The 10% Factor; Home Sales, Prices Brighten - WSJ.com

Home Sales, Prices Brighten - WSJ.com

An interesting thought comes to mind in terms of how to view the economy going forward.

1) Consider the fact that the current administration is working to take the percent of GDP spent by the Federal government from roughly 20% to pushing 30%. In other words, 10% of GDP that went to the private sector to produce goods and services will now be taken from the private sector and spent by government. The government's choice of economic utility of goods and services, not the individual' or business' choice.

We can call this a substitution effect, reallocation, whatever - but, it is a transfer of spending.

2) As with any transfer of spending - say you'd have bought chicken for dinner but decide on canned tuna. In one case there is more demand for chicken, in the other tuna.

Add this up on a macro scale and you have a lot of private demand having to go away. You can look at this as the difference between between just 20% and 30% - which is a 50% difference; or, you could look at the difference in the aggregate of the whole economy, where it is 10%.

3) It's perhaps just playing with numbers, but logic says that when part of the economy has to go away (i.e. the part of the private economy that used to represent that 10% of GDP now being taken by government), then jobs in that part of the economy and companies that were there - they also have to go away.

Clearly, they may be replaced; but, the government tends to be an inefficient producer if it really produces at all. And, there are lots of studies that purport government workers to be paid anywhere in the range of 50-100% more than workers in the private sector (benefit programs, etc.).

4) Now, we have a situation where healthcare taxes may be roughly $12-15,000 per year for an average family. So, if the breadwinner is being paid $100-200,000 per year, this is a sizable but not outlandish sum.

However, if the breadwinner is earning only $20,000 a year... you can see where this goes.

But ah, the subsidy from uncle. Well, maybe so; but, it is an economic distortion - someone else (or many someones are going to have to fore-go something else they would have bought (higher economic utility) in favor of giving their money to uncle to redistribute.

Most people I know like a bargain and they hate to be cheated. How this additional burden on producers to keep less of what they produce will impact the economy isn't calculated. Also, these producers will have less remaining to invest.

And, if there isn't a scary bottom line, the government - by taking 30% vs. 20% - basically becomes the arbiter of investment and consumption - and, as we know, the government isn't really good at either one; at least not as effective as the individual business owner or the shopper looking for a bargain.

So, how much money will be left in society for housing?