Is Debt and Government Spending Crushing Us?

Table 1: GDP by Consumption

In the Republican Iowa debates I repeatedly heard the claim that government percentage of the GDP has skyrocketed. I have yet to see data that supports this claim. If you they are talking about raw numbers, then yes, government spending has increased. However, as a percent of GDP, government consumption has not, and it is the relative percent that is important. Not only is our government spending far less than other industrialized countries, but at least as far back as I can find at the Federal Reserve online data (1945), our government spending has been roughly the same, as indicated by Table 1. On a previous blog post, I charted the changes in "sector" growth since 1945, data from the BEA. Namely, manufacturing has gone down dramatically, service and finance has gone up dramatically, but, again, government spending has remained the same in the production measure as well (Table 2). That is two separate measures, production and consumption, where government percent has remained the same.

Table 2: GDP Production by Sector



Another issue is the larger economic model. If you go back to Table 1, you will notice that there are 3 major sectors of consumption that create the Federal Reserve measure: consumer consumption (which technically also includes non-profit spending), government spending, and business spending (which includes farm, finance, corporations--all business investments and inventories). By far the largest chunk of this is consumer spending--that means the money that you and I use to buy food, cars, tvs, movies, etc. Far above both government and business spending combined, is the money that regular people put into the economy by buying. This can only happen when consumers have money to spend. Here we can see a flaw in the neoliberal argument from the historical data. In earlier blogs I have charted that we are paying less in taxes than we have since 1950 (as a % of GDP), contrary to what we heard at the Republican debates. However, our disposable income has continued to decline, and wages have stagnated. The mantra of lower taxes have increased the income of the top 40% of earners, who have been saving and re-investing money, not spending it. Thus the largest driver of our economy, consumer spending, as shown in Table 2, while increasing slowly under Reagan and Clinton, leveled off or declined during all three of the Bush terms (Sr and Jr).

Table 3: U.S. Debt by Sector


The third piece of the recent rhetoric has been debt, thus the question, "Are we being crushed by debt?" to which I answer, yes. However, it is not government debt that is causing our economic problems, but household debt. As shown in Table 3, federal debt in the last 15 years, as a percent of GDP, is the lowest it has been since WWII (yes, you are reading the chart correctly--federal debt as a % of GDP after WWII was 70%, and did not reach current levels until the 70s). We have seen a rapid, recent increase in debt/GDP, however, it is the rapidity of the climb since 2005 to "average" levels that has caused us to perceive the shift as problematic. Whether as a comparison with other industrialized countries, or a comparison with our own history, our current debt/GDP ratio is unproblematic. The perception of the problem, and the potential real problem, is that since unemployment has dramatically risen, and wages have contracted, this shifts the debt/GDP ratio higher than it might otherwise look, as well as "feeling" like a crisis for households. When you look at the historical debt chart, the major differences since the 60s has been a radically lowered federal debt, a skyrocketing share of debt by the financial markets, and peaked levels of mortgage debt. The declines in financial and mortgage debts are evidence not of improved circumstances, but the bursting of the market bubbles that have led to debt-write offs, bankruptcies, and reassessed values, with federal support systems taking their place to prevent systemic collapse even worse than what it would have been. The larger trend for household debt, both mortgage and consumer debt combined, has remained relatively stable. However, given that total real GDP/capita (which accounts for cost of living increases) since 2000 has only increased 6%, and real income for the bottom 50% of earners has declined or remained stable since 1980, that means a declining disposable income after accounting for a debt ratio that does not decline. Decreased spending capacity by the majority of consumers means not only a diminished capacity for the economy as a whole to grow, but also an impoverished life for the growing number of citizens who have to live below the poverty line.