Friday, July 29, 2022

D(ebt) is what converts the GOP in to GDP

Social media is abuzz with stories of how today’s GDP report proves we are now in a recession. And while an “official” recession is technically determined by a panel of economists (something that usually happens well after the recession has ended), the common understanding of a recession is two consecutive quarters of negative economic growth – which is exactly what we’ve just experienced.


But what do all these words means?


The most common method of calculating GDP is the “expenditure approach.” This adds the total amount spent by private consumers for goods and services, the total amount spent by governments (both federal and local), the total amount of investments made (in equipment, inventories and housing), and the net exports in a given period of time (typically a quarter or a year). 


You might want to note two things: (1) the more the government spends, the higher the GDP and (2) government debt doesn’t show up anywhere in the formula. Therefore, GDP increases as long as the government is spending money, even if it is money it doesn’t have. 


One of the common cries of Republicans is that we have to bring the size of government back under control. Currently, direct government expenditures make up about 17.3% of our GDP.


Joe Biden has now been President for five full economic quarters. Government expenditures have fallen each of those quarters (from 2021Q2 through 2022Q2). In contrast, government expenditures rose each year during Trump’s presidency and the federal debt ballooned. Trump added more debt in 4 years than any other President in our history.


So when a Republican points out how “great” the economy was under Trump, remind them that GDP growth during his term was an annualized 1.6% (the lowest of any President since Herbert Hoover [think 1929 and the Great Depression]), and that a large portion of that was generated by a federal government spending money it didn’t have. The Trump administration grew the size of government and left us the bill. In contrast, the GDP grew 5.7% in Biden’s first year. 


Now don’t get me wrong, the economy has slowed and the GDP report shows decrease in goods and investments. But if the Biden Administration had continued the fiscally irresponsible, grow the federal government through ever increasing deficits policies that Trump advocated, Joe wouldn’t have ended up with two consecutive quarters of GDP contraction.


[Oh, and before anyone screams “but inflation.” All my data is based on real (not nominal) dollars using the 2012 base used by the Bureau of Economic Analysis, the agency that issued this morning’s GDP report.]





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