Higher government spending leads to slower growth

ok so US Q3 GDP just revised down to 2.0% from the flash number of 2.1%,. We expect GDP to further disappoint into Q4 2015 and 2016. Why?

The chart below shows the annual change in US real GDP (red line) compared to US Government Expenditures (aka, “spending”) divided by US real GDP (black line). In other words, how much government is spending as a percentage of GDP. Vertical grey bars are periods of US economic recession.

You’ll notice pre-financial crisis while government spending as a percentage of GDP ranged from 24.86% to 29.52%, real growth in GDP averaged 2.6% and 2.7% respectively.

Post financial crisis government spending, as a percentage of GDP, has surged, averaging 37.83%, while read GDP growth has averaged a mediocre 1.2% – yup.

Its pretty simple and illustrated here: increased government spending doesn’t automatically translate into higher economic growth. Rather the contrary. Something we already know and have known, for a long time. When will government catch on?

Well, it gets down to fooling some of the voters some of the time.

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