Thursday, August 18, 2011

What Economic Indicators Have the Biggest Effect on the Economy (Part II)

When performing a linear regression model and solving for Debt, Trade Deficit, GDP, Inflation, Tax Revenue, Unemployment, Budget, and Consumer Spending we get the following equations:

Parameter Intercept Unemployment Inflation GDP Debt Budget Home Price Housing CPI Trade Deficit Tax Revenue Consumer Spending Auto Sales
Debt = -2376 -145.5 32.43 -1.792 0 3.052 -0.00231 0.9519 26.18 -0.004196 0.0003138 0.003041 -6.192
Trade Deficit = -1998 -32294 3619 -487 -114 1894 0.8807 254.1 -3220 0 0.04326 0.8848 -2816
GDP = 938.6 -66.82 -28.08 0 -0.1021 -0.1053 0.002069 0.2452 -7.214 -0.001058 4.89E-05 0.00169 -4.819
Inflation = 22.29 -0.5324 0 -0.00574 0.000391 -0.00753 3.15E-05 -0.01656 -0.1417 1.61E-06 -1.33E-06 1.02E-05 -0.03918
Tax Revenue = 1657362 -70587 -14010 105.7 40.01 -818.6 -3.349 -92.53 -9519 0.203 0 0.4324 -2671
Unemployment = 15.83 0 0.2722 -0.00693 -0.0009 -0.00198 -6.25E-06 0.001771 -0.1215 -7.34E-06 -3.42E-06 1.42E-05 -5.22E-02
Budget = 1382 -15.92 -31.05 -0.08868 0.1518 0 0.0007186 -0.1167 -11 0.0003468 0.0003193 0.000348 -2.086
Consumer Spending = -691475 44461 16049 544.7 57.85 133.1 -0.7387 -143.9 5940 0.6197 0.06453 0 3156

For example, for the national Debt the equation is equal to -2376 – 145.5 x Unemployment + 32.43 x Inflation – 1.792 x GDP + 3.052 x Budget – 0.00231 x Home Price + .9519 x Housing Startups + 26.18 x CPI – 0.004196 x Trade Deficit + 0.0003138 x Tax Revenue + 0.003041 x Consumer Spending – 6.192 x Auto Sales.

We can learn a lot about our economy by evaluating each equation. For instance, the debt equation shows that the debt will decrease as unemployment increases; the debt will go up as inflation increases; the debt will decrease as GDP goes up; the debt will increase as the national budget increases; the debt will go down as home prices increase; the debt will go up as housing starts increase; the debt will go up as Consumer Price Index (CPI) goes up; the debt will go down as the trade deficit increases, the debt will go up with tax revenue increases; the debt will go up with consumer spending; and the debt will go down as auto sales increase.

It certainly is not surprising that our national debt is lowered if GDP or other economic indicators such as auto sales or home prices go up. And it is certainly not surprising that our national debt goes up if the federal budget increases, or if there is higher inflation, or if CPI prices increase. There are however, some surprising results – in particular, even as tax revenues and consumer spending increase the debt continues to go up – that is because as the government receives more in tax revenues, they spend more money. This result is apparent by reviewing the results of the other 7 equations. But there are some mind boggling results. For instance, if unemployment and our trade deficit increase it would yield a lower national debt. This actually states that the federal government tends to be more frugal during recessions – this is certainly not the case with our current president.

But there are some other more logical explanations for the strange results in the national debt formula. First, the intercept value starts negative (so there has already been a negative compensation in the formula), so there has to be more upward movement in the formula. Secondly, unemployment and the trade deficit are in the bottom five parameters that affect our economy. The impact of each economic indicator can be weighted in each of the above 8 equations. The 4 most significant parameters that affect the economy are GDP, Consumer Spending, Debt, and the national Budget. The parameters that have the smallest impact on the economy are inflation, tax revenues, and the trade deficit.

Thus, a thriving economy is one where GDP and consumer spending are maximized whereas tax revenues are minimized while at the same time balancing the budget. In other words, we need a society that emphasizes capitalism over government interference. The bottom line is that higher tax revenues do little to fix the budget deficit because the federal government irresponsibly spends any additional revenues it receives.

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