Fiscal Spending – The Steroids of GDP

Published on Gonzalo Lira, by blog owner (?), April 4, 2011.

… First off, let’s put away DeLong and Leonard:

Government spending has increased—drastically—at all levels of American government—under any and every metric you’d care to name over the last year. After all, there is a reason the Federal deficit has ballooned to $1.6 trillion in fiscal year 2011: FY 2009 government spending was $5.896 trillion. FY 2010 spending dipped to $5.798 trillion—a fall in $96 billion, roughly 1.6%. (data is here)

But for fiscal year 2011, which started this past October 1? The fiscal year where first quarter GDP figures are firmly nestled? Spending increased to $6.163 trillion—a bump up over FY 2010 spending of 6.29%. 

So according to DeLong and Leonard, a rise in spending of 6.29% is contractionary? Please alert Merriam-Webster—tell them to update their definition of the word “contractionary”.

(Leonard also rather dishonestly claims that “Cutbacks in government spending — local, state and federal — shaved 1.09 percent off the growth rate. Plug that spending back in and you’ve got almost 3.0 percent GDP growth.” Where he gets this figure he leaves unsaid, just as he leaves unsaid that much of the local and State spending cuts were necessary in order to avoid local and State insolvency. Crap like this is why Leonard shouldn’t be taken seriously. (Well, then again, he’s not.))

Second, of course the GDP number would be better had the government spent more—government spending is one of the components of GDP … //

… Now, this level of indebtedness is going to bankrupt the United States. Of course, a sovereign nation cannot be liquidated in a bankruptcy proceeding: So what will happen is, either there will be a default on Treasury bonds, or the currency will be inflated away (as is currently happening with QE-2 and likely QE-∞) until monetary recklessness trips over into hyperinflation.

But nobody in the political class is doing anything about this sovereign bankruptcy. Nobody in the political classes is trying to reign in the debt. Certainly not the Democratic administration, certainly not the Republican opposition.

(BTW, the liberal critique of the Ryan budget proposal is dead-on: Paul Ryan’s proposal is a bunch of bullshit. Any budget proposal that doesn’t touch the Department of Defense cannot—and should not—be taken seriously, period. I say this as an anti-choice, anti-welfare-state, anti-vegetable, pro-red-meat, pro-gun, pro-Catholic-Church Conservative who is eagerly waiting for the Constitutional Ammendment that will make it legal to shoot hippies for sport.)

A lot of critics of fiscal austerity are claiming that “Austerity doesn’t work—because it’s shrinking the GDP! It’s not making the GDP grow—like it’s supposed to!”

They’re pointing to the examples of Britain and Iceland, and other countries that have embarked on austerity programs, proof positive that austerity shrinks the GDP—

—and they’re right: Of course austerity shrinks the size of the economy—because that economy wasn’t real.

That’s the nub: The U.S. economy we’ve been living in—most especially the economy of the past decade, but arguably the economy since 1987—was an illusion.

It was nothing more than a credit-fueled spending spree, an economy based on over-consumption—over-consumption based on debt. A debt that was created by myriad “innovations” and central bank lassitude. A debt that was encouraged by government spending programs and tax incentives, that have created what I think is likely an insurmountable sovereign debt. A debt that was used to buy a false sense of prosperity—

—a debt that simply could not be sustained.

It looked okay—because every year, everyone said, “The GDP is growing! The GDP is growing!” But those GDP numbers were like the bulging muscles of a steroid-soaked body-builder.

And just like a juiced up body-builder, we never considered the shape of this “growth”: Was it healthy, to have exported so many middle-class and manufacturing jobs overseas? Was it healthy, to allow the rich to become so disproportionately rich? Was it healthy, to allow a casino mentality to permeate private finance? Was it healthy, to let all the distortions of all the speculative bubbles percolate throughout the economy, explaining it all away by reference to the “growing” GDP?

Like those poor twisted body-builders who want to “get big” regardless of its costs, all we saw as a society was the growth of GDP—regardless of its costs.

The UK is getting realistic about its fiscal debt: It’s cutting its fiscal spending, rolling back a lot of services and payouts, getting tough with its financial system, and taking a good hard long look at its military and other necessary government departments.

The usual suspects in the economic commentariat—DeLong, Leonard, not to mention Little Paulie Krugman—seem to think that this austerity is a bane to the British GDP—which it is, because the UK government is spending less, therefore the British GDP is contracting.

But is this necessarily a bad thing? Would it be necessarily a bad thing if the U.S. eonomy “contracted” to something healthy and sustainable?

What if—despite what mainstream economics insists—we allow the American GDP to contract. We cut spending—seriously cut it, defense and all—start retiring Treasury debt, and let the chips fall where they may? What would happen?

Might we wind up with a smaller but far healthier economy? Might we wind up with a society which is better overall?

But this goes to the heart of the problem with so much of economics as a discipline, and economics as a prominent part of the public discourse: The use of GDP as the sole measure of the health of the economy. Size over quality.

The political classes refuse to cut spending because the primacy of GDP plays into their peculiar needs: Politicians need a simple metric which they can sell to the electorate, proving to them that they are “leading the country”. So they latch on to GDP. How do you goose along GDP? By pumping the government full of debt.

Hence the hole we’re in … (full long text).

Links:

Gross domestic product GDP;

List of countries by GDP (nominal);

Sorry, But I Don’t Believe This.

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