Monday, December 17, 2012

GDP, Unemployment, and Welfare - part two of three

The United States GDP – the value of all the goods and services produced in one year – is a direct measure of economic growth.  In the chart below, the green line represents GDP growth (recession), and the yellow line represents the unemployment rate.  As is clear below, GDP growth and recession tends to be a predictor of unemployment percentages.  When the economy grows, unemployment decreases - when the economy contracts, unemployment increases.  The correlation coefficient between GDP growth and unemployment in the next year shows a negative correlation at   -.62

(click on image to enlarge)

Although estimates on federal welfare spending range quite a bit, the blue line below represents a simplified estimate: the total percent of the federal budget allocated to housing assistance, food assistance, and other income security – sections 604, 605, and 609.  The yellow line again represents the unemployment rate.  The red and blue shading represents party control of the House, the Senate, and the Presidency.  (The white space from 2001-2002 represents an even split in the Senate.)

Intuitive as it may be, it’s clear that a spike in unemployment tends to be correlated with an increase in welfare spending.  Therefore, a recession in GDP causes an increase in unemployment, and an increase in unemployment tends to be correlated with an increase in welfare spending.  (In addition to chickens laying eggs, there are also some eggs hatching chickens – but the data supports GDP → Unemployment & Welfare.)  1993 and 1994 look like notable exceptions where a drastic decrease in unemployment did NOT impact the growing percent of the federal budget going to welfare.  1995-2007 demonstrates another observation that should be intuitive: percent welfare spending is more difficult to decrease than it is to increase.

(click on image to enlarge)

Data Sources:
Budget data
GDP data
Unemployment data
Party data

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