Using the data from the U.S. Bureau of Economic Analysis on gross output per industry, a deeper understanding of government as an economic sector and its investments and has been conducted.

The Government as an Economic Sector

In an excerpt of the Bureau of Economic Analysis paper “Measuring the Economy”, they define the government sector as:

“General Governments. This sector receives revenues from taxes and other sources and uses these revenues to provide public goods and services, such as education and defense, and transfer payments, such as social security or Medicaid benefits. The sector includes Federal, state, and local government agencies, except for government enterprises.”

Deciphering this definition leaves us with what the exact sources are for the government revenues and expenditures listed are classified by the national income and public accounts.

• Current taxes (Includes licensing fees like business licensing, drivers license)
• Social insurance contribution (Includes social security, medicare, unemployment insurance, and other smaller programs)
• Income receipts from government assets (Includes interest, dividends, and rental income, such as royalties paid on drilling on the outer continental shelf (deep-water drilling). Also, governments earn interest and dividend income on financial assets.*
• Current transfer receipts (Includes grants, fines, fees, donations, unclaimed bank deposits, deposit insurance premiums, and tobacco settlements)
• Current surplus (or deficit) of government enterprises (Government-sponsored enterprises or GSE are financial service corporations that attempt to increase the flow of capital to systems such as housing, veterans, farming, and education. They consistently run on a deficit.)

Here are the four main categories of expenditures.

• Consumption expenditures (Including compensation, fixed capital, intermediate goods and services purchased among others)
• Current transfer payments (Include social security, medicare, other income providing support such as Medicaid and food stamp benefits. Also includes federal aid to foreign countries and payments to international organizations like the United Nations)
• Interest payments (interest paid to borrow their capital and operational costs)
• Subsidies (Includes payments to businesses, homeowners, and government enterprises)

Commentary

I think it is important to show how our government operates financially. It may seem daunting and slightly paradoxical but our government is actually very transparent with its reports especially compared to other governments. Yet, as transparent as it is, it may seem pretty confusing. The NIPAs (national income and product accounts) released by the Federal Reserve shows in detail the revenues and expenditures of the government each year. And as important as I think it is, I only want to draw a couple conclusions from it so I can move onto the important piece I found from reading through the NIPAs.

Takeway

Kind of obvious, but the federal and states revenues and expenditures do not differ in percentages too much from each other, although the local governments do. Local governments revenues include larger portion coming from state government grants-in-aid and property taxes. On the expenditure side, consumer expenditures count for the vast majority of spending compared to the federal governments social benefits as the biggest spending unit. I do ask the question where is the military spending in all of this?

The Government Investments

This section I will go over what I found in the NIPAs and from a Janet Yellen testimony, as well as trying to confirm the hypothesis between a correlation in government’s gross expenditures and government issued investments.

The * explained.

If you read through the NIPAs in the above section you came across a * in the revenue section of income receipts on government assets. I believe this asterisk is important in determining the level of some investments in the financial markets. This may be common sense to some but is worth clarifying to show its importance.

The Federal Reserve holds securities in the financial markets.

That list of securities held by the Federal Reserve (should be released to public knowledge) is a key tool to use when investing. During the 2008 financial crisis the Federal Reserve, treasury, and bank leaders scrambled to put a relief to the financial industry in the form of cash into the financial markets. This liquidation which then came in the form of quantitive easing, gave the financial markets a safety net. The point is one of the largest held securities by the Federal Reserve must have been during the quantitative easing period (and possibly after) high institutional banks, or in other words, banks that have access to the overnight rate (federal funds rate). This list is available here.

What does the Fed invest in?

The Federal Reserve invests in low risk assets that are mostly held by government sponsored agencies, treasury notes, and TIPS. It is held by the Federal Reserve and managed in the System Open Market Account for the purpose of liquidity and essentially is the Federal Reserve’s emergency money.

A deeper look at the Fed’s portfolio including the investment banks that underwrite their securities will be mentioned in an article later, for now lets continue on our journey through government investments.

The Hypothesis

For those of you who did not read my Economic Statistics by Industry I showed the gross output by industry through statistics from the BEA (Bureau of Economic Analysis) and made a hypothesis stating the gross output of the government is related to government issued investments. So the point of this article was to test this hypothesis. After some background into the government as an economic sector, and some introduction into government’s investments lets define what I’ll be using as a “government issued investment”.

 The gross output provided by the BEA divided government into two subcategories; federal and state. I will be doing the same for their government issued securities.

Federal

Treasury bills, notes, and bonds are the most common securities that to me are defined as “government issued investments” and will be used to analyze the government’s gross output to the returns represented by the T-bills, T-notes, and T-bonds. It is important to realize I will not be taking into account another form of government issued investments in the form of GSE’s. The securities listed as agencies will not be used in this project because defined by the BEA’s definition of government as an economic sector they do not include GSE’s as part of their definition. I’m also not including government savings bonds.

State and Local

The way I define “government issued investments” for state and local governments is simply municipal bonds. Municipal bonds are the most direct way to invest in state and local governments. I will be using muni bonds against the state and local gross output for my project.

Conclusion

After giving some time to define the government in depth as an economic sector, and preview what I will be using to correlate the government’s economic output vs. the government’s investments, the only thing left to do is retrieve the data, punch some numbers and I will be reporting to you the results in the near future. This preliminary search was conducted to clearly define the project and hopefully give some insight and knowledge into the government from a financial perspective. During my findings I found some sidetracked search involving the Fed’s holdings and will also deliver an article diving deeper into that portion. Feel free to email alleywayinvesting@gmail.com for any questions and inquiries.

All data for this project was retrieved from the Bureau of Economic Analysis, Federal Reserve, and the Federal Reserve Bank of New York.