Really Measuring Real GDP

August 12, 2015

Consider two families. Both have a weekly income of $1000, and both spend it all.

Next year, one family gets a $30 raise (3%) and again spends it all ($1030). The second family does not get a raise, but it borrows $30 and spends all $1030.

Question: Are both families doing just as well, or is one doing better than the other?

My guess is that you can see that it is earnings which are important, rather than spending. I expect that you will agree that family one is 3% better off than family two, which borrowed 3% to match the spending of family one.

On a national scale, GDP tries to describe how well the US Economy is doing. It is flawed mightily in several respects, not the least of which is the phony adjustment for inflation. But, putting the other flaws aside, let’s look just at how the GDP numbers relate to our two families above.

One defining formula for it is: GDP = C + I + G (+Net Exports), where C equals all consumer spending on goods and services, I equals all business spending on goods and services (wages aren’t counted to avoid double counting), and G equals all government spending on goods and services (transfer payments also are excluded to prevent double counting).

If you were looking closely, you’d have noticed that GDP measures only the spending side of the ledger – just like our family two above. It ignores the government borrowing (Budget Deficits). But, just as family two was no better off because of its borrowing (which had to be paid back), the true measure of GDP should include the Deficit.

Let’s look at some national level numbers. US GDP is around $18 Trillion (similar to the National Debt!). The reported annual rate of increases were 1Q15 → 0.6% and 2Q15 → 2.3%. If we assume that the 3rd and 4th quarters match the 2nd at 2.3%, then for the year, official US GDP growth will come to just under a 1.9% increase.

The 2015 Budget Deficit, based on the 9 months through June ’15, is running at a (reduced) annual rate of $430 Billion. Compared to GDP, that’s government borrowing of almost 2.4% of GDP. If we reduce the GDP growth by the 2.4% borrowing – to match our family one way of accounting, we find that the US Economy, after adjusting for federal borrowing, is SHRINKING by 0.5%!

Our Economy is NOT doing well. The US Economy is getting smaller, and has been getting smaller for a generation. A shrinking Economy means that you and I and all Americans are getting poorer.

Now, even I will admit that at least some of the spending by our government has more than zero value. But that value cannot possibly equal $1 for $1 of what the private, productive sector of the US Economy produces – else the private, productive sector of the Economy already would be providing it.

My conclusion is that, to really improve the economic welfare of all Americans, we need to cut back government spending drastically. We need to eliminate the Budget Deficits (or even run Surpluses!), since these deficits screw with our perceptions of Economic Growth. We need to get rid of as much government spending as possible, since this less than $1 for $1 value takes awake from the potential of the private productive sector.

Congress and the President have a built in bias toward expanding their domains – frequently referred to as Empire Building. We must force them to shrink government so that all Americans can be more well off.

Action Items:

  • Enact a Balanced Budget Amendment (but which would allow Surpluses)
  • Enact a National Debt Payback Amendment
  • Enact an Amendment which would set a Dollar Limit on future government spending
  • Change Congressional Rules to limit Bills to a 50 page maximum, require each Bill to undergo a Constitutionality review in each house before passage, and require Senators and Representatives to Certify that they have read the Bills before they may vote yes (a no vote before reading is OK).
  • Require Congress to prioritize spending through a Dollar cost/benefit analysis of each Bill
  • Grant automatic standing in federal court for any US Citizen to challenge the cost/benefit analysis of any Bill or the Constitutionality of any Law

Robert (Bob)  Shapiro is self-taught in Austrian Economics and has consulted briefly for the governments of Mexico, Greece, Portugal and Spain. He has traded Gold & Silver and their stocks since 1970. Bob Shapiro’s blog is

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