally I think both candidates did well in the debate.  I think Obama was stronger on the economy and personal demeanor with McCain fairing better on foreign policy by virtue of his personal anecdotes and experience.  Neither candidate was considerably stronger than the other on any one of the topic and no knock out blows were landed.

McCain made his disdain for Obama plainly clear by never looking at Obama or addressing him directly and repeatedly using dismissive actions and comments to belittle him.  Obama seemed more gracious in addressing McCain directly and acknowledging when he made good points.  I kept a count, which is admittedly subjective, of some of the talking points and interaction which is presented below.

I went to FactCheck.org to see how well each candidate stuck to the facts.  I used my judgment to characterize each of the deviations from the truth into: “Mix-up of the facts”, “Stretching the facts” and “Falsehoods”.  This is subjective but feel free to go to FactCheck to make your own decisions.

Overview of what was lies were characterized where and why below.

• Kissinger Back Obama on talking to foreign leaders - Obama & McCain/ Stretch
• Obama voted to raise taxes on people making only $42,000 - Obama & McCain/ Stretch
• Obama’s timetable for withdraw- McCain / Stretch
• Earmarks tripled in past 5 years - McCain / Falsehood (down significantly since 2005)
• $3 million bear DNA study - McCain/ Stretch
• Iraqi surplus exaggerated- Obama/ Mix up
• $700 Bln for importing oil- McCain/ Mix up
• Amount of people Obama will cut taxes for - Obama / Stretch.  For details read one of my previous posts, The Facts about the Obama and McCain tax Plans
• Employers will be taxed for health benefits- Obama / Mix up.  (Employees will be charged)
• Americans will be forced to get government health care- McCain/ Falsehood
• Ike wrote a letter resigning - McCain / Mix up
• Obama Naive on Georgia- McCain/ Stretch
• Obama doesn’t think the Iranian revolutionary Guard are terrorists - McCain/ Stretch
• McCain saved taxpayers money from a bad Boeing deal- McCain / Stretch
• Obama doesn’t support nuclear power- McCain /Falsehood
• McCain is against alternate energy - Obama / Stretch
• McCain was against the initial plan to send troops to Beirut- McCain / Mix up

http://www.factcheck.org/elections-2008/factchecking_debate_no_1.html

Enjoy.

-ep