Apples, Oranges, & The Expenditure Method

The chart above has successfully made its rounds across several news media outlets over the past few weeks, capitalizing on the negative public sentiment towards "bailouts" and seemingly inciting outrage wherever it appears. While it does present an informative visual representation of the dollar amounts related to the federal expenditures of 2008($4,616,000,000,000 as of November), it fails to properly classify the "expenses" resulting in an "apples to oranges" comparison.

The chart suggests, or fails not to, that the "2008 Bailout" is a single expense; an enormous cash outflow similar to The Marshall Plan or the Moonshot, rather than as an investment. An argument can be made, of course, that the Louisiana Purchase or NASA's advances were also investments. That each provided significant resources or breakthroughs we enjoy daily (even the Marshall Plan helped develop the current world order). But what was the ROIC on such expenditures? On the Vietnam war?

With the confirmation of a global recessionary economic environment, few would expect significant capital gains (perhaps even positive returns) from the billions of dollars of toxic assets the government has been purchasing in the near term. Fewer still, however, would assume that the assets are utterly worthless and will provide no return, or see no appreciation. Certainly the preferred equity of major banks, with dividends upwards of 10% and an equitable ownership of future revenues can be considered a sound investment. An investment I would happily purchase from the government in the open market, especially when considered against a long-term horizon.

Perhaps more importantly though, the image is often the basis for the "anti-bailout" sentiment; the suggestion that the spending is irresponsible or unreasonable. This argument undoubtedly ignores one of the most basic economic equations, the Expenditure Method of Calculating GDP:

GDP = C + I + G + (X-M)

With consumption(C) and private investment(I) down significantly and falling, and exports (X) shrinking as a result of the strong USD, the only option for avoiding a dramatic decline in GDP and subsequent and significant rise in unemployment, is an increase in government spending. One can argue that the spending is misplaced, but it would certainly be a difficult argument to make that it isn't necessary.

Such spending under normal circumstances may cause inflationary concerns or worries about crowding out the private sector, but with the economy operating well below available resources and as the Fed continues to combat deflation and prepares to take rates below 1%, printing more money has considerable merit. In fact, as Harvard economist Kenneth argues, a touch of moderate inflation may be rather beneficial.