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.
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