GDP 101

There are some remarkably savvy people hanging around here, and I’m betting all of you know what GDP is without my explaining it.

What GDP means is another story.  Most people don’t know what the GDP figure means in any in-depth manner.  Most people don’t need to know this.  It’s not generally considered to be vital information.  My education was in mathematics, and I didn’t know until the last decade (mathematics is a hard science, whereas economics is the art of mathematically predicting what a herd of cats will do next).

The GDP formula is simple by even middle school standards:  C + I+G +(x-m).  Consumer spending plus investment plus government spending (federal, state and local) plus next exports (exports minus imports) equals Gross Domestic Product.

Here’s what this means.

Government produces nothing for the economy, the only thing it is capable of doing is siphoning money out of the economy via taxes.  Further, taxes have a cumulative effect.  If your business will pay an extra $10k in taxes next year, you will not merely say, “C’est la vie, I have $10k less to spend in my business next year.”*  You will trim expenses somewhere to make up for that loss.  It may mean you cut one employee, or you switch suppliers (and then they make less money, and may cut an employee).  Someone, some where, loses a job.  This results not merely in your $10k leaving the economy, but also the spending of the person who lost a job.

An increase in taxes always affects either C or I in our formula, and at a higher figure than the actual taxes removed.

In the natural order of things, government has a parasitic relationship with the market and knows it.  All government spending is a burden upon the taxpayer and the economy, and government must carefully watch for precipitous spending lest it kill the very thing that feeds it.

And then we discovered debt.

These days, the fellow that lost his job lives on credit cards – spending money he doesn’t have and can’t pay back.

The government figured out that if raising taxes would lower GDP by decreasing either C or I, then it would simply borrow lots of extra money from others and promise to pay it back with raised taxes later.  Some day.  Probably.

This is exactly why today’s economy isn’t called a depression.  That’s defined by a 10% contraction of GDP.  C and I contracted like hell; government increased G hugely by adding 100% to government spending through money it borrowed, without the ability to pay back via tax revenue.

If you have ever successfully balanced a checkbook, you can see what is wrong with this picture.  Neither C nor I and damned well not G are figures which can be maintained.  The person who lost his job will not be able to live on credit cards forever – at some point the credit reaches its end and he can only spend what he earns.  Now extend this one person across the broader economy.  U-6 unemployment stands at 16.2% as of August – nearly double what it was four years ago.  And yet GDP has grown every quarter since?  I don’t think so.  16.2% will show up in C.  That is a fact which cannot be ignored any more than one can ignore gravity.

G cannot be maintained indefinitely.  If you think it can, go talk to a Greek.  No one can continually spend ever-increasing sums of money it does not have without eventually getting presented with a bill.  Not even countries.  It took Greece a long time to hit the limit on their credit card (decades, even), but they did eventually hit it.  We will too, and it won’t be decades from now, because we’re right behind Greece in all the debt-to-GDP statistics.  We’re so near the event horizon, we might have crossed it already.  I suspect we have (and if you’d like to know why, I direct you to my recent post wherein I proved that the bill for every individual – man, woman or child – in the state of Texas for their federal and state tax burden is $17,063.50 per year, and that does not include the money needed to pay the government debts).

Do you want to know what happens to countries when their credit cards get cut up?

This happens:

Greece’s gross domestic product per capita of $30,400 in 2008 was close to the European Union average. It was caused not by an exceptional surge in productivity, but mostly by huge subsidies and extensive borrowing. Greece’s continuing current account deficit, estimated by The Economist at 8.3 percent of gross domestic product in 2011 despite a severe recession, indicates that it remains deeply uncompetitive.

This suggests Greece may require living standards to decline by as much as 40 percent to become competitive…

And this:

Writing in the Die Welt newspaper, [German economic minister] Mr Roesler said: “To stabilise the euro, we must not take anything off the table in the short run. That includes as a worst-case scenario an orderly default for Greece if the necessary instruments for it are available.”

He said such a default would mean “re-establishing the affected state’s ability to function, perhaps with a temporary restriction of its sovereign rights”.

And let’s not forget this:

Another tactic for pulling the debt-stricken country out of crisis could be replacing “the obviously ineffective administrators” there, he added. Because Greek officials have failed at collecting outstanding taxes and selling state-owned assets as planned, Oettinger alleged, experts from other EU nations should be sent in to do their jobs instead. “They could operate without concern for resistance and end the inefficiency,” he told Bild.

Your standard of living cut in half while foreign nationals take over elected positions to make sure to extract from you repayment of money your government borrowed and spent.  That isn’t tinfoil nuttery, that’s actual quotes in the actual goddamned news.

Does no one read history books?  Statements such as the above are soft declarations of war.

This will not end well.  Not for Greece, not for Europe, and not for us.


*Or maybe you will.  Some people will say anything.

Published in: on September 12, 2011 at 8:45 am  Comments (5)  

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5 CommentsLeave a comment

  1. What does any of this have to do with God Damn Perverts?

  2. Hi Emily,

    Thanks. That’s the first readable explanation of GDP I’ve seen. Most posts about economics put me to sleep. Even Denninger, when he goes into professor mode, and says, “the CDS spreads on the PIIGS (composite) is up an astounding 60%,” puts me right to zzzzzzzzz…………….. I have no idea what he’s talking about.


    • Denniger confuses me too, and my degree is in mathematics. So don’t feel bad. I still can’t follow his CDS charts. I’m trained in maths, which gives a great foundation for economics (for which I am not trained, I just read a lot), but it’s not the same.

      I like to think my forte is in taking complicated math and presenting it in layman’s terms. With lots of swearing.

  3. WOOT! Excellent, EXCELLENT ‘splainin’ of the “big financials”. Ponzi himself is rolling in his grave saying “Why the fuck didn’t I think of that!”

    There is a reason why usury used to be a crime and a sin…

  4. You know me, the bluebird of happiness…I found something to be cheerful about: I’m glad I’m recessed and not depressed. 😀

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