TGS for anarchists

John Mauldin writes (pdf):

Few would argue that a healthy economy can grow without the private sector leading the way. The real per capita “Private Sector GDP” is another powerful measure that is easy to calculate. It nets out government spending—federal, state, and local. Very like our Structural GDP, Private Sector GDP is bottom-bouncing, 11% below the 2007 peak, 6% below the 2000–2003 plateau, and has reverted to roughly match 1998 levels. Figure 1 illustrates the situation. Absent debt-financed consumption, we have gone nowhere since the late 1990s.

There are some good diagrams at the link.  For the pointer I thank Shiraz Allidina.


I recently received an email with a very similar sentiment from a Tea Party relative, only with a much more, "economists are all part of a Keynesian conspiracy for including gov't spending in GDP" bent to it. Some of the points are valid, and indeed looking at purely private sector activity has it's uses, but some of it is just accounting. Look at other equal ways to measure GDP, (value added, income, etc.) and the line between public and private blurs. I run a small business. I have no idea where exactly my customers get their money. They could collect welfare (although doubtful, given my clientele), but some may be government employees, or some may be private employees from companies with gov't contracts (like an engineer from Lockeed Marin). Cut out that money, and you're cutting out money from my purely private business as well. What percent of money spent at Walmart, on Apple products, or whatever is gov't in origin indirectly when that money is traced back to "the source?"

That's not to say that there aren't uses for understanding what the economy does on a purely private level, and that is not to say that we aren't indeed relying on quite a bit of borrowed money. But the point is, we ALL are. There isn't a store out there that doesn't have some "gov't borrowing" in their register. I find that people forget this - that they read things like this and think that gov't borrowing is a problem (and maybe rightly so), but also think that because their personal business has no direct links to gov't that were that borrowing to stop, they wouldn't be affected. But unless they are certain that none of their customers have ever been paid by the government, or that none of their customers were paid by people who were paid by the government, or that none of them were paid by people who were paid by people who were paid by the government (and so on and so forth), it's simply a naive view of how interconnected all economic activity is.

Look at Tyler. George Mason is a public university, is it not? But more importantly, it makes money off tuition. Some of that is federally backed student loans. But even for those paying their way. How did those families make their money? Might some of them work directly for the gov't, be it NASA, the DoD, etc? Might some work for companies with big government contracts? Maybe someone makes their money like John Fleming running Subway sandwich shops. And maybe those shops are in DC where a lot of the clientele are government workers. So what percentage of Tyler's salary is public spending in origin? What about when he spends this at his favorite hole in the wall Chinese restaurant or buys a ticket on an airline to travel? What percentage of their income is from gov't borrowing?

Point being, yes, there are interesting numbers one can look at and interesting thoughts about what those numbers mean. It just too often causes people to draw really false conclusions about the repercussions from changing the way things are.

Crazy e-mails are often a leading edge of interesting ideas. Crazy people just don't get to publish papers. Tyler at George Mason is a bad example, the exception that proves the rule. But it doesn't even have to be about the government nearly always doing useless things. The key point is that some things are useful and some things are not. If you know the still doesn't matter because it's not a market.


A great, reasonable, 'centrist'-style post. So guaranteed to be flamed hard here. Already started it seems.

It depends on what you are looking at, and looking for. GDP is a record / estimation of economic activity in a period. For some purposes it doesn't matter what gave rise to that activity. If you are asking did the economy generate enough to feed everyone, it doesn't matter where the food came from. For other concerns, it's hugely important. If you are trying to measure the capacity of that economy to generate tax revenue to service public debt, it's very important to separate out private sector from public sector because governments can't tax themselves. In the same vein, if you are wondering whether to add lots of government debt to generate economic activity, you ought to think about, well, if I do this in period n, where do I get the funds to pay it back in period n+1.

John Mauldin is very focused on this issue so it stands to reason he would find this separation very important. Arguably more policy makers should have focused on it too as opposed to the short term boost in economic activity.

The Tea Party doesn't understand that the government deficit is making up for the private sector delveraging. They do not understand the depth of the depression that would follow if USG balanced its books tomorrow. But I don't think this means they are wrong in their policy prescription. The implications of the information is that we may need to cut government spending to 1998 levels to return to a sustainable path. Reverse no child left behind, prescription drug benefits, SS and Medicare increases, end the wars, etc. Yes, it will be painful, but the alternative is even more pain because the current path is unsustainable. Just wait until we drop back into serious recession and the budget deficit clears $2 trillion, and there's another debt ceiling debate before the election. It will make August 2011 look like a knitting circle.

What's the elasticity between public debt and private debt?

Change understand to believe and I'm with you. It's a strawman that people want to balance the books tomorrow. The people who want that yes, certainly haven't been paying attention. The folks like me who have been and have been calling for these changes for 10+ years know that the government budget is holding us hostage like a too-big-to-fail bank. The time to start was 10 years ago. Now it's more painful to start, but the time is still now.

> People like me ...

You are the exception that proves the rule.

Not really. There are tons, John Mauldin for one. He's hardly an anarchist. The point is basically simple, you can have big government if you choose, just don't expect the same growth rate as small government. And even if you still want it, don't finance it.

I find papers like these fascinating. When I first read about GDP, my immediate reactions were, "why should government spending be equated with private spending?" And "can't the government make GDP whatever it wants by just spending enough?" Decades later, this is news?

8) There is nothing wrong with private sector deleveraging that the government should "make up for". It's this "making up for" that is turning a necessary correction into a global debacle.

Very interesting, thanks for sharing.

"Few would argue" in this case as in most means "I'm going to hide all the assumptions I can't defend by pretending everybody already agrees with me". Plenty of people argue it, often rather persuasively.

"Plenty of people argue it, often rather persuasively" is as vacuous as "Few would argue". Given in rebuttal, it is more so. Let's see you argue it. Right here. Right now.

The problem is that few *would* argue that a healthy economy can grow without the private sector leading the way. However, *no one* can argue that that proposition is the same as saying that no government services have any value. Lots of people would agree that the private sector should normally lead the way in economic growth, and also accept that teachers and firefighters do something useful with their time.

Nylund is making some very good points. Moreover,the analysis is more complex because GDP does not directly measure output.

To really measure private sector output you should look at the output data in the productivity release. If you look at that data the peak in business output was 106.0 in IV Q 2007 ( 2005 = 100) and it was 104.3 in II Q 2011. Compared to this real business output fall of 1.6% real GDP fell from $13,326.0 b(2005 $) to $13,260.5 B (2005 $) or less than 0.01% over the same period.

NB: This is a Rob Arnott paper (his firm Research Affiliates is now associated with PIMCO).

If Maudlin's contentions are correct, why are we even calling it Gross National/Domestic Product? Shouldn't we call it Gross National Consumption?

A “correct” measure would subtract all new debt that is backed only by future income, lacking collateral. Very little private debt lacks collateral, and very little public debt is backed by anything other than future income.

This statement, in footnote 2, is utterly incredible. Both credit card and student loan debt have exploded in the past 10-15 years. One also wonders how to measure debt when the value of the collateral drops.

I agree that the second half of this statement appears outrageous. What do you think about the first? It seems to me that we should treat collateralized debt very differently from uncollateralized debt. I seems to me that this is walking towards counting government debt to build roads or water treatment plants differently than federal debt, which is also sensible.

" Both credit card and student loan debt have exploded in the past 10-15 years."

I'll give you that, but I still have to wonder, what is the bulk of private debt, collateralized or uncollateralized? If we assume that credit card and student debt doubled over the last ten years, what does that mean? If they represented <10% in 2000, they'd still be [very?] little.

Unless businesses have been financing equipment with AmEx.

Mortgage debt dwarfs credit card debt and student loan debt, a statement you can verify from the Fed's flow of funds. Therefore most private debt is collateralized.

So look at this from the article

"This week’s Outside the Box is a recent white paper by Rob, where he argues
that the traditional way we look at GDP is flawed, because it overstates what is
happening in the real, private part of the economy, which is the productive part.
Government spending is either money collected from the private sector in the form of
taxes or borrowed money that future generations must repay"

So if government spends, say $10 million to operate a school and educate students, this is not the productive part of the economy, but if a private school spends, say $10 million to operate a school and educate student, this is produtive part of the economy?

The total lack of logic in the basic assumption of the article is more than enought to disqualify it from serious consideraton.

Fitting, since we've been stagnant or in bubble-fueled growth since 1998.

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