Inflation, Population & Government

For several months I have been privileged to receive informational emails from Senator Jeff Denham, who represents California’s 12 Senate District, a verdant (if gerrymandered) expanse of land that includes vast swaths of the San Joaquin Valley, along with virtually all of the beautiful Salinas Valley to the west. Senator Denham has been resolute in his opposition to California’s economically disastrous, politically opportunistic Global Warming Act, which has earned him credibility here, and hopefully elsewhere.

Today Senator Denham’s email dealt with another topic, the size of California’s state government, another area where Denham’s stated preference for smaller state government earns him additional points. Today’s email included some comments from one of his constituents that bear analysis – here they are:

“…in 1970, California took in 28 percent of state revenues from personal income taxes. Fast forward to 2010 and you find the state now pulls in a whopping 52 percent of its revenue from personal income taxes. During this same time period, our state budget increased from $6 Billion to $120 billion, an increase of approximately 2,000 percent. All the while, our population has barely increased 100 percent. As such, you could say that for every 1 percent increase in population, our spending has increased 20 percent.”

These are dramatic numbers – but they are misleading. Unlike people, who cannot be devalued, currency is a fluid asset, whose value is only pegged relative to other currencies and the commodities we use currency to purchase. And by this measure, Denham’s constituent has made a point we must attenuate. A good online source for compiled CPI (consumer price index) measurements is the website US Inflation Calculator, where there is a chart entitled “Consumer Price Index Data from 1913 to 2010.”

If you review this CPI chart, which references a “base year” of mid-1983, and reports the estimated purchasing power of a dollar for years before and after 1983, you will see that the year 1970 had an index of 37.8, and 2010 has an index of 216.7. This means that what a dollar would have purchased in 1970 would cost $5.73 today. While the CPI index is itself subject to criticism and is certainly not 100% accurate, it is obvious there has been inflation since 1970. In 1973, for example, the Big Mac burger made its debut, priced at $.50. Today a single Big Mac sandwich costs about $3.00. Similarly, homes that cost $50K in 1970 cost about $300K today (or more; the rate of price increases for residential and commercial real estate have exceeded the rate of inflation over the past decade – hence the deflationary pressures we’re currently facing).

So while Senator Denham is on the right track when he compares – and deplores – per capita government spending today vs. forty years ago, he needs to normalize not only for population, but also for inflation. The operative assumption requiring modification is this:  “During this same time period, our state budget increased from $6 Billion to $120 billion, an increase of approximately 2,000 percent.” In reality, the $6 billion needs to be increased by a factor of 5.73, which means $6 billion, in today’s dollars, would be $35 billion. This represents a growth in spending of 340%, which means that for every 1.0% annual increase in population, California’s per year state government spending since 1973 has increased 3.4%, not 20.0%.

Should California’s state government spending increase at a rate of 3.4x the rate of population increase? Absolutely not. But Senator Denham and other sincere and courageous advocates for limited government will not as effectively advance their agenda using statistics that cannot bear the light of day. Economics is called “the dismal science” for good reasons, and Mark Twain’s old adage that there are “lies, damn lies, and statistics” has endured as a favored quote for good reasons. But this doesn’t absolve any of us from making ongoing and sincere attempts to extract the truth from the myriad sea of numbers – because the truth exists, even if it isn’t precisely knowable – and because with integrity, instinct, intuition and reason, we get closer to that truth. And if our clear intention is to find the truth, even if that truth appears disruptive and disturbing, then our findings may convince not only those who already agree with us, but those multitudes who are still searching.

As it is, Senator Denholm is right, and his point is valid – California’s government is big enough, and should not grow at a rate more than triple the rate of population growth – particularly since today most of California’s politicians don’t want to use taxpayer’s money to build anything, but would rather use government as a weapon to restrict infrastructure development in favor of bloated wages and benefits for unionized government bureaucrats.

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