A friend asked today how to make sense of Barack Obama’s proposed plan to have the federal government spend $3.8 trillion per year (nytimes). The traditional way to look at this is divide it by U.S. GDP of $14 trillion and come up with 27 percent of GDP. Today, though, I wondered if it made more sense to look at it as a percentage of the private economy, which is the primary tax source. Ignoring state and local government spending, the federal government would need to collect 37 percent of private GDP in taxes. But if we add in state and local government spending, total government spending is trending towards 50 percent of GDP. If private GDP is truly the source of U.S. wealth, the government would have to tax nearly 100 percent of it in order to feed itself. As taxes are plainly not 100 percent, this way of looking at the numbers can’t be right.
So we have to circle back and look at government itself as a source of GDP. If the government redistributes money to Social Security recipients, for example, that cash is spent pretty much in the same way as it would have been by the people from whom it was taxed (though obviously they might have preferred to keep it and spend it themselves!). If the government pays interest on debt to U.S. bondholders, does that contribute to GDP? What if the government pays interest to a Chinese bondholder?
I’m wondering if it will get ever more challenging to compute GDP as the government grows. Certainly we had a tough time figuring out the Soviet Union’s GDP and even the Soviet economists couldn’t quite figure it out due to a lack of market prices for many goods.
Circling back to the $3.8 trillion… how do we make sense of that number?
I’ll start: the Haitians have asked for $3 billion to rebuild their wrecked city of 2 million souls. So the U.S. government proposes to spend enough in one year to build new cities, complete with infrastructure, for 2.5 billion people.
US infrastructure projects cost far more for reasons that elude me, although bureaucracy has to be one of the reasons. The replacement for Doyle Drive, the access road to the Golden Gate Bridge on SF side, is a billion dollar project. The bridge itself cost $35M in 1937, or half a billion dollars adjusted for inflation. No wonder bridge construction is at a near-standstill and the bridges we do have are so poorly maintained.
GDP is just measuring the ponzi scheme that is US-China trade. US Governement spending is financed by foreign purchases of government bonds, but those bond purchases are compulsory on the part of foreign governments lest they have runaway inflation from the flow of dollars into their countries. So round and round we go until the music stops.
As a society we have completely confused GDP growth with standard-of-living.
Intuitively, the average person isn’t going to recognize an increase in government spending (a primary component of GDP) as an increase in their standard of living. Unless, that is, you are lucky enough to be a direct benficiary of said spending (i.e. government employee, vendor to government for lucrative contracts, etc.)
The top two household costs that determine disposable income (and standard-of-living in the “am I better off now than…” sense) are #1 housing and #2 health care.
Our leaders seem determined to (1) make sure that housing consumes as much of our income as possible (low rates, must support residential housing prices., etc.) and do almost nothing to contain health care costs.
Does anyone have the statistic that cites health-care spending as the primary component of GDP growth in the last few years?
GDP is essentially impossible to reliably calculate anyway. It’s a summation of all economic activity across the nation. How the heck are you supposed to do that once, much less on a quarterly basis? Look at how much effort and pain the Census takes once every ten years. This is arguably more difficult to count than heads, particularly after hedonic adjustments, the GDP deflator, etc. etc. I don’t know why anyone even takes this exercise seriously.
I believe that tax revenues, both sales and income, federal and state, provide a much more plausible real-time picture.
I’ll start: the Haitians have asked for $3 billion to rebuild their wrecked city of 2 million souls. So the U.S. government proposes to spend enough in one year to build new cities, complete with infrastructure, for 2.5 billion people.
Haitians are simply asking for basic housing. The U.S. budget will go to enhancing the substantial McMansions of those sequestered behind gated communities, as well as their support infrastructure (lobbyists, attorneys etc.).
Scott: Thanks, but I wasn’t looking for people to continue the Haitian theme. I’d like to see completely new ways to look at what it means to spend $3.8 trillion.
With 3.8 trillion, we could…
– prosecute two wars half way around the world and maintain the ability to project massive force world wide with nearly 1.5 million men and women under arms
– provide high quality (and high quantity) health care for 45 million aging Americans
– provide a monthly stipend to 50 million elderly and disabled Americans
-provide health care and pensions to 23 million Americans who served the U.S. in the armed forces
– provide temporary income continuity and COBRA benefits to 20 million unemployed Americans
– pay $800 in interest per person because of our past inability to balance Federal spending and income
– and a whole lot more (I think the full list would take thousands of pages to enumerate)
… using government workers!