Tag Archives: austerity

Government Employment vs. Spending

Cafe Hayak had a good primer on Government Employment today.  http://cafehayek.com/2012/07/what-has-happened-to-public-employment.html This revelation wasn’t shocking if you are up to date on the state/local austerity measures, but the data from the post is still useful.

“Using the most recent preliminary numbers (for June) shows that employment is down by about 640,000 from the peak in 2007 and 2008 which was in August of 2008.”


In the last decade, we have increased governmental spending.  There are a few that believe that the increased spending has prevented the economy from becoming worse.  The epicenter is jobs.  More governmental spending means more governmental jobs right?

Say it ain’t so. 

The first item I examined was the increase in total governmental spending.  http://www.usgovernmentspending.com/us_20th_century_chart.html  (need better reference)

Comparing 2002-2010 total government as a percent of GDP increased from 34.74% to 40.75%.  The increase in government spending amounts to ~17%.  Over this same period from 12/2002 – 12/2010 government employment increased from 16.6% of the workforce to 17.1%.

  • ~17% increase in Governmental spending
  •  ~3% increase in Governmental employment.
  • Unemployment rose from 5.8-9.6%

The money disproportionately went to some other place than governmental employees.  I came up with possible ideas why the ratio is out of line.  The first thing that came to mind is technology.  With technological progress, government may spend more on capital good and equipment than people.  We’ve had quite a bit of technological progress since 1950, so I examined 1950-2010.

  • ~70% increase in Governmental spending.
  • ~26% increase in Governmental employment.

This clarifies that the 2002-2010 era displayed hiring constraint, and it probably had little to do with technological/automated process.  The cause could also be outsourcing/military spending.  I hear Reagan did quite a bit of spending on the cold war, and searched out the greatest increase in spending during his tenure. 

  • Between 1979-1893 Governmental as a percent of GDP increased ~15%
  • ~5% decrease in Governmental employment.
  • Unemployment rose from 5.8 to 9.6%

The government was able to decrease employment drastically while increase spending.  This illustrates the point increased government spending does not necessarily lead to more government jobs.  It is possible that the spending increased jobs in the economy, yet overall unemployment still drastically increased.

Why is any of this significant?

Politicians collectively rant about job creation and reduction of unnecessary spending.  A simple and intuitive concept.

The application of this concept seems to be more difficult.  In the last decade we have seen increased governmental spending while governmental job gains have been disproportionately low. (Japan liquidity trap. Possibly a primer for other jobs related posts.  High spending / low jobs may be worse than low spending / low jobs).


assuming the 4% guaranteed return

Traditionally most economists have assumed the 4% guaranteed return. It is not radical to say that deviations from the 4% are norm-reverting. While many will be quick to point that we are in abnormal state, I will assume most seasoned financiers still average 4% returns on risk free assets.

Since the inception of the Vanguard Long-Term treasury fund (1986), it has averaged an annual return of 8.7%. The CPI inflation rate has averaged around 2.5-3% (note the graph below). Asset prices outside of CPI probably rose more. For simplicity we will say the real return was 4-6%. The extra return could be accounted by duration premium and stability/lower inflation. The point of this data is to show that 4% real yields are not unreasonable, and still probably exist today.


Time to make our leap… Lets assume that financiers will not loan money for less than 4% for a risk free real return. While they have little control over nominal rates (Ie. meddling by Fed/ECB/UK), they have significant control over money supply through lending standards/qualifications. They will not loan money till they get their real rate they are seeking. As a result, they can effectively control the money supply and inflation. If financiers collectively demand 4% risk-free returns, they will ultimately get it.

In order to figure out what all this means, we should examine the current interest rates. Below is today’s chart of treasuries and i-treasuries. I will be examining the 10 year and 30 year nominal.

The 10 year rate is 1.51 and the 30 year rate is 2.62.

For an omni-potent / oligopolistic financier to guarantee him/herself a 4% risk free return with the 10 year, he/she need 1.51-4 = -2.49% rate of inflation. For the 30 year he/she needs 2.62-4 = -1.38% rate of inflation.

What does this all mean?

  1. Although financiers may not be omni-potent, they do have the power not to lend money. This can have a strong deflationary effect. Financeers also have the power to influence austerity/tea-party/corporate layoff measures to push deflation along. Their pure goal is to get higher real rates of return, not necessarily nominal.
  2. When the Fed/Japan/UK/ECB claim to stimulate the economy with lower rates, they are selling snake oil. There is nothing stimulative about low rates when asset prices continue to drop. Financeers will simply push to make asset prices drop further to get their 4%.
  3. The only way to get financiers to invest right now is with some form of guaranteed deflation!
  4. The inflationary/consumption measure of financiers/investors is drastically different than the cpi. The average urban consumer behavior, is definitely not the same for the weighted average investor. For this reason we can see a CPI expected inflation of 2.21% and a expected financier inflation of -2.49%. Talk about alternative universes.