A Revenue or a Spending Problem?…… The GDP Effect!

GDP(Gross Domestic Product) Growth - 1929 to 2010

Beginning in 1929, since records have been kept by the Bureau of Economic Analysis(BEA), the Gross Domestic Product(GDP), the National output of goods and services, has steadily risen in a logarithmic progression every year except for 6 odd years where it went down.

Four years in a row, from 1930-1933, the GDP dropped precipitously from $103.6 billion to $56.4 billion – a staggering drop of 45.6% over the years marking the darkest depths of the Great Depression.  It dropped again in 1938 when New Deal deficit spending decreased and dropped again slightly in 1946 at the end of World War II.

The next drop in GDP wasn’t until 63 years later in 2009 and only a 1.8% drop at that, yet we were in economic chaos.  2010 rebounded, though, with the GDP up a reasonable 3.7% from the year before.

The Difference Between the Great Recession and the Great Depression

What is different about the current Great Recession from the Great Depression is government debt and spending compared to the GDP. Now both are far, far higher than they were just after the Depression.

As late as 1941 federal  spending was only 10.7% of GDP and debt then was 42.3% of GDP. This year spending will be about 25% of GDP and our debt is now about 100% of GDP.

Both those last two are frightening numbers. And that is not counting state and local government spending.

Economists suggest that federal spending at about 19% of GDP and a debt level below 85% of GDP is sustainable.  We jumped above both of those in 2006.

But the main reason those numbers are so scary is because federal spending is growing far faster than the national economy and there is no end in sight.

Government Spending is Driving the Economy

Government spending and debt is now so large that it has become the primary driving force behind our economy whereas it wasn’t during The Depression. And since government is primarily a consumer and not a producer its drain on the national economy is putting a strain on the private sector to create new wealth and prosperity.

The private sector is suffering a double whammy because of the mortgage bubble collapse.

The situation is complicated further by a growing and ironic wealth gap where more and more wealth is concentrated in the top 1% of the population. That happened just before the crash of 1929.

The national economy is getting further and further out of balance and rickety.

The Mathematical Uncertainty

Look at the graphic above and you see that, with the exception of the 2008-2009 hiccup, economic growth is accelerating in a logarithmic progression. That would take it mathematically to infinity in a finite period of time.

Clearly, in the real world that cannot happen. Something has to give. That curve cannot go upward indefinitely. Unfortunately, government’s spending patterns assume it will.

Couple that with government spending and debt above sustainable levels already and we will hasten the time of when the logarithmic progression comes undone and we meet our economic demise.

A Spending Problem

Government spending policy has bent Keynesian macroeconomics to the breaking point.

We can crow about raising taxes on the rich and rich corporations to balance the budget until the cows come home but that will not change the fact that the federal government is already spending an unsustainable 25% of the GDP and its debt level is at 100% of GDP.

Both those things must come down to have a viable economy and that can only happen if the federal government cuts spending far more than it raises revenues.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on May 9, 2011, in Deficit, Economy, National Debt, Politics and tagged , . Bookmark the permalink. Leave a comment.

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