Charts that Count: how Donald Trump is weaponising growth
FT Alphaville's Brendan Greeley explains how the growth in military spending under the US president has helped to stimulate the economy and boost GDP
So the formula for calculating economic growth is pretty straightforward. Okay, so gross domestic product is consumption plus investment plus government expenditure plus net exports. We're not going to go into too much detail here, because today we just care about government expenditures.
Now, you can divide up government expenditures even further. You've got state and local, or federal expenditures. And then, within federal expenditures you have defence and non-defence. Defence is military spending, things that go boom. That's what we care about today.
So what you're looking at right now is contributions from federal defence spending to annual GDP growth. The GDP growth numbers should not be important in American politics, because there are better ways to measure how we're doing. But it is.
That's just the world as it's given to us. Every White House gets measured on how high they can get that number. Can you get it to three? Can you get it to 4 per cent?
So we take a look at the contribution that defence makes. It's easy to see a pattern. This right here right after 2001 is the ramp up in federal defence spending after September 11th.
Then, we see again during the recession, there's nothing else happening. We don't have a lot of consumption. We don't have a lot of investment. It's government spending is all there is really. Right, so it becomes the only mainstay in a stimulus.
Then, something happens, two things together, in fact. This right here is the Obama administration winding down wars in the Middle East. But at the same time, it's having a fight with Congress that results in a sequester.
Kind of crammed it in there, but a sequester is basically a terrible arrangement, where you decide that to force yourselves to get along you're going to make very painful cuts to the military and some other discretionary kinds of funding. So they're stuck. They lift the caps on the sequester from year to year, but not by a lot.
So what we're looking at right here is that defence spending is a net drag on economic growth. Now, I'm not a defence policy analyst. I can't say whether that's a good idea or a bad idea. I can tell you that that has an effect on this number, GDP growth, that presidents get judged by.
Something happens here. In the last year, Congress has lifted the caps particularly on defence spending by a lot. So now you have a positive contribution to GDP growth. It's no longer a drag when we're looking at that number.
It's actually even more dramatic when you look at the quarterly numbers. So if you have second quarter of last year, whiz bang, 4.2 per cent. That's an amazing number. The administration made a big deal out of it, rightly so. We hadn't seen it in a while.
The contribution of defence spending in that quarter to GDP growth was .22 percentage points. Take that away, make it a drag like we did a couple of years ago, and you don't get to 4 per cent. . So this is a big deal.
In theory, the Republican party in the United States doesn't like to stimulate the economy through government expenditures. They prefer consumption and investment coming from the private sector. But there is one exception.
It's what we're looking at right here, defence spending. Barney Frank is a retired congressman from Massachusetts. He's a Democrat. Used to call this weaponised Keynesianism.
Keynesianism - not a philosophy that Republicans in the United States traditionally adhere to. But it, basically, says in times of great need you need to step in as a government and spend a lot of money to make up for all that private consumption and private investment that has disappeared. What we have happening right now is what we have happening right now.