Babbling Joe Biden is running his mouth again on topics about which he knows little, such as the need to spend to avoid bankruptcy. This bit of brilliance comes in the same week in which the deficit for the first nine months of FY 2009 exceeded US$1 trillion for the first time in history.
These pieces of news made me wonder as to just what effect these deficits are really going to have. Since I’m a quantitative sort of thinker, I started doing a little math. If anyone in the Obama Administration wants to follow along but has trouble with math, perhaps they can have Larry Summers recommend a tutor – after all, he fancies himself an expert on just who is and isn’t good at math. In any case, here’s what I came up with:
The means of accounting national income states that GDP can be expressed as one of two sums – the first is the sum of government spending, non-governmental spending, non-governmental investment, and net exports; the second is the sum of non-governmental spending, taxes, and savings. Put symbolically (this is where the Administration types may want to call Dr. Summers), they are respectively:
GDP = G + C + I + NX
GDP = C + T + S
Equating these two (as they are the definition of the same quantity) and canceling non-governmental spending (C) as it appears in both:
G + I + NX = T + S, or
(G – T) = (S – I) – NX
Put in words, this means that the deficit (government spending minus tax revenues) equals an amount diverted from domestic savings that could have been used for investment (S – I) plus the trade deficit (-NX). As a practical matter it means that the deficit is funded by domestic bond sales which take away from private investment that could be used for economic growth – adding employees or capital expenditures (either new technology or to accommodate depreciation) or by bond sales to foreign entities which are financed by dollar outflows to those entities’ nations.
Now let’s put some real numbers into action here (paging Dr. Summers…). The US GDP is $14.1 trillion dollars. The projected deficit is $1.841 trillion dollars on total spending of $3.997 trillion (CBO); meaning tax revenues are 3.997 – 1.841 = $2.156 Trillion. The savings rate (percentage of disposable income not spent) is expected to average about 5% over the course of this fiscal year (which started in October 2008), 5% of $11.944 trillion (GDP minus taxes – I know I left out state and local taxes and spending but including those shows the situation to be even worse) is $597.2 billion dollars. The trade deficit is expected to run about 4.5-5% of GDP; let’s split the difference and cal it 4.75% of GDP = $669.75 billion.
Where does this leave us? Since (G – T) = (S – I) – NX, the investment potential of the economy is:
I = S – (G – T) – NX = 597.2B – 1841B + 669.75B = -$547 Billion (or -3.9% of GDP). That’s right – not only does Obama/Babbling Joe’s spending to avoid bankruptcy take every dime away from private investment (which is what is REALLY needed to pay the salaries of the potentially re-employed and fund new capital expenditures which will get the economy moving again), but we will STILL need to come up with $547 Billion even after we go hat in hand to “nice folks” like the Chinese.
Put bluntly, Babbling Joe’s spending to avoid bankruptcy ensures that there is NO WAY IN HELL that we can get out of this recession.
Since math is equal opportunity (Dr. Summers’ assertion not withstanding) – the left always liked to go after President Reagan’s deficits, so let’s subject his budget to the same sort of analysis. The highest dollar amount deficit came in 1986 at $221.2 billion ($990.4 billion spending with $769.2 billion in tax revenue). This was with a $4.428 trillion GDP, a savings rate of 8.5% for FY 1986 (St. Louis Fed data), and a trade deficit of 3% of GDP ($132.84 billion). A savings rate of 8.5% on discretionary income of $3.6588 trillion (GDP – taxes) gives savings of $310.998 billion. Plugging those numbers in:
I = S – (G – T) – NX = 310.998 – 221.2 + 132.84 = $222.64 billion, or an available investment “pool” of about 5% of GDP. GDP growth during that time ran 3.5%-4%.
Maybe we should have some former Reagan people suggest a math tutor instead.