An Age Of Illusionists

Tyler Durden's picture

Authored by Steve Hanke, originally published at GlobeASIA,

Watching Barack Obama and Mitt Romney duel in the presidential campaign should have convinced the spectators that we live in an age of illusionists. Few of the assertions and conjectures thrown around have been subjected to what the political chattering classes deem to be the indignity of factual verification.

As a point of departure from illusion to factual reality, I present the accompanying chart, which traces the evolution of federal government expenditures, as a percent of GDP, since 1952. Based on the data, from 1952 until 2008 – when President Obama was first elected – we would expect, with an assurance of 95%, that the relative size of the federal government would fall in a range of 16.5% to 23.4% (see the accompanying chart). Since President Obama’s election, in 2008, the federal government has been in uncharted territory. Today, for example, federal government expenditures, as a percent of GDP, register at 24.3%. This is nine tenths of a percentage point higher than the high end (23.4%) of the so-called 95% historical range. For many people and businesses, this unusually elevated level of government spending is a source of uncertainty and anxiety.

Before proceeding, another inconvenient little fact must be mentioned. The economic cost of a dollar’s worth of government expenditures is more than a dollar, because taxes must be imposed to finance government expenditures. These taxes impose distortions (costs) on the economy, and these distortions cut the economy’s potential and reduce economic productivity. The costs created by taxes are referred to as the “excess burden” of taxation.

Since 1992, even the White House Office of Management and Budget (OMB) has recognized the existence of the excess burden. For purposes of evaluating federal projects, the OMB requires that an excess burden of 20% be employed. A wide range of scholarly research indicates that the average excess burden of the federal tax system is actually closer to 35%. Accordingly, the real economic cost of a dollar’s worth of federal spending is $1.35, not $1.00. To put this fact into context requires us to expand the level of government expenditures by 35%. After we do that, federal government expenditures, as a percent of GDP (including the excess burden of taxes), rise from their current level of 24.3% to a whopping 32.8%. By adding this little inconvenient fact into the mix, the “big” versus “small” government debate comes into sharper relief.

The accompanying table allows for a more precise look at the fiscal record of U.S. Presidents. Let us begin with President Bill Clinton. The Clinton presidency was marked by the most dramatic decline in the federal government’s share of the U.S. economy since Harry Truman left office. The Clinton administration reduced the relative size of government by 3.9 percentage points. Since 1952, no other president has even come close. At the end of his second term, President Clinton’s big squeeze left the size of government, as a percent of GDP, at 18.2%.

What is noteworthy is that the squeeze was not only in defense spending, but also in non-defense expenditures. Indeed, the non-defense squeeze accounted for 2.2 percentage points of President Clinton’s 3.9 total percentage point reduction in the relative size of the federal government. Since 1952, the only other President who has been able to reduce non-defense expenditures was Ronald Reagan.

The Clinton squeeze didn’t last long, however. By President George W. Bush’s second year in office, the federal government’s expenditures (both defense and non-defense) were exploding. By the time he left office, his administration had added a whopping 2.6 percentage points (equally split between defense and non-defense expenditures) to the federal government’s share of the economy.

With President Obama, the size and scope of the federal government has expanded at an accelerating rate. In his first four years, President Obama has operated in the twilight zone, with government expenditures, as a percent of GDP, exceeding the top of the 95% historical range in each year of his first term. In just four years, President Obama’s administration has added a record 3.5 percentage points to the federal government’s share of the economy. It took George W. Bush eight years to reach what was then a near-record increase (2.6 percentage points). The astounding thing about this brief account of the evolution of the relative size of the federal government is President Clinton’s change of mind. During his presidency, Clinton squeezed and squeezed hard, and his rhetoric matched his actions. Recall that in his 1996 State of the Union address, he declared that “the era of big government is over.”

By contrast, the champion of “big government” – in both rhetoric and deeds – is President Obama. And who was a champion of the President’s reelection? None other than President Clinton – the illusionist?

This brings us to the sharp pencil people in the Obama administration, specifically the OMB. They claim to know what the relative size of the federal government will be in 2016, at the end of President Obama’s term. According to the OMB’s plans, the federal government, as a percent of GDP should be 22.5%. That’s a 1.8 percentage point drop from the current level. Given that President Obama’s first term recorded a record growth in the relative size of the federal government, and that the President campaigned on a platform of more big government, it is doubtful that he will come close to meeting his own OMB forecasts, in his second term. Yes, the illusionists, not the President’s sharp pencil people, will probably carry the day.

What will make the President’s task even more onerous is money – as in the money supply. It turns out that the Obama administration, led by U.S. Treasury Secretary Timothy Geithner, has embraced the imposition of more stringent capital requirements on banks. And, the Obama administration isn’t alone. All the major powers have backed the use of Basel III bank capital requirements. These elevated bank capitalization mandates, when applied in the middle of a slump, are misguided and dangerous.

They have forced banks to deleverage on a massive scale. In consequence, bank money (the portion of the money supply created by the banking system) has contracted in most countries. And, since this portion of the money supply is so much larger than that accounted for by state money (the portion of the money supply produced by central banks), the net result has been a tight monetary reality in most countries – with a few exceptions, such as Canada, Germany, and several Asian countries. This explains why we are witnessing so many credit crunches at the same time central banks are pouring out liquidity.

The Obama administration (and the Bernanke-led Federal Reserve) isn’t the first to be caught wrong-footed by the embrace of more stringent bank capital requirements. In 1988, Basel I was approved. It had been supported by President George H.W. Bush and then-chairman of the Fed Alan Greenspan. As the accompanying chart shows, the money supply growth rate slowed sharply in anticipation of the more stringent capital requirements, as banks reined in loan growth.  

The result was a mild recession; one that cost H.W. Bush a second term. In the case of both Basel I and Basel III, the illusion of “safer banks” ultimately weakened the economy and made the banks less safe.

Back to Basel III and President Obama’s money supply woes. As the accompanying chart shows, the Fed has dramatically increased the supply of state money (Monetary Base) since the fall of 2008, when Lehman Brothers collapsed.

But, state money only makes up roughly 15% of the total U.S. money supply. Bank money is the elephant in the room, and due to the anticipation of more stringent capital requirements (Basel III), bank money has been contracting. In consequence, the total money supply (Divisia M4, excluding treasuries) has slumped.

Since money dominates, the economy has failed to ever recover to its trend rate of growth. A U.S. growth recession – growth, but below the trend rate – at best, will make it very difficult to push government expenditures, as a percent of GDP, down into the normal range, let alone reach the fanciful OMB target of 22.5% by 2016. It would seem that the President’s promises of future cuts are nothing more than an election-year illusion.

Thanks to Basel III, the U.S. money supply isn’t the only one creating growth headwinds. Europe faces significant money supply deficiencies (see the accompanying table).

It’s no surprise that the Eurozone has just fallen into a recession. When it comes to the money supply, just about the only bright spots are in Asia (see the accompanying table).


Will Asia continue to be the world’s locomotive? We will have to wait and see. At present, though, one thing is certain – an age of illusionists has arrived.

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Oh regional Indian's picture

All the world is a stage eh? 

Heck, even a region at war is called a 'Theater". Quite a tell.

As long as there is this monsterosity called the BIS, and it's Basel Accords (Discords actually), every CB action has to be seen in the light of global fiat currency manipulation. All this depth analysis is pointless, really. 

Perhaps it's time to stop calling fiat notes money as step one. It's not money supply, it's Debt Note supply.


economics9698's picture

If anyone is interested here are the tables he was using for this blog.  He used mostly table 1-3.

flacon's picture

I don't like "GDP" as a measure of PRODUCTION when government spending is included in GDP as if it was PRODUCTION. That was Keynes fault. 

Oh regional Indian's picture

I think Milton Freidman deserves an equal share of the blame for such mis-conceptions.

Keynes gets the blame, but the US is actually a Freidmanseqe dream/nightmare.

And clearly, the Chicage School is IN DA HOUSE.


economics9698's picture

It was Simon Kuznets who came up with the GDP formula.  Keynes stole the concept and combined it with another rip off, Richard Kahn’s multiplier and whalla, his “masterpiece” Money and Credit bull crap.

Freidman was the guy in his “”masterpiece” history of banking that said the Fed screwed up the Great Depression by restricting the money supply 27% causing the 1929-33 crash.

Both were wrong.

The Fed increased the monetary base from 29-33, its right there on the Fed web site.  What was happening was the public was freaking out with Hoover going ballistic on spending, deficits, tariffs, and taxes.  I mean who would not freak out if Obama raised taxes to 63%, passed huge tariff increased to 41%, and spent like a drunken GW Bush?

The decrease in money supply was the public freaking the fuck out from the insanity in the White House.

Keynes whole premise is based on “autonomous injections of cash into the system” which is complete bull shit.  Money for government comes from taxes, borrowing, or printing.  All three methods take money out of the productive private sector and generally waste 55 cents on the dollar for public goods.

Michaelwiseguy's picture
Israeli Professor Shlomo Sand talks up the ideas of his new book, The Invention of the Jewish People, challenging the underlying logic of the State of Israel as a homeland for the Jewish People.

He argues those who claim to be of the Jewish People cannot claim a blood connection with the original Jewish inhabitants of the Holy Land, but converts along the way. His book was a best-seller in Israel for 19 weeks in 2009.

Shlomo Sand: Challenging notions of a Jewish People (54.000+ views already)


Michaelwiseguy's picture

More than you think.

Watch the video. Pause it and rewind it if you miss something. Then open your mind to searching for filler answers elsewhere on the Internet. It's not easy. You must come to an understanding of the mindset that drives the concept.

Nobody is calling for anybody to be killed in this debate of enlightenment and solutions to our problem. Except for maybe people whom have committed crimes against humanity, and that would be very few compared to the size of the population.

You would be advised to see also, to understand mass psychosis;



Side note;

70% of American Jews voted for Obama.

hawk nation's picture

I say the gov spending is closer to 75 cents on the dollar waste

Michaelwiseguy's picture

ORI, It truely is staged and then they try to convince us it's something else, but we figured out what it really is. Now we get to see Obama bring the NWO into the light of day by turning Internet control over to the UN and his followers will finally see what filth the D's & R's NWO is trying to dish out for us.

Advisor Zbigniew Brzezinski: “Populist Resistance” Is Derailing The New World Order


Zbigniew Brzezinski Still Admits The Global Political Awakening Proving Very Difficult For The Elite

Oh regional Indian's picture

Michael....good is a tell..

Zbigiew.... Zee big New..... The Big order...



Michaelwiseguy's picture

The filthy fucking presstitute reporters on our TVs every day promoting this New World Order in their sneaky way, are guilty of crimes against the USA for their part in this scam. They need to be ridiculed and punished.

Lore's picture

It's actually pronounced "Spig-nee-eff."

Oh regional Indian's picture

Thanks Lore, good to know. Sure as heck looks like Ze Big New though, eh?


Michaelwiseguy's picture

Thank the Creator Joe Lieberman (Joseph Isadore Lieberman born February 24, 1942 (age 70)Stamford, Connecticut) from the USA Senate, is Retiring at the End of 2012!


Michaelwiseguy's picture

Neo-Fascist Feudalist Vs Marxist Progresser

Who do you think is going to win?

inevitablecollapse's picture

the age of delusion is upon us

BlackholeDivestment's picture

...ummm, that's ''prophetic strong delusion''. 6000 years from Adam to 2015 and ''boing'', the Whore of Babylon aborted labor and the check bounced. Oh I'm sure Benny will raise rates and save the Whore House from foreclosure. LMAO.

fonzannoon's picture

I thought Basel 3 was being pushed off a year? and by a year i meant forever.  I also thought it would hit european banks much worse than US Banks....I also thought Ben Injet....okay enough....

Zgangsta's picture

Why are some Guest Posts not labelled as Guest Posts?

BlueCollaredOne's picture


The author seems like a smart guy. Shit, he even uses bold text and charts. How could he really believe that one man really is in control? The power lies in the hands of the money holders., not a man that reads from a teleprompter. The presidency position consists of countless meetings each day, all meant to guide his path.

The United States is now a corporation, so we must examine it as such. In a corporation who has the ultimate power? The CEO (president), or the board? (men behind the curtain). CEO's are merely pawns, as are all politicians.

Fuck you author, for trying to make me think that the economic calamities that I am witnessing are the product of one man.

earnyermoney's picture

Are you saying it's not Bush's fault?


Where's the FU to Barry and the media for pushing this line the past 8 years?

Crtrvlt's picture

Not to mention fiscal year 2009 started in oct 2008

We will also be paying dearly for the wars, projected to cost 4-6 trillion all in, for years

Lore's picture



This is the author's main concern:

"Today...federal government expenditures, as a percent of GDP, register at 24.3%."


So what this means is that the American economy can be expected to contract by AT LEAST 24% in order to "right size."

Scary, huh!

(That doesn't even consider all the spending that's off the books.)


Henry Hub's picture

***We will also be paying dearly for the wars***

Shh! You're not supposed to mention the war spending. All our problems are caused by Social Security and Medicare.

hawk nation's picture

Wars are the costs required to keep the dollar the reserve currency

Without force who other than americans would accept the dollar as payment for services?

Widowmaker's picture

Mission accomplished, sucker.

Get back to work, big business needs freedom.

Illusory logic's picture

Did someone mention my name???  ;)

When I tell people everything they know is false and worse, a lie, almost all don't believe it.  People want to believe the lies, even big lies, if it favored their point of view and seemed mainstream.  Hell, I wanted to believe the lies, until the truth was just too evident to ignore it anymore.

This is the new war (or not so new): a psychological war.  Whoever can make the masses believe their interpretation of reality, wins.


Incubus's picture

The difference between an intelligent person and a conditioned person boasting 'vanity intelligence' is that the genuinely intelligent person has the capacity to look at the facts and admit when when they're wrong;  this is called learning.


The ones who put on airs of intelligence for vanity are generally 'always right.'

Zgangsta's picture

And they're going to do this while scrapping their entire nuclear plant infrastructure.

What the hell, if you're gonna lie, might as well tell a whopper.  It's not like anybody expects people to actually keep promises made years in advance anyway...

vnguru's picture

Well! he even uses bold text and charts. How could he really believe that one man really is in control? The power lies in the hands of the money holders., not a man that reads from a teleprompter. The presidency position consists of countless meetings each day, all meant to guide his path.  (Minneapolis, MN)

woggie's picture

the beast is on the gobble
and all that matters is we're all headed for it's belly

alfred b.'s picture


    In this day and age, every politician is a magician!    ...or so they pretend.



MyBrothersKeeper's picture

I agree that GDP calculation is a farce, especially since it counts govt spending too much vs private sector spending... but a better chart would show you who had control of the house and senate during those spending girations.  Generally spending went down more during Republican congress' than Democrat controlled versions.

j0nx's picture

"One thing is certain – an age of illusionists has arrived."

What has been will be again, what has been done will be done again; there is nothing new under the sun. - Ecclesiastes 1:9

thomas pain's picture

I'm not a magician Michael, I'm an illusionist

Jason T's picture

Asia's growth is all "productivity" growth.

d edwards's picture

Is "illusionist" just a new name for "liars?" (answer: yes)

SKY85hawk's picture

Does anyone remember the Clinton Tax Increases?


Now these illusionists try to say more govt spending will overcome the reduced spending of 76 million people!

Perhaps govt should wake up and prosecute the mortgage frauds they've been ignoring.  A guilty judgement on a billion dollar bank should shake a half billion loose each time.

Oh, one last thing.  The Democrats say 'ignore the Fraud & Waste in Medicare'.  Someone should lobby for outsourcing the claims function to a company that has a track record in controlling these huge costs.

Thank You for your time.



jayman21's picture

Q:Remind me again who actually is able to spend money?

A:It is congress.


I can do without the distractions.  President this president that.