# Unemployment rate vs deficit spending

1. Apr 30, 2010

### Orion1

I attempted the following plot on Wolfram Alpha:
Code (Text):
plot United States unemployment rate,(United States federal deficit/United States GNP)
The resulting graph is as attachment.

According to my understanding of this graph, the derivative of the United States unemployment rate is a direct result of deficit spending by the United States Federal Government.

The greater the amount of deficit spending the exponentially higher the unemployment rate.

Are there any economists here that can improve upon my calculation?

Reference:
http://www.wolframalpha.com/input/?...ed+States+federal+deficit/United+States+GNP)"

#### Attached Files:

• ###### un01.gif
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12.2 KB
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Last edited by a moderator: Apr 25, 2017
2. Apr 30, 2010

### Gokul43201

Staff Emeritus
What is it that you are trying to calculate? If anything, you can extract a correlation between unemployment and deficits. Without a proposal for a mechanism, you have provided no basis for a causation.

Moreover, a naive inspection of your plot shows a lag in the deficit relative to unemployment. And it's hard to not notice that rising unemployment causes governments to go into spending overdrive in an attempt to stave off job losses, stimulate economic activity, or provide more unemployment benefits. So there's clearly an argument for the causation to be primarily in the opposite direction to your claim.

Last edited: Apr 30, 2010
3. Apr 30, 2010

### Ivan Seeking

Staff Emeritus
What's more, if we assume causation, then the graph suggests that the government succeeds in reducing unemployment through spending, but it takes a few years for the full effect to be seen.

4. May 6, 2010

### imiyakawa

We must understand OPs position, from 1990 onwards there seems to be identical correlation, it doesn't seem to be a lagging indicator, which doesn't help with the hypothesis that unemployment is causing deficit spending.

I suggest everyone thinks about the actual events that are happening in line with the changes in the gradients.

Our limits in infering given this data are:
-One cannot conclude that unemployment is causing deficit spending.
-One cannot conclude that deficit spending is causing unemployment.
-One CAN conclude that global events are causing both unemployment and deficit spending.

(1) beginning of 2000, Stock market crashes -- Fiscal Stimulus AS WELL AS inevitable unemployment. Both have a root cause, (A) isn't causing (B), (B) isn't causing (A), (C) is causing (A) and (B).

(2) 1990s, general domestic economic prosperity within USA (call this (C)). This caused (A) reducing unemployment, (B) reducing deficit. Again, (C) caused (A) and (B).

(3) 2010, SubPrime mortgage crisis, 383 mortgage-related financial institutions bust! (ml-implode.com), (A) is not causing (B), (B) is not causing (A), (C - collapsing financial system), is causing but (A - unemployment) and (B - a responsive deficit).

Last edited: May 7, 2010
5. May 6, 2010

### Ivan Seeking

Staff Emeritus
Really? I clearly see the spending [the deficit] lagging the unemployment rate before and after 1990. Where on the graph [approximate date] do you see the opposite?

Last edited: May 7, 2010
6. May 7, 2010

### imiyakawa

Just the small patch between 1993.5 to 2002.5 :p

There looks like identical correlation.

ALthough you of course have grounds to argue against that patch. 2001 you could argue that the gradient of the deficit increased markedly not only in response to the stock market crash but in response to quickly growing unemployment.

7. May 7, 2010

### Staff: Mentor

Also, high unemployment lags behind a drop in GDP and a drop in GDP has a direct impact on tax revenue.

8. May 7, 2010

### Staff: Mentor

Right: you can't assume causation, you have to demonstrate it with logic. The was the problem with the OP!

9. May 7, 2010

### Ivan Seeking

Staff Emeritus
Indeed.

10. May 9, 2010

### Matterwave

Perhaps it's best if you also included a regression on the two variables. Instead of graphing them over time, plot the data points for each year on a graph with deficit spending on the x-axis and unemployment on the y-axis. This should give you some better indication if there is correlation (on an instantaneous basis). You can then expand your analysis by plotting say, the unemployment rate at time t and the deficit spending at time t+3 or something to see if there is supposedly lagged correlation.

This is all correlation...it's very hard to come up with causation arguments without first correcting for every omitted variable...omitted variable bias is incredibly hard to get rid of in something as complicated as this haha.

11. May 10, 2010

### hamster143

Not an economist but I can surely improve on that calculation:

plot United States unemployment rate, (United States federal receipts/GNP), (United States federal outlays/GNP)

2001 and 2008 recessions are clearly accompanied by sharp drops in government revenues. Government spending did not increase substantially during the 2001 recession, and it only started to rise with considerable delay during the 2008 recession.

12. May 13, 2010

### imiyakawa

THIS. .. THIS. THIS. THIS!!!!!

Yes!!!!!!

Although such a regression will be basically nonsense. As matterwave said, omitted variable bias. This means there's an X2 that's causing both X1 and Y1, and this X2 isn't in your model. This makes it look like you have very neat correlation, but you actually don't! (E.G., when comparing student test scores to class size, an example of X2, X3, X4 would be income, geographic area, and whether there are computers in the classroom). An example of that X2 in what we're talking about are real world events, such as recessions, etc. Recessions are causing correlated directional changes in both GDP and unemployment, but it's not in you rmodel, and so it makes unemployment look like it's having a huge causal effect when it's not!

I dunno how you're going to account for this, frankly.
----------------------------------------------------
There is some reason to expect this kind of negative correlation after all!
Inflation and employment are negatively correlated. It's not unwise to suspect that the government would risk a deficit during times of non-inflation. This will make it seem like a deficit is causing unemployment. Another omitted variable!

Last edited: May 13, 2010
13. Aug 17, 2011

### Orion1

unemployment rate vs government spending...

Code (Text):
plot United States unemployment rate, (United States federal receipts/GNP), (United States federal outlays/GNP)
Given that causation has not been established and there is an omitted variable bias, it still appears that the government spending rate drives the unemployment rate.

Reference:
http://www.wolframalpha.com/input/?...s/GNP),+(United+States+federal+outlays/GNP)+"

#### Attached Files:

• ###### un02.JPG
File size:
33.8 KB
Views:
74
Last edited by a moderator: Apr 26, 2017
14. Aug 17, 2011

### WhoWee

You might want to consider using GDP.

15. Aug 17, 2011

### hamster143

Federal spending comes in two major categories, discretionary and mandatory.

Discretionary spending (e.g. deciding to spend extra $5 billion on the space shuttle program, or to save$5 billion by shutting down Tevatron) does not vary much (except when the government decides to start a new war). And it is a small part of the total bill. In the last pre-recession budget, non-defense discretionary spending accounted for less than 20% of all spending.

Big fluctuations you see in the chart come from mandatory spending, they reflect recession-time increases in safety-net spending on Medicaid, unemployment insurance, welfare, and food stamps. These all increase automatically as a consequence of rising unemployment and poverty.

Likewise, fluctuations in federal receipts are causally linked to unemployment (fewer people working mean fewer taxes collected).

16. Aug 17, 2011

### mheslep

The OP is attempting to show, I believe, how spending or the deficit drives unemployment, not the other way around.

17. Aug 17, 2011

### hamster143

And we're trying to explain to him that he's wrong.

18. Aug 17, 2011

### mheslep

??? Not in this thread. The only arrows thrown are ones casting doubt on the causality, not that he's wrong.

19. Aug 17, 2011

### hamster143

He is wrong because he posits causality in one direction, when in actuality the causality goes in the opposite direction.

20. Aug 17, 2011

### mheslep

That does not mean his thesis is wrong. Causality might go both ways.

Last edited: Aug 17, 2011