Fiscal Spending—The Steroids of GDP

Last week, first quarter GDP numbers came out—they weren’t pretty: GDP grew at a pace of 1.8% per year, during January through March. These figures are supposed to be adjusted for inflation. But if you think as I do that the Bureau of Labor Statistics is off in its inflation estimates, then at this pace, the American economy is probably contracting.

Body-builder, after a round of
Keynesian steroids—
I mean, “stimulus”.

Apropos of the announcement, Brad DeLong said, “Contractionary fiscal policy is contractionary.” Andrew Leonard at Salon added, “When you cut government spending in a slack economy, you practically guarantee a slowdown.”

DeLong and Leonard presuppose several things by these statements. One, of course, is that there have actually been cuts in government spending. Two, that the GDP number would have been better if there had simply been more government spending—so therefore, anyone opposed to increasing government spending is also against increasing the GDP.

But the third assumption they make is the assumption I’m interested in discussing: The notion that the GDP number is something we always want growing. The notion that a positively growing GDP number is always and with absolute certainty the thing we want most, as a society.

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.

Review the definition of “Gross Domestic Product”: The sum of private consumption, gross investment, government spending, and exports minus imports.

DeLong and Leonard and most other Neo-Keynesians implicitly believe that anyone opposed to more government spending is opposed to the growth in the GDP—and anyone who is opposed to the growth in the GDP is necessarily opposed to prosperity in the U.S.A.

This is the fallacy I’m interested in pointing out: The conceit that growth of the GDP is the same thing as national prosperity.

On its face, identifying GDP growth with prosperity seems sensible: After all, as a society, you want a simple measure of whether or not things are going good in the economy.

The problem with this need—and with the worldview that identifies GDP growth with prosperity—is that it uses GDP as the measure of an economy’s health, but without ever examining what the GDP is really measuring.

As per its definition, GDP is merely a measure of spending—nothing more. Spending on what is left undetermined—

—and right away, you can see the problem with measuring the health of an economy by the growth of GDP. Presumably, increased spending on hookers and blow would be a good thing, by the metric of GDP; so long as the hookers didn’t send remittances back to their home countries, and the cocaine was domestic-made, they’d be golden for the GDP.

I’m being facetious, of course—but not by much: The GDP has been turned into a fetish number by economists and—much more troublingly—by the politicians and the electorate, who view it as the be-all-end all.

The mise en place that economists and their discipline have laid for politicians and the general society makes it all but impossible for people to consider economic prosperity by any other metric—all is spending. All is GDP.

But consider this simple real-world hypothetical:

Suppose you earn $3,000 a month—but you spend $3,500 a month. The extra $500? You get that from your credit card.

Now of course, you can’t go on like this forever: The bill’s gonna come due. After a whole year, you earned $36,000—but you spent $42,000.

Which means you have $6,000 worth of debt—plus interest.

Question: Would you ever claim that you actually earned $42,000 a year? No—of course not, that’s absurd.

But that is exactly what economists who kowtow to The Great God of GDP—and the politicians they advise—claim it measures:

They confuse spending with actual wealth—irrespective of how that “wealth” is financed.

Another question: If you cut up your credit cards, and in fact tried to pay them off, does that mean you are earning less money? No of course not—it means you are spending less money. Which will of course make you feel poorer—because you’re feeling the effects of having pulled future earnings into the present, and now living with the consequences. But you won’t actually be poorer.

But that is what so many economists seem to think, when discussing austerity measures: Reducing government spending in order to pay off fiscal deficits reduces GDP—ergo, these economists claim that the country is “poorer” because of austerity measures.

A third question: Suppose that after a year of this spending spree, you said to yourself, “I am not going to cut back: I’m going to keep on livin’ high on the hog, as I’ve been doin’—spending $3,500 a month without fail—and hope that my salary goes up enough to pay off all this debt I’m building up.” What do you think will happen?

Sure, you might get a raise, pay off all your debts, and live happily ever after—but then again, you might not. And if you don’t, then it’s bankruptcy court for you.

That is exactly what the United States is doing, under the influence of this GDP fetish: It’s government has added on even more debt—between pointless wars, ineffective stimuli, and ridiculously expensive health care—in an effort to “grow our way” to prosperity.

So the U.S. fiscal deficit for fiscal year 2011 stands at about 12% of GDP. And it will be another 12% of GDP for 2012, 2013, 2014 and 2015—for sure.

If not higher.

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.

They always complain that austerity hawks are “ideologues”. But Krugman and the other Neo Keynesians dominating the mainstream discourse and thus the conceptual framework driving the government apparatus—by definition—are themselves the worst sort of ideologues, bent on bankrupting a society. Bent on bankrupting America—literally. Because they see only expenditure as the measure of health of an economy—size as all that matters. And if that measure isn’t big enough? Then to this mindset it has to be juiced up—by way of government spending. By way of government debt. And then more government debt. And then more debt on top of that—they’ll only be satisfied when the government is finally bankrupt and either defaults, or hyperinflates.

That’s why they were silent while the incompetent Bush administration pissed away the national capital.

That’s why they’re clamoring that British austerity measures are a “failure”.

That’s why they are claiming that the growth in GDP would be higher if only the government would spend more—without ever considering the effects of such expenditures. Without ever considering the effects of such debt.

Viewing an economy—any economy, but particularly one as complex as America’s—through the pointilistic approach of GDP is either cynically blind, or corrosively autistic. (Which I guess would make Paul Krugman the Rain Man of macro-economics: “More GDP! Definitely-definitely-definitely more GDP!”)

An economy is not about how much you spend. The economy isn’t even the most important thing about a society.

But try telling that to the people bemoaning last week’s low GDP numbers. Try telling that to the people clamoring for more spending-spending-definitely-more-spending!

They’ll only be satisfied when the Federal government either defaults on its Treasury obligations, or more likely hyperinflates away the debt.

If you’re interested in my discussion about the end game scenario, please check out my presentation “Hyperinflation in America”.