Less Bang for the Federal Buck: Literally
The phrase, "more bang for the buck," is usually associated with the Vietnam War. It is associated with Defense Secretary Robert McNamara's focus on statistics: military expenditures vs. enemy deaths. This was his infamous "body count."
In fact, the phrase came from Eisenhower's Secretary of Defense, Charles Wilson. He used it in 1954 to justify the Defense Department's reliance on nuclear weapons rather than conventional armies. McNamara's focus on armies was a reversal of Wilson's context.
In 1953, Eisenhower gained a stalemate in Korea: a ceasefire. There has never been a treaty ending that war. In the decade of 1965-1975, in a much longer war, the United States lost. Today, the United States has lost the war in Iraq -- where we are still bombing ISIS troops -- and is losing the war in Afghanistan. Each of these wars has lasted longer than the Vietnam war, which began officially with Congress' Gulf of Tonkin resolution on August 10, 1964.
What we are seeing is a steady reduction of the bang-for-the-buck ratio. The federal government is spending vastly more money on defense, but Presidents are wasting this money on offense -- failed offense.
David Stockman has made a fascinating discovery. It has to do with real (inflation-adjusted) final sales in the economy. He regards real final sales as the best indicator of economic growth.
Real final sales, for example, include the national defense spending accounts of NIPA [National Income and Product Accounts], which currently amount to $750 billion. But defense spending generates pure economic waste--even if it does arguably provide for the intangible good called "national security". That's relevant because between 1953 and 1971 there was zero real growth in the defense component of GDP.By contrast, between 2000 and 2014, the real defense spending component grew by 37%.
This indicates a decline in bang for the buck. As the Defense Department absorbs an ever-greater percentage of the federal budget, the results turn increasingly negative: longer wars, but no victories.
We see this in other areas of the economy where the federal government is increasing its control, as measured by spending. One is public education. Another is healthcare. The ratio of federal spending to real output keeps rising, meaning less bang for the buck.
This long-term slowing of the ratio of output-per-government-resource-input is now being matched in the private sector. Consider this crucially important ratio: credit to real GDP. It takes more and more debt to produce a slowing increase in real GDP. Again, I cite Stockman. He has provided a remarkable chart, courtesy of the Federal Reserve Bank of St. Louis. The chart compares credit growth to real GDP. The lines crossed in 1985, the year that Stockman resigned in protest as Director of the Office of Management and Budget, although he did not mention this coincidence in his article.
Here is his explanation:
Since 1940, real per capita GDP in the US grew by 2.5% a year. That's mediocre. But since the 21st century began, real per capita growth has averaged only 1% a year. That's downright awful. . . .Once debt levels began to explode in the wake of Nixon's gold default, economic growth rates almost immediately faltered. . . .
Non-farm business productivity is rising at the slowest rate in 50 years. And the velocity of money -- the speed at which each unit of currency changes hands and a key component of inflation -- has fallen to the lowest level in half a century. Why?
Because of the declining marginal utility of debt. When there is little debt, you can add cash and credit to a system and get a boost. The money circulates. The economy revs up. But the more you add, the greater the burden of debt becomes… and the less of a boost you get from it.
Finally, you've ballooned the Fed's balance sheet to $4.5 trillion and you're getting a measly 1% per capita GDP growth in return. And then… as in the first quarter of this year… the growth falls to near zero. All the "stimulus" since 2000 was a scam. It stimulated nothing but more debt -- which slows the rate of real growth.
The ratio of credit to real GDP keeps increasing. This is another way of saying that the ratio of output from additional debt is slowing. The economy is facing an inevitable crisis. At some point, the private sector will not accept any additional debt. It will be tapped out. Borrowers will understand that they will not be able to repay the debt out of increased production. So, they will stop borrowing. Stockman has a phrase for this: peak debt. (This refers to the private sector. When it comes to the government sector, there is plenty more where that came from. When the federal government can borrow 30-year money at 2.5%, we are nowhere near peak federal debt.)
Economic growth is slowing. If we take inventory accumulation out of the statistics, real final sales are actually falling. When we look at the chart, it becomes clear that the almost steeply rising increase in credit in relation to the mediocre increase in real GDP cannot be sustained much longer. Either real GDP will have to shoot upward, or else the growth of credit must stall. There is no evidence that the first scenario is possible. When the growth of credit slows, real GDP is going to turn downward. Then credit will shrink, as it did in 2009.
When it comes to the federal government and the Federal Reserve System, the United States' economy is getting ever less bang for the buck. This is black-hole economics. It sucks productivity out of the entire economy. This is Keynesian economics on steroids. This is tax, borrow, and inflate. Back in 1948, Ludwig von Mises identified Keynesianism as the economics of stones into bread. Keynesianism is now in its terminal phase: bread into stones.