Enlightening Aggregation

I typically think that looking at things like the economy in terms of aggregates is not helpful.  GDP, for example, is an economic aggregate, or a sum of several different categories of spending that is used as a gauge on the health of the economy.

GDP can be useful for visualization, comparison and analysis.  For example, it’s fair to use GDP per capita to compare the relative living conditions of the U.S. and Zimbabwe, or folks living today and folks living in the U.S. fifty years ago.

The danger comes when those in power believe it is something they need to micro manage.

The following passage provides an example of an author who used aggregation to create an effective visual.  I read it years ago, and every now and then it bubbles back to the surface.  I think it may be especially timely now with the debt limit debate in DC (emphasis added).

Wm. Rickenbacker editor of the Rickenbacker report and author of a recently published “Savings & Investment Guide” has pointed out that 28.6 mil.  Americans depend on gov’t retirement and disability programs.  Then you add in recipients of survivor programs — almost 9 mil, unemp. benefits to 6 mil., Military 3-1/2 mil., civilian emps. & dependents and you come up with a total of 81.3 mil. people dependent on tax dollars for their year round living.

All of those tax dollars must come from 70.2 million Americans working & earning in the private sector.  Ah! but you say govt. workers pay taxes too. And so they do. But all their inc. & therefore the portion they pay in taxes comes originally from tax dollars so they are just returning to gov’t. tax money already pd. by the worker in the pvt. sector.

The 70.2 mil. private sector workers have 62.1 mil. personal dependents, so we’re talking about a private sector of 132.3 mil. sharing their income with an additional 81.3 mil.

To sum it up roughly 70 million Americans provide a living for themselves and 143.4 [million] additional people.

Now, don’t take this as meaning there should be no recipients of tax dollars or that all who work in gov’t are parasites.  Obviously, we want to provide for the needy & disabled.   Just as obviously we must have & are happy to have in the military those who provide for our security.  This goes also for policemen and firemen & all those who provide services we want & need.

The point I’m making is that somewhere there must be a figure beyond which we can’t go in the growth of gov’t without wimping out those in the private sector who pick up the tab.

The plain truth is every effort to slow gov’t growth or reduce gov’t costs has failed.  In the last 20 yrs. corp. profits have risen 105%–wages have gone up 213%–govt. costs have risen 340%.  There is one sensible, long overdue answer; fix in the constitution a limit on the share of earnings govt. can take without becoming a drag on the economy.

These words are from the book Reagan: In His Own Hand.   They were written as a manuscript for a Paul Harvey-esque radio spot that Reagan gave in those days.  This one aired on radio on November 16, 1976.

I thought this was an interesting way of looking at the economy.  Wealth must first be created in the private sector before it can be used by government.  Government doesn’t divine wealth out of thin air.  It lives off the wealth created in the private sector.  And the ratio of folks living of that wealth is high.  Someday I might try to update these numbers to see if the ratio has changed.

The reason we transitioned from hunter-gatherers — folks who spent most of their time providing the essentials — to where we are now is through private sector trading that allowed us to free up time amongst ourselves and others.  That freeing up of time allows us to use some of our produce to fund things like government.  It allows some people to not produce much at all and do things like occupy government positions.

While people have many different ideas about what wealth is, wealth derives from this savings of time.  How much time does it take to feed ourselves compared to our hunter-gatherer ancestors?  Much less.  If it didn’t, we couldn’t afford government.

I think it’s good to keep that in mind as some of those in government seem awfully preoccupied with biting the very hand that feeds them.