Does Government Spending Boost the GDP? PSA’s GDP Data Says No!

Of all tyrannies a tyranny sincerely exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience—C. S. Lewis

Does Government Spending Boost the GDP? PSA’s GDP Data Says No!

The PSA revised the base period of the GDP from 2000 to 2018. This change led to increases in the real GDP numbers in three of the four quarters in 2019 and the annual GDP from 5.9% to 6%. (Figure 1)

Boosting the GDP is so simple, just change the assumptions or the methodology, or tinker with deflator, or manage the inputs, to show what is intended.  As Professor Ronald Coase once wrote, “If you torture the data long enough, it will confess.”

According to media and the establishment, please blame the COVID-19; the Philippine GDP posted a -.2% change in the 1Q, its first contraction since Q4 of 1998!  

Figure 1

Yet, the total infected as of May 12th has only been 11,350 compared to an estimated population of 109 million with a median age of 25.7.

Simply put, total infections account for an infinitesimal .01042% of the population! Importantly, the young demographic should translate to reduced deaths from Covid19! Data from the Department of Health, John Hopkins, and Worldometer exhibit almost similar distribution of mortality concentrated on the elderly. 

So instead of protecting such groups, a one-size-fit-all policy was forced upon the nation, which effectively relegated the economy into suspended animation!

And with the Luzon Enhanced Community Quarantine (ECQ) of the National Capital Region extended until May 15th, albeit (relabeled as Modified) this extrapolates to 77-days since its inception, a day more than the duration of the Wuhan, Hubei lockdown, which commenced on January 23 and lifted on April 8, or a 76-day quarantine! NCR has a 38% share of the GDP (2018).

As a side note, because of the sudden spike in COVID-19 cases, the Wuhan government announced that it would implement universal testing.

That said, won’t a decrease in the standards of living or an increase in poverty make the population more vulnerable not only to COVID-19, but to other health risks?

Back to the GDP.

And here’s a quirk on the data.

If the GDP grew by 6% each in January, February, and in the first half of March, this entails only a 30% drop in the second half that led to 12.05% contraction in March that expunged the two and a half months of GDP growth.  

Yet, the Luzon Enhanced Community Quarantine, which, again, started in mid-March, involved also many provinces and cities outside the region.

With Luzon accounting for nearly 70% of the overall GDP (2018 Regional GDP) as the baseline, the economic shutdown meant that the national economy must have suffered more than the published national accounts statistics.

Regardless of the accuracy of the GDP statistics, that government spending is the elixir to economic development has been the mantra embraced by the consensus even before the COVID-19 induced crisis.

Now, public spending will rescue the economy from the crisis, so they say.

Yet even from the Philippine government’s Philippine Statistics Authority national account data, this would seem like a hollow claim.  

Figure 2

Even before this shutdown, the household consumption data has been under pressure.

The annual GDP elaborates on this diminishing role of household consumption. In contrast, public spending has been revving up. Though both have been intact since 2001, these trends, signifying a shift towards public spending, has accelerated since 2016.

Reinforcing this view is the ratio of the share of household consumption to GDP relative to the share of the government spending to GDP. The reduced role played by household consumption, effectively, dragged the GDP since 2012, but again intensified from 2017 onwards.

Figure 3

The per capita data exhibits a much better angle.

The household consumption topped in Q2 of 2016, then, traded at the lower bound of the range since it hit bottom in Q3 2017.  The GDP per capita data resonated with this entropic motion. But then, the economic shutdown broke that floor in the 1Q. Not so with government spending.

It followed Ernest Hemingway’s two modes to bankruptcy: gradually, then suddenly! 

The household-GDP correlation tells us that the larger the government spends, the lesser disposable income is made available to private-sector households.  

As the great Austrian economist, Ludwig von Mises warned,

The fashionable panacea suggested, lavish public spending, is no less futile. If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes on the one hand as many jobs as it creates on the other. If government spending is financed by borrowing from commercial banks, it means credit expansion and inflation. Then the prices of all commodities and services must rise, whatever the government does to prevent this outcome.

Or, through the crowding out, household consumption represents the opportunity costs of increased public spending.

From the mainstream viewpoint, the fiscal multiplier is less than one.
 
And there’s more.  

Figure 4

Despite the spending downtrend, households appear to have been escalating the use of credit to bolster their consumption.

Credit usage rocketed by 40.14% and 37.6% in January and February, just before this crisis, but dropped to 22.93% in March, when the ECQ was implemented.

The boom in Consumer credit (ex-real estate) has primarily been from credit card borrowings, which zoomed 57.04%, 50.93%, and 18.98% over the same period.

And ironically, booming consumer credit came in the face of stagnating retail credit, which has been in decline since 2H 2018. Though March’s retail borrowings spiked 6.8%, this looks likely in response to building up cash reserves in expectation of the economic freeze than from the greasing of commercial activities.

Yet, what happens to the consumer’s capacity to spend when credit becomes scarce in the face of shrinking economic opportunities or when money tightens?

This brings us back to the original premise: public spending.

So would the avalanche of public spending to rescue the economy improve the weal of the many? Or will these signify a redistribution in favor of the politically connected elites? And will it create conditions worse or opposite than the intended?