What does it mean to be able to afford our own government? Most (although apparently not all) people realize that if we are to ask government to provide us with an ever-increasing list of services, we need to be able to pay for them. And what better measure of affordability than the rate of growth of personal income? It is from personal income that we pay our taxes, that pays for government. Using data retrieved via the St. Louis Federal Reserve Bank’s eminently useful “FRED” system, I calculated an index that measures the former against the latter. Let’s call this the Government Affordability Index. I think it exactly quantifies why we collectively feel so financially strapped. Bear with me for a little econometric tedium…
FRED’s Federal Government Total Expenditures data series goes back to 1960, while their Personal Income series goes back to 1947. Using a starting index level of 100 in 1960, I grew each new series by the annual growth rate in the source series (total expenditures and personal income), with each annual growth rate reduced by the annual GDP inflation index. The inflation adjustment serves only to remove a lot of the exponential growth effect that shows up otherwise. Here’s the result:
Personal Income Index Vs. Government Expenditures Index 1960-2012
To zero in on the relationship between the two, I then took the one index and divided it by other, using Personal Income as the numerator, as any value over 1.0 implies that our total income level is commensurate with what we’re asking from over government. Sadly, the graph only visits 1.0 twice since 1960:
Government Affordability Index 1960-2012
I can already hear the howling from the Left about using Personal Income as a proxy for affordability. But to do so, they need to perform class warfare and taxpayer slice-and-dice stunts worthy of Benihana’s. And that’s the point. Government needs to be affordable by everyone, in total, and not according to some ruling majority’s view as to what constitutes someone else’s “fair share.” Furthermore, although interest rates are indeed at record lows (cue clip of Ben Bernanke’s helicopter), and too many people are saying we shouldn’t fear more debt, the annual interest on that debt still needs to be paid back from, guess what, Personal Income.
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