Y = C + I + G + NX and the GDP Bull Crap Numbers

As usual I and millions of other Americans are getting tired of these phony GDP numbers telling me the economy is just grand. Unlike most people who can only complain I happen to be a overeducated American who can figure out where the bull crap is. It was not that difficult to figure out. In case anyone missed the news flash the government is spending way too much money. Here are the numbers.

I did a simple evaluation of the Gross Domestic Product (GDP) numbers comparing the 2005 economy to the 2010. Back in 2005 the economy was in year three of the five-year housing boom. Government spending from the Bush administration was in full swing with two wars and Homeland Defense spending.

First the equation Y = C + I + G + NX means Gross Domestic Product (GDP) = Consumption (C) + Investment (I) + Government Spending (G) + Exports minus Imports (NX).

Professor of Economics and Statistics, 1971 Nobel Prize winner Simon Kuznets invented the GDP equation

The equation was developed by Simon Kuznets and first used in 1934. It is often mistakenly associated with John Maynard Keynes who wrote the General Theory of Employment, Interest and Money in 1936 which advocated government intervention into the economy. Because the equation makes government equal to consumption and investment it justifies the Keynesian government intervention approach to the national economy. Simply put the two fit together perfectly for big government spending economist and politicians.

The fallacy of the equation Austrian economist have been pointing out for years is that consumption, investment and government spending are NOT equally as important for economic growth and prosperity.

Government has a negative effect on the economy. That is not to say we don’t need peace and stability, we do. But we defiantly do not need more than 15% or 20% of the federal, state and local governments consuming national wealth.

The Austrian economist might rewrite the equation as Y = C + (1.05) I + (0.3) G + l NX l placing a absolute value on import minus export portion of the equation. To a Austrian trade always balances out. We give IOU’s for our trade deficit and if the recipient of the IOU does not want reciprocating trade in return then good luck with the financial instrument and may the buyer beware.

The Austrian fix to the equation, Y = C + (1.05) I + (0.3) G + l NX l, would increase the importance of investment into the economy and drastically discount the governments contribution. Applying a little common sense to the calculation makes the medicine go down so much better. Really what economist other than the economic illiterate Paul Krugman thinks the government contribution to the GDP is anywhere near as important as private investment into the economy? I would like to see that debate with Peter Schiff or Dan Mitchell.

John Maynard Keynes and his General Theory of Employment, Interest, and Money gets the blame for giving politicians the green light to spend, spend and spend.

Getting back to the task on hand let’s look at year 2005 verses 2010 taking out all numbers and looking at strictly the percentages of the components of the GDP and how they have changed in such a short period of time. We will use Simon Kuznets equation as is.

In 2005 the equation was, using percentages to make it as clear as possible, 100% GDP = 68.7% (consumption) + 17.3% (investment) + 20% Government spending + (- 6% imports minus exports) or

2005 GDP 100% = 68.7% + 17.3% + 20% + (-6%).

Note that because of a negative trade balance this equation subtracts from the GDP and considers the imbalance “bad” for the national wealth. This economic philosophy dates back to the mercantilismeconomic philosophy of the 18th century.

Compare 2005 to the 2010 numbers.

2005 GDP 100% = 68.7% + 17.3% + 20% + (-6%).

2010 GDP 100% = 67.6% + 11.5% + 24.1% + (-3.2%).

Consumption decreased 1.1%. That is fine but, the stunning fact is investment as a part of the GDP numbers has decreased from 17.3% to 11.5%. This is a staggering 33.5% decline in investment as a percent in the GDP equation.

Government spending has increased from 20% of the GDP to 24.1%, an increase of 20.5%.

In numerical terms investment has declined from 2,276.3 (billions) to $1,796.7. Government spending has increased from $2,634.6 (billions) to $3,778.8. This is the exact opposite of what should be happening for our economy to provide long term growth and a positive standard of living.

Looking at it another way just looking at consumption and investment the GDP has gone from $11,314.8 (billions) to $12,380.0 (billions). This represents a growth rate of 9.4% over 5 plus years or a growth rate of 1.9% annually. Not even enough to keep up with the population growth. Compare that to a bloated 19% growth rate in the GDP numbers when government growth is included or a 3.8% clip.

So it is stating the obvious that government spending is way up and investment is way down. What is so devastating is that when inflation rears it’s ugly head and the government cannot borrow trillions of cheap dollars to prop up the Y = C + I + G + NX equation the economy will drop like a rock. Literally half of our GDP growth in recent years has been the government borrowing, printing cheap dollars, and spending them.

Borrowing money from the Chinese so government can spend it so people can buy Chinese products does not help our economy, it just adds debt. We can clearly see it in the sharp reduction in domestic investment into the economy. We can see it with the ballooning government spending and deficit. What this is saying is that when that money bubble, government spending bubble, burst this economy will crash HARD!

We have followed the path of the Weimer Republic of Germany in the 1920’s of financing government expenditures with borrowed dollars. It’s that simple. Sooner or later the rest of the world will figure it out that we have way too many dollars in circulation and they will divest themselves from the dollar. When that happens the dollar will fall, imports become more expensive, inflation will ruin rampant, government unions will demand more raises, government will print more money to pay the unions and provide more bailouts, and the vicious cycle will have begun. It will all be one big emergency after another. Inflation, misery, poverty and the perfect conditions for a Hitler, Stalin or our american tyrant to gain power.