MONDAY MAY 3, 2010

Government Goose Egg!

The Gross Domestic Product  (GDP) for the first quarter was released on Friday and showed that the economy grew 3.2%.  This number was solid albeit a little disappointing.  Nonetheless, the number is strongly positive and shows the economic recovery is well on its way.  However, it is interesting to examine the breakdown of the GDP.  A quick reference to the old economic textbook provides the formula for GDP:  GDP = Consumption + Investment + Government or C+I+G.  What is interesting to note is that the G, government, contributed zero, a goose egg, to economic growth in the first quarter!  How can this be?  The politicians are all over the airwaves telling us how much the government is contributing to the economy.  Indeed, without government, we are led to believe we would be stuck in a depression.  Yet, the GDP numbers are pitching a shut out for government contributions.

What is happening is the massive federal government spending is being off set by state and local government.  New York is a clear example.  Most of the federal dollars allocated to NY, measured in billions, has been consumed by the state and local government.  The money has been spent to "save" jobs in the economy, but all of those jobs are in the state and local government.  One can see the battle playing out in our cities, counties, and Albany, as special interest groups fight for their share of the federal largess.  However, this masks the true state of our government balance sheets.  Yes, they are worse than they appear, if that's possible!  At some point, Uncle Sam's life support will go away and local and state government will have to fend for themselves.

Unfortunately for taxpayers, it doesn't appear our politicians have the political courage to make the grossly needed structural changes to our government.  It's frustrating to see trillions of dollars spent without any positive contribution to our GDP.

POSTED AT 1899-12-30 12:13:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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