GDP Growth & Government Spending

Obama’s Economic Hero

There are many things that puzzle me. For instance, why is the cold water tap always on the right-hand side of the faucet? It’s as if the guy who invented indoor plumbing arbitrarily decided to that cold water should come from the right and everyone since has followed suit. There’s no real reason for it. We could just as easily have cold water coming from the left and nobody would be any wiser for it.

A similar thought process seems to have occurred in regards to including government spending as part of a nation’s economic health, currently expressed as GDP. Once upon a time, we didn’t calculate GDP. We calculated GNP; the gross national product. That figure didn’t include government spending – because economists were interested in determining the productivity of a country’s economy. Governments simply do not produce anything; no goods, no services. In fact, government spending used to be regarded as a negative economic indicator. After all, the more governments spent, the more they had to raise revenue by confiscation (and yes, taxation is still confiscation – just with a prettier name). That pulled capital from the real economy – which lowers a nation’s GNP.

GNP remained the way the government and most economists measured economic output until 1993. The Clinton administration, swept to power on the mantra of “It’s the economy, stupid” was looking for a way to juice up the headlines. By switching from GNP to GDP, they found their way to reinforce the perception that the economy was improving. It didn’t matter that actual economic output barely increased from 1992 to 1993. By including government spending in the measure of the nation’ economic health, it seemed as if the economy had rebounded.

The Obama administration is relying on similar hocus-pocus to fool the American public in 2012. Yes, GDP is growing – but only because government consumes more of the national economy than at any time in history. Yes, more than during the New Deal of the 1930’s, more than the war spending of the 1940’s and more than during the profligate 80’s. In 2011, the US Treasury spent in excess of $6 trillion dollars and accounted for 41% of all economic activity recorded in the US GDP. By comparison, at the peak of World War II spending in 1944, the Treasury only accounted for 28% of GDP. Even at the height of the last major recession in 1983, the Reagan treasury only accounted for 36% of GDP. Yet, during the Obama administration, we’ve jumped from 36% in 2008 to 40% in 2009 – and haven’t fallen below that mark since.

Of course, there’s a flip-side to this coin: if government spending is what is driving perceived economic expansion, the reality must be that the real economy is shrinking. And after adjusting for inflation, that’s exactly the case: in 2008, GNP totaled $9.1 trillion dollars (that represented a $31 billion drop from 2007). But economic activity has continued to decline under the current administration’s tutelage. In 2009, GNP totaled $8.9 trillion and it has continued to drop since, all the way to $8.4 trillion in 2011.

This is the principle reason why job growth remains a real negative. The Obama team loves to pat itself on the back for “creating 4 million jobs over the past 18 months.” The sad truth is that the economy should have produced about 4.3 million jobs over the past 18 months just to keep pace with population growth. But the jobs picture makes sense when you compare it to actual economic growth. As the economy continues to contract, the demand for workers continues to decline. The only difference between 2012 and 2008 is that businesses don’t need to lay off workers to accommodate the reduced demand. They just simply don’t hire new employees.

I can summarize this with a very simple statement: if it seems to you that the recovery we hear so much about hasn’t ended the Great Recession, that’s because it hasn’t. There hasn’t been a recovery, except for those with direct ties to government spending. That’s the one component of GDP that has increased: by over $1 trillion over the past three years.

So, the next time you see a GDP number that trumpets economic growth, remember to dig into the numbers a bit. And remember, this is White House that replaced managing economic growth with managing spin.