The Beauty of This Chart if You Are a True Private Equity Believer

May 13, 2013

If you’re a true private equity believer, the following chart has got to be beautiful.

The figure shows the most recent GDP figures by the three broad expenditure categories (which, excludes net exports): consumption, private domestic investment, and government expenditure.

In the political budgeting realm, there is no bigger issue than the debate over the short-term costs and long-term benefits of the only category with negative quarter over quarter growth – government spending.

On the one side of the debate are academic economists and government control advocates who argue that government spending adds more to the economy than it takes away, and thus such individuals lament the decline in the costs of government operations.

On the other side of this discussion are professionals well aware of the detriment government activity does to generally well-functioning markets.  Professionals with understanding of the natural state of markets generally arrive at the opposite conclusion: government regulation and general activity takes away more from the current and future generations than the good it could possibly help materialize right now.

Now, these generalized straw-man statements have a good deal of debate behind them.  Forgoing the endless debate, the question here is:

Why should private equity professionals find it beautiful?  After all, the financial press is full of stories decrying the risks associated with federal spending cuts?  (As a side note, one should view the spending cuts as cost reductions rather than some sort of draconian spending reductions).  At the extreme, some seemingly credible economists think prolonged spending cuts (also known as austerity measures in Europe) could send the U.S. economy and even perhaps the world’s economy into a recession.

The simply answer to the posed question is that true private equity professionals should find the GDP chart beautiful because it generally discredits the “government is the center of the universe” idea. There are at least two ways that the GDP by major sector chart makes this point.

The first is that it shows a decoupling of growth by sector, something long understood by unfettered free market thinkers. The chart shows the most recent five quarters, four of which show a decline in government costs (a good thing).  Over the same period, growth is positive in private consumption and investment.

Now, some government regulation theorists and cost increase advocates will simply say that growth would be higher now absent the savings in the costs of government.  The simple counter answer to this line of thought is simply that there’s really no evidence behind it.  And, if an academic tries to find some correlation, the more likely culprit behind below trend growth is the recent tax burden increases and lack of respect among certain political figures for allowing markets to function freely.

The second beautiful thing the chart shows is something deeper, something only appreciated by individuals with a care for our children’s future.  The beauty is a signal, a signal that shows to kids and others that the costs of government are on the way down, hopefully on a long-term basis.  This is better for our kids in a number of ways, such as the signal it sends that government employment isn’t a good career path and that the economy’s productivity will likely be higher because of a shift in employment away from the generally unproductive government sector towards products useful in a voluntary market.

Overall, private equity professionals, at least in the vast majority, understand these principles and thus find the GDP chart to be a thing of beauty.

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