Economics, GDP, debt, and deficit.
May 6, 2024 9:01 AM Subscribe
This is a question I’ve long wondered but haven’t found a good answer to. If the US govt spends approximately $2t more than it takes in, and the total US GDP is about $25t, then I think you can say that +/-7% of GDP is just debt creation?
So…if the US GDP growth is about 3%, then the “real” economy is shrinking at 4%. Isn’t our long-anticipated-but-not-yet-here recession actually underway but it is just being wallpapered over by govt largesse? If the US govt spending was brought down to long term averages wouldn’t we see a massive recession? How does this recursive process stop? Shouldn’t debt growth sorta match GDP growth?
So…if the US GDP growth is about 3%, then the “real” economy is shrinking at 4%. Isn’t our long-anticipated-but-not-yet-here recession actually underway but it is just being wallpapered over by govt largesse? If the US govt spending was brought down to long term averages wouldn’t we see a massive recession? How does this recursive process stop? Shouldn’t debt growth sorta match GDP growth?
I think you are positing that every dollar of debt issued by the US government in excess of tax revenue winds up as a dollar of GDP, or that all GDP is traceable to US debt issuance, but I don't think that is conceptually correct. As an example, some substantial portion of things made or services rendered by US companies are paid for by non-US government actors, including non-American entities or people. People from Japan could buy 8 zillion Taylor Swift albums, increase the US GDP, and have no connection to US government debt, to take one example.
posted by Mid at 9:47 AM on May 6 [2 favorites]
posted by Mid at 9:47 AM on May 6 [2 favorites]
GDP is determined by both aggregate supply and aggregate demand. The total amount of total supply is potential GDP - "an estimate of the value of the output that the economy would have produced if labor and capital had been employed at their maximum sustainable rates."
If actual GDP is at potential, then additional government deficit spending will not actually increase GDP, but will result in higher inflation. (There's been an ongoing debate in recent years about how much federal spending contributed to inflation.)
But during a recession, when actual GDP is below potential because demand is too low, then deficit spending - which can be implemented by increasing spending, cutting taxes, or both - is known as fiscal stimulus and is generally desirable. That's what you're referring to, but when needed, fiscal stimulus is not wallpapering over a recession, but moderating or preventing it.
The problem is that now that the recession is over, we are continuing to run large deficits, which will at some point cause significant problems. When that point it, no one knows.
posted by Mr.Know-it-some at 10:19 AM on May 6 [1 favorite]
If actual GDP is at potential, then additional government deficit spending will not actually increase GDP, but will result in higher inflation. (There's been an ongoing debate in recent years about how much federal spending contributed to inflation.)
But during a recession, when actual GDP is below potential because demand is too low, then deficit spending - which can be implemented by increasing spending, cutting taxes, or both - is known as fiscal stimulus and is generally desirable. That's what you're referring to, but when needed, fiscal stimulus is not wallpapering over a recession, but moderating or preventing it.
The problem is that now that the recession is over, we are continuing to run large deficits, which will at some point cause significant problems. When that point it, no one knows.
posted by Mr.Know-it-some at 10:19 AM on May 6 [1 favorite]
Deficit spending is also one way the Govt increases the money supply
The real index of danger is the interest on the debt as a percent of the budget.
posted by SemiSalt at 10:57 AM on May 6
The real index of danger is the interest on the debt as a percent of the budget.
posted by SemiSalt at 10:57 AM on May 6
I think your understanding is not correct, because government spending in excess of tax receipts is not "just debt creation" -- it is also producing whatever those dollars are spent on.
US GDP is defined as the total value of everything made in the US ("final" goods and services; intermediate goods produced in order to produce something else don't count). Notice that the definition of GDP does not at all concern how those goods and services are paid for. If, one year, the government borrows $10 trillion dollars from China to produce a bunch of stuff, and no one else in America produces anything, then US GDP for that year is $10 trillion, even though it was done with $10 trillion financing from China.
You may be thinking that, if the US needs to borrow money in order to produce goods, then that means it can't really "afford" those goods, and including them in its production overstates its wealth. This is a tempting confusion one can be led to by thinking about public finances by analogy to the finances of an individual or a household. For you or me, we can afford something if we have enough money to pay for it. I can afford to buy a house over 30 years if I have enough wealth and income over those years to finance a purchase of the house. This notion of "affording" doesn't really apply to a nation (and especially not the US, for reasons that will be touched on later). GDP is measured in dollars but national income and wealth are not ultimately money at all; they are stuff. What a nation can afford, really, is what it is physically and socially capable of producing. The money system is just a way of coordinating that production and measuring the value of the inputs and outputs.
This discussion may make it sound like national debt doesn't matter at all; that's not correct either. Public finance is a very complicated subject, and spelling out the ways debt matters are mostly beyond the scope of this comment. (How it matters is also subject to contention.) A very high level summary would be: a government's debt load affects its ability to spend in the future. That's because, to service debt, it has to either raise tax revenues or print money, and to the extent it does those things to service the debt, they become correspondingly less effective for coordinating public spending (in addition to other possible negative side effects). Alternatively, it can default on its debt, but that will tend to destroy its ability to raise credit, which is also bad for its ability to spend and can have other negative side effects. But the limits imposed by these dynamics are much more elastic than the ways debt constrains an individual or household.
The continuing growth of US national debt actually is a bit of a puzzle. But the puzzle is not, When will the other shoe drop? It's, Why do creditors (including foreign governments) still want to own more and US Treasury obligations? What's so great about US government paper -- which for a long time was paying close to 0% interest? Part of the answer is presumably that it is seen as a very safe investment. Part of the reason that it's a safe investment is because of the special role of the dollar as the "global reserve currency." The US's easy access to debt is part of the "exorbitant privilege" it accrues because of this central role it controls in the international monetary and trade regimes. The bigger danger to the US from its debt load is probably in what would happen if it lost the exorbitant privilege and suddenly had to finance its spending -- and all its existing debts -- like a regular nation and not a world hegemon. (Whether the exorbitant privilege is actually good for its holder is a complicated question -- here's an interesting commentary by Michael Pettis).
posted by grobstein at 9:36 PM on May 6 [4 favorites]
US GDP is defined as the total value of everything made in the US ("final" goods and services; intermediate goods produced in order to produce something else don't count). Notice that the definition of GDP does not at all concern how those goods and services are paid for. If, one year, the government borrows $10 trillion dollars from China to produce a bunch of stuff, and no one else in America produces anything, then US GDP for that year is $10 trillion, even though it was done with $10 trillion financing from China.
You may be thinking that, if the US needs to borrow money in order to produce goods, then that means it can't really "afford" those goods, and including them in its production overstates its wealth. This is a tempting confusion one can be led to by thinking about public finances by analogy to the finances of an individual or a household. For you or me, we can afford something if we have enough money to pay for it. I can afford to buy a house over 30 years if I have enough wealth and income over those years to finance a purchase of the house. This notion of "affording" doesn't really apply to a nation (and especially not the US, for reasons that will be touched on later). GDP is measured in dollars but national income and wealth are not ultimately money at all; they are stuff. What a nation can afford, really, is what it is physically and socially capable of producing. The money system is just a way of coordinating that production and measuring the value of the inputs and outputs.
This discussion may make it sound like national debt doesn't matter at all; that's not correct either. Public finance is a very complicated subject, and spelling out the ways debt matters are mostly beyond the scope of this comment. (How it matters is also subject to contention.) A very high level summary would be: a government's debt load affects its ability to spend in the future. That's because, to service debt, it has to either raise tax revenues or print money, and to the extent it does those things to service the debt, they become correspondingly less effective for coordinating public spending (in addition to other possible negative side effects). Alternatively, it can default on its debt, but that will tend to destroy its ability to raise credit, which is also bad for its ability to spend and can have other negative side effects. But the limits imposed by these dynamics are much more elastic than the ways debt constrains an individual or household.
The continuing growth of US national debt actually is a bit of a puzzle. But the puzzle is not, When will the other shoe drop? It's, Why do creditors (including foreign governments) still want to own more and US Treasury obligations? What's so great about US government paper -- which for a long time was paying close to 0% interest? Part of the answer is presumably that it is seen as a very safe investment. Part of the reason that it's a safe investment is because of the special role of the dollar as the "global reserve currency." The US's easy access to debt is part of the "exorbitant privilege" it accrues because of this central role it controls in the international monetary and trade regimes. The bigger danger to the US from its debt load is probably in what would happen if it lost the exorbitant privilege and suddenly had to finance its spending -- and all its existing debts -- like a regular nation and not a world hegemon. (Whether the exorbitant privilege is actually good for its holder is a complicated question -- here's an interesting commentary by Michael Pettis).
posted by grobstein at 9:36 PM on May 6 [4 favorites]
Isn’t our long-anticipated-but-not-yet-here recession actually underway but it is just being wallpapered over by govt largesse?
When thinking about whether or not there's a recession underway, it helps to think about what being in a recession actually means and, vitally, to whom. This is something that crushing the entire complexity of an economy down into a single figure - GDP - simply cannot do.
A recession is where business conditions worsen over time and both stuff that businesses exist to provide and employment within those businesses becomes harder to get as a consequence. Worsening business conditions cause businesses to let employees go, which reduces the amount of money available to the customer base, which makes business conditions even worse and the whole thing just kind of spirals.
But customers ain't customers. Simply adding up everything that every customer in the country has spent over the course of a year to calculate GDP, then looking at whether that's growing or shrinking, doesn't tell you which customers are spending less because they have less. As things stand today, in most places the spending power of the already extremely wealthy has exploded in recent years while everybody else has been doing it tougher, so we see what is effectively a recession happening at the lower-priced end of the economy while businesses that supply luxury goods are making out like bandits. There's a reason why that guy who sells chi-chi handbags was the wealthiest man in the world for a while there.
And that reason is, in large part, driven by the massive amounts of money that governments have been pumping into their economies since the financial crisis of 2008: not so much because it was newly created money, but because of where it rapidly ended up.
Trickle-down economics is widely and rightly derided as a fairy tale, but only because most people's mental model puts the ridiculously wealthy at the top with everybody else underneath, gazing wistfully upwards and hoping to catch a drop or two. But that model is exactly upside down. Money does trickle down from wherever it exists in the economy, eventually pooling up in the deep, dark sumps where the economic bottom-feeders live: the ultra-wealthy who derive their incomes not from working, but by extracting rents from everybody else for the use of the unthinkable amounts of assets they own.
So that's the group that now has not only all that extra money created by "quantitative easing", along with the record-breaking extra extra that governments everywhere handed out while lockdowns were still the only reasonable response to COVID-19. A tiny minority of massively wealthy bottom-feeders is now making so much income for doing nothing more than continuing to breathe that there is literally nothing they can possibly spend it on other than acquiring yet more assets. Having fully sated their appetites for Hermès with two minutes worth of passive income, they go on to buy your mum's house.
So, naturally, that's what they've been doing. Which is why real estate prices are going inexorably up, which is why rents both commercial and residential are going inexorably up, which is why young people from middle-class families are now joining the ranks of the precariat and the working class is just fucked. And this divide that's ruining the living conditions of ordinary people is going to keep getting worse until governments grow enough of a spine to use their powers of taxation and pump the excess back up and out from the sump.
And none of that maldistribution-driven dynamic shows up in the GDP, which is why the corporate media so rarely mention it; meaningless sound bites about "growth" are much more their speed.
Elon Musk's assets are worth what, two hundred billion at this point? Assuming he's making a conservatively modest 3% annual return on those, that's six billion dollars a year - over ten million dollars a day - that he doesn't even have to roll out of bed for. What would you spend that on?
posted by flabdablet at 8:26 AM on May 7 [1 favorite]
When thinking about whether or not there's a recession underway, it helps to think about what being in a recession actually means and, vitally, to whom. This is something that crushing the entire complexity of an economy down into a single figure - GDP - simply cannot do.
A recession is where business conditions worsen over time and both stuff that businesses exist to provide and employment within those businesses becomes harder to get as a consequence. Worsening business conditions cause businesses to let employees go, which reduces the amount of money available to the customer base, which makes business conditions even worse and the whole thing just kind of spirals.
But customers ain't customers. Simply adding up everything that every customer in the country has spent over the course of a year to calculate GDP, then looking at whether that's growing or shrinking, doesn't tell you which customers are spending less because they have less. As things stand today, in most places the spending power of the already extremely wealthy has exploded in recent years while everybody else has been doing it tougher, so we see what is effectively a recession happening at the lower-priced end of the economy while businesses that supply luxury goods are making out like bandits. There's a reason why that guy who sells chi-chi handbags was the wealthiest man in the world for a while there.
And that reason is, in large part, driven by the massive amounts of money that governments have been pumping into their economies since the financial crisis of 2008: not so much because it was newly created money, but because of where it rapidly ended up.
Trickle-down economics is widely and rightly derided as a fairy tale, but only because most people's mental model puts the ridiculously wealthy at the top with everybody else underneath, gazing wistfully upwards and hoping to catch a drop or two. But that model is exactly upside down. Money does trickle down from wherever it exists in the economy, eventually pooling up in the deep, dark sumps where the economic bottom-feeders live: the ultra-wealthy who derive their incomes not from working, but by extracting rents from everybody else for the use of the unthinkable amounts of assets they own.
So that's the group that now has not only all that extra money created by "quantitative easing", along with the record-breaking extra extra that governments everywhere handed out while lockdowns were still the only reasonable response to COVID-19. A tiny minority of massively wealthy bottom-feeders is now making so much income for doing nothing more than continuing to breathe that there is literally nothing they can possibly spend it on other than acquiring yet more assets. Having fully sated their appetites for Hermès with two minutes worth of passive income, they go on to buy your mum's house.
So, naturally, that's what they've been doing. Which is why real estate prices are going inexorably up, which is why rents both commercial and residential are going inexorably up, which is why young people from middle-class families are now joining the ranks of the precariat and the working class is just fucked. And this divide that's ruining the living conditions of ordinary people is going to keep getting worse until governments grow enough of a spine to use their powers of taxation and pump the excess back up and out from the sump.
And none of that maldistribution-driven dynamic shows up in the GDP, which is why the corporate media so rarely mention it; meaningless sound bites about "growth" are much more their speed.
Elon Musk's assets are worth what, two hundred billion at this point? Assuming he's making a conservatively modest 3% annual return on those, that's six billion dollars a year - over ten million dollars a day - that he doesn't even have to roll out of bed for. What would you spend that on?
posted by flabdablet at 8:26 AM on May 7 [1 favorite]
Isn’t our long-anticipated-but-not-yet-here recession actually underway but it is just being wallpapered over by govt largesse?
It's heuristically useful to make a distinction between the real economy and the financial economy. The real economy is what gets produced and consumed. The financial economy is what money instruments circulate and to whom. These worlds are obviously related. They are ultimately one system. But you can get confused if you run them together.
As a measure of production, GDP is a feature of the real economy (the unit that GDP is measured in is normally financial -- but in fact you could measure it in burgers if you wanted; PPP measures are a bit like this). Recession is a feature of the real economy, most often instrumentalized as a sustained decline in GDP, but also conceivable using other real-economy measures like unemployment. In general (and leaving specific definitions aside), "recession" means, less stuff of value is being produced relative to some baseline.
Budget deficits and national debts, on the other hand, are features of the financial economy. Debt and deficits obviously affect the real economy, and debt loads can cause recessions under certain circumstances. But no level of debt is per se recessionary. There is no straightforward way to combine debt measurements and GDP measurements to declare that an economy is "actually" in recession; the numbers are all about different things.
You might get something out of a basic course in macroeconomics, which is the study of the dynamics of these systems. It's a very messy subject but certainly important.
posted by grobstein at 1:44 PM on May 7 [1 favorite]
It's heuristically useful to make a distinction between the real economy and the financial economy. The real economy is what gets produced and consumed. The financial economy is what money instruments circulate and to whom. These worlds are obviously related. They are ultimately one system. But you can get confused if you run them together.
As a measure of production, GDP is a feature of the real economy (the unit that GDP is measured in is normally financial -- but in fact you could measure it in burgers if you wanted; PPP measures are a bit like this). Recession is a feature of the real economy, most often instrumentalized as a sustained decline in GDP, but also conceivable using other real-economy measures like unemployment. In general (and leaving specific definitions aside), "recession" means, less stuff of value is being produced relative to some baseline.
Budget deficits and national debts, on the other hand, are features of the financial economy. Debt and deficits obviously affect the real economy, and debt loads can cause recessions under certain circumstances. But no level of debt is per se recessionary. There is no straightforward way to combine debt measurements and GDP measurements to declare that an economy is "actually" in recession; the numbers are all about different things.
You might get something out of a basic course in macroeconomics, which is the study of the dynamics of these systems. It's a very messy subject but certainly important.
posted by grobstein at 1:44 PM on May 7 [1 favorite]
Another thing to keep in mind is that the "technical recession" beloved of the usual gang of shouting heads, defined as two successive quarters of GDP shrinkage, is a bullshit term made up by the news media to describe a rule of thumb. In fact it's the least technical definition of recession because it ignores almost everything that's actually going on in the economy.
posted by flabdablet at 6:55 PM on May 7
posted by flabdablet at 6:55 PM on May 7
Few if any economists use the two-quarters rule of thumb. Rather, they use the dates of the NBER’s Business Cycle Dating Committee. "The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. ... Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity."
posted by Mr.Know-it-some at 11:53 AM on May 8
posted by Mr.Know-it-some at 11:53 AM on May 8
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