Increase in Borrowing doesn’t lead to Increase in GDP

A friend called me up with an interesting analysis.  The supposition was that if the Government is going at least $1,000,000,000,000 into debt every year in order to “Save the Economy,” shouldn’t the economy (the GDP) be growing at a rate of $1 trillion per year?  If the government is borrowing from the Federal Reserve, Foreign Countries and Private Interests at $1 trillion per year and spending it, wouldn’t the GDP be increasing that amount by brute force alone?

First I compiled the GDP from 1992 to 2012 and adjusted for inflation.  $1 in 1992 could buy a lot more than it can in 2012, so the GDP needs to be adjusted for the modern value of our money.  Then I compiled the total government (federal, state and local) spending, revenue, and calculated the deficits.

DEFICITvGDP(click for full size)

If things were perfect, every time there is a deficit (the blue line dips beneath 0 axis) the GDP increase should be equal to the value of the dip.  But as you can see, that just isn’t so.  Furthermore, it’s not even relatively close.  The deficits of 2008 and 2009 were in years that had GDP declines, and the deficits of years 2010, 2011, and 2012 had a deficit to GDP increase efficiency rate of 25%, 12% and 28% respectively.

I also included another Data Set on this chart.  That Data is the Federal Debt Service, i.e. the interest costs per year for the Federal Debt held.  I attempted to look for State and Local debt service costs, but was unsuccessful for the short amount of time I put into it.  These costs are how much the Federal Government must pay each year for the privilege of borrowing money on the people’s credit.  This is a deceptively stable number.  But the reason it is stable is because of the interest rate the Government is borrowing from the Fed and other countries.  Even 10 years ago the interest rate was near 3x what it is now.  It was double what we have now from 5 years ago.  Despite the amount being the same, the ratio of debt to service debt was much higher due to higher interest rates.

The point of including it was to show how much the Federal Government spends to pay the interest per year, even though they aren’t paying down a single cent of the debt.  This roughly ~$400 billion per year that is spent (and included as part of the total spending) is of no benefit to Americans.  It can not lead to a single iota of growth.  Yet it is the largest single expense of the Federal Government.  With the debt assumed to grow in the future, and the nigh-impossibility that the interest rate on the debt going below the current ~2%, the costs of merely having debt will grow every year as well.  With the rising probability of the interest rate increasing, so will the debt service as a portion of total spending.

So every year we plunge headlong into debt, and yet see only marginal returns on our GDP.  These returns every year are less than the interest rates cost us.  This is, of course, ignoring the fact that the debt is piling up, and will need to be paid off.  Just like paying the debt service off doesn’t contribute anything to our economy, neither will paying off the debt.  And since the federal debt just broached the value of the GDP, it will require a monumental effort to pay off our debt.  This is also ignoring the unfunded government liabilities that I highlighted in an earlier post on this blog.

My conclusion for this is that government deficit spending has either no effect on the GDP, or actually has a negative effect on it.  This is hard to measure because it’s almost impossible to tell what the economy would have done without government intervention.  We only have history to tell us that it didn’t work.

In a completely, most assuredly unrelated topic, ever since the Housing Crash and the Default Credit Swap Crash in 2008 the average net worth of the to 50 Federal Government Legislators is up 25%.  At the same time the median income of US Households is down 7%.  The fact that the US Legislators  just voted almost unanimously to allow more insider trading for themselves is also probably irrelevant.

As a pseudo aside, part of the original conversation of government spending was figuring out a better way to measure progress on the economy.  The GDP encompasses all spending, but it isn’t a true measure of wealth.  Both the rich and the poor buy food, so food purchases can’t be included as a truer measure of the wealth of the country.  But the value of shipments of durable manufactured goods (I.E. the TV you just bought, or the wood a contractor just bought to build a house) is a better measure of wealth and wealth creation in this country.

Durable Goods Shipments(click for full size)

The blue line is the durable goods per year.  The red line is the same, but adjusted for inflation.  It’s not perfect, and I still want to work on a good way to measure wealth and real progress for the economy, but it’s a good start.

If you see any information that looks suspect in here, please inform me so I can check and modify it (if necessary0.

Sources:

http://www.treasurydirect.gov/govt/rates/pd/avg/avg.htm

http://www.usgovernmentdebt.us/

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

http://www.census.gov/manufacturing/m3/historical_data/index.html

My excel spreadsheet econ

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