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U.S. Economic Growth: GDP Minus the Federal Deficit

April 28, 2011 Guest Commentary by Randy Degner

Note from dshort: A few days before today’s publication of the Q1 2011 advance GDP estimate, I received an email that eloquently expresses a widely held view of Gross Domestic Product — namely that it is a gross exaggeration. It was accompanied by a pair of chart. One is straight from the St. Louis Federal Reserve database. The other is the creation of the author of the email. My name is Randy Degner. I’m a commodities trader for an oil company in Houston, TX. I try to keep up with what is going on in the economy and I frequently look at your website for interesting insights. One of the things I’ve been watching lately is the discussion about the federal debt as a percentage of GDP. There seems to be a lot of talk about that, trying to determine whether it’s harmfully high or not. I’m not sure that’s the salient point. I believe that the annual deficit spending has been inflating GDP, making it appear the US is more productive, and more prosperous, than it actually is.

To get a sense for this, I took data from the federal government and calculated annual percent change in GDP.

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The blue line on the chart below gives a pretty standard looking GDP graph which almost exactly matches the official GDP graph put out by the Commerce Department.

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I then took the GDP data and subtracted the annual federal budget deficit from the GDP. I did this because deficit spending is in essence “borrowing” prosperity from the future, either through direct government spending or through payments to states, local governments, and individuals who then go out and spend money. As we know, about 70% of GDP is consumer spending and about 60% of the federal government budget is devoted to payments directly to or for citizens. It’s pretty easy to see how deficit spending artificially inflates GDP, since that borrowing leads directly to consumption which would not occur without it.

The red line is annual GDP change, taking out federal deficits. The change is pretty amazing. Since 1980 the number of years with negative GDP growth jumps from 7 to 15, and the average GDP growth rate drops from 2.7% to an incredible MINUS 0.3%. Note especially that 2009 would have had a year-on-year change of -12%. That’s depression-era bad. This data shows that without deficit spending the GDP is actually negative since the Reagan Administration. I’m no economist, but that seems pretty bad to me. I suggest that there are only two possible paths ahead: Either we reign in government spending now and suffer through a generation of negative growth as we pay off the bill for borrowed prosperity, or we continue injecting the US economy with the heroin of easy money and the cocaine of fiscal stimulus until the addict dies.

What am I missing? I hope it’s something, because if it isn’t we have some very tough times ahead.

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