The Debt/GDP Ratio

The fiscal liberals have begun a debate on the 'acceptable' level of debt we can have with respect to GDP. The purpose of the debate is to cajole lawmakers into spending more money.

The debate is misleading since the process of government spending (and the borrowing that precedes it) increases GDP. The method used by the Bureau of Economic Analysis (part of the Department of Commerce) is:

GDP = C + I + G + (E - I)

where;

• C is consumer spending
• I is investment (by industry, not as liberals define it)
• G is government spending
• (E - I) is exports minus imports

Debt is not in the equation but debt-driven spending is.

Let's say we have a country of one frugal taxpayer who spends, invests, imports and exports nothing. The government taxes him $1 in the first year and spends it. The GDP is $1.

The following year, the taxpayer once again spends, invests, imports and exports nothing. The government taxes him $1 again but also borrows $1 and spends them both (no surprise there). The GDP is now $2.

The liberal spenders would have us believe that if the taxpayer spends $1 in the third year while the government taxes him $1 again but borrows $1 more and spends them both, the increasing GDP is a good thing and a debt-to-GDP ratio of 2/3 is acceptable.

It's this kind of reasoning that leads to the condition of the European Union.

One more thing about our debt. The media frequently reports that our debt/GDP ratio is about 70% even though they are roughly equal at about $16 trillion. How can this be? Well, they don't count the $4.7 trillion that congress has 'borrowed' from us, largely by raiding the Social Security trust fund. I guess they figure they can screw us and get away with it. Oh wait, they are screwing us and they are getting away with it!

I recall when we used gross national product (GNP). However, GNP excludes government from the calculation. GDP reflects best on spendthrift politicians and that's why we switched to it.

From my perspective, debt is bad and a ton of debt is worse. At some point, debt grows to a limit where nobody will loan to you any more. When that happens, sequestration will look like a day at the park.

I keep coming back to public education because, contrary to popular belief, it is the largest business in the world. Exxon has revenues of a mere $482 billion.

Public education (K-12) in the US has revenues of approximately $2.2 trillion (by extrapolation from my city) and is operated strictly by politicians with virtually no oversight. Bigger than the economies of Italy or Russia!

More than 10% of the US GDP and all based on government spending. Frightening.