Sunday, June 30, 2013

Federal Consumption Components of GDP


Graph below of part of the "G" component of U.S. Gross Domestic Product.

This is the contribution from U.S. Federal Government consumption expenditures and gross investment.






















This is broken down into 'Defense' and 'Non-defense' components.

The total is running at about $1.2T.  The 'Non-Defense' component is running at about a $400B annual rate while the 'Defense' component is at about $800B.

Since the 'Non-defense' component is only $400B, we can examine the U.S. Treasury statement to identify the expenditures that this 'Non-defense' component does NOT include.

We know generally that the G component of GDP does not include "Transfer Payments" so that rules out Social Security and Interest on US Treasury Securities, and based on the statement , we can also rule out two other categories of 'automatic appropriation', Medicare and Medicaid.

Here is a link to the FY2012 year end Treasury Statement.

For year end FY 2012, these two line items are $246B for Medicaid and $542B for Medicare; totaling well in excess of the $400B of Non-defense consumption and investment expenditures so logically they cannot be part of this $400B Non-defense component.

So for U.S. GDP, the direct contribution to this form of measurement of economic activity from the Federal Government does NOT include at least that from:   Social Security $658B, Interest on US Treasury Securities $215B, Medicare $542B and Medicaid $246B for a total of $1.661T Federal Expenditures that simply are not included in the widely followed GDP measure and/or monitored by economists.

Indeed if we look at the total Federal spending computed by subtracting total Federal securities redemptions from total withdrawals from the TGA for year end 2012 we can see they withdrew a total of $11T while $6.8T of that was to simply redeem US Treasury securities so that leaves $4.2T of net total Treasury account withdrawals for the year, while the Federal contribution to G is reported at $1.2T.  So the remaining $3T of withdrawals is directly ignored by this popular GDP economic measure.

I guess economists wait until these $Trillions of Federal expenditures eventually show up in Consumption expenditures or something and add it up at the cash registers well after the fact ex post and come up with GDP a few months later.

Is this a good idea or helpful?

We just had a "GDP disappointment" this past week for 1Q (hey, better late than never...) and everybody acted as if surprised, could this have been predicted (or god forbid prevented...) with better real-time economic surveillance?

Good thing airlines don't operate this way as far as how much fuel they put in before a flight:  "Hey Joe, do we have enough fuel"?... "I don't know, I'll tell you after we get there or not"....

Pretty sad situation.

Our current crop of economic policymakers both in the government and the academe that advises them are simply not qualified for their positions. We need to get people in there who have the cognitive abilities to be able to understand what is really going on.


12 comments:

Bob said...

figures never lie but liars figure, I say flush them all along with Tobin Smith

Dan Kervick said...

Why is this an issue here? Isn't that why they use labels for these kinds of accounts like "national income and product accounts" and "gross national product"? They are only supposed to measure expenditures on final goods and services. Those goods and services might be consumption goods or investment goods. Looked at from the point of view of income rather than product, every component of the nation's product is some entity's income.

If I give you $100 as a gift, I have not added to the national product or income. The purchasing power over that product has just moved from one person to another. If however, you raise and harvest some additional quantity of carrots in exchange for the $100 I give you, then my expenditure serves as a measure of an addition to the national product.

That's not to say that a transfer payment can't make important secondary or follow-on economic contributions to the national product. If money is transferred from savers to consumers, the transfer will stimulate the production and exchange of more real goods and services.

Tom Hickey said...

Good thing airlines don't operate this way as far as how much fuel they put in before a flight:  "Hey Joe, do we have enough fuel"?... "I don't know, I'll tell you after we get there or not"....

Sums it up. Strongly suggests that politicians can't do simple arithmetic.

Real Fact Bias said...

I have to second Dan here. There is no issue here. It is NOT the case that $1.66T in federal transfer spending is NOT counted to GDP. It DOES get counted under another component (eg. C), if that transfer ultimately results in expenditures on final products (goods or services).

A transfer payment is not an expenditure on a final product, so that federal transfer spending should not be counted under G. The recipient of a SocSec transfer may choose to save that money in a given year, in which case it is never counted to GDP for that year. But if he does spend it on a final product then it is counted under C.

Treasury Interest payments are more likely to be saved than spent. Financial investment is saving not expenditure, thus never counted to GDP. But if spend on a final product, then it is counted under C or possibly I.

Matt Franko said...

Dan, Real,

Pardon me, I didnt realize everything is hunky-dory.... Right everything is just fine... We've got a bunch of people running policy who know what is going on ??????

If this is not surprising, then why are we all surprised when the GDP number comes in and 'disappoints'?

What are these people looking at?

(fyi btw My post is not directed at people who are "in paradigm")

I'm not an economist and I cant figure out why anyone would think its a big deal to look at our economic performance 3 months after its already over and think it is this big deal or something... this "measure" of GDP doesnt even make sense to me....

Who CANT just add some stuff up 3 months after it has already happened?

Is this a big deal? Is this truly helpful? I say no way...

rsp,



Matt Franko said...

We certainly have the IT to conduct surveillance (and how!) why dont we use it to monitor economic performance in real time?

Because we have a bunch of dopes in economic policy who take 90 days to get their thumbs out of their asses long enough to figure out what happened 90 days ago thats why...

Matt Franko said...

Dan, Real,

I fully understand how economists can figure out their version of what happened 3 months later...

rsp,

paul meli said...

Matt,

Good points. There is no good reason or technological constraint.

Bob said...

Most people view the GDP as the economic health of the economy, that is the sheeple, what gubbament measure takes into account of the legacy costs of social security and health care as opposed to critical mass meltdown. Exponential growth to hell.
I am short.

Real Fact Bias said...

Matt,

Apologies, if I was not completely sure what you are getting at. No doubt economist consensus rarely gets it right when it comes to predicting economic data. They certainly don't have access to BEA data, I don't know what their sources are, wouldn't surprise me if it is just a WAG:)

Even the BEA doesn't get it right in the first release, this is 3rd revision of Q1 GDP and it significantly lower then the 1st revision from April.

So is your point that because this data is not real time that is not that useful? I am not sure if we have the technological infrastructure to do it real time right now. Maybe we do have the capability as you say, but not necessarily the infrastructure. Do you further info/papers on how we can do a real time GDP? That certainly would be better.

But still, my view is even though it is delayed it is still useful as a metric. GDP is simply the amount of final product created domestically within a given period, that is all. Spending = income, so GDP is also Gross Domestic Income. BEA tracks GDI separately and those two figures are within 1% of each other after final revisions. GDP - net income receipts from the rest of the world gives us GNP. GNP - CFC (depreciation) gives us National income, all income made in the US, i.e compensation of employees, corporate profits, rental income, net interest payments, proprietor's income etc:

I am sure everyone here is already familiar with all this, but I am reiterating this to make the point that all this is still useful. We can see for eg. more and more of a share of GDP is going to corporate profits vs individual income. But when GDP is used to measure welfare then that is wrong way to use GDP in my view. It is just domestic product and national income for a given period.

Dan Kervick said...

Matt, I guess I just don't understand what point you are making.

Matt Franko said...

Dan,

Govt is injecting like 3T per year that is seemingly untracked/monitored until perhaps these balances show up in the consumption component of GDP way ex post...

I just dont think that this type of economic analysis is helpful or obviously timely...

Scott has just published a blog on helicopter drops over at NEP... asserting that they are "fiscal"... I agree with everthing Scott writes there but he is making kind of the same point I'm trying to make here...

Drops into education subsidies for instance would not be in "G-T" which I always equate "fiscal" policy as that associated with this "G-T" metric... the 'deficit', etc...

So types of helo drops could not be considered part of G-T so how could they be "fiscal" per se?

It would be like if we did a big Healthcare or Education helo drop, we wouldnt know how to model it and it would show up in G-T, until a few months later, we perhaps would see an uptick in consumption by the addtional educators who went shopping at Safeway to buy food with their otherwise non-existent paychecks...

We need some new ways to evaluate/monitor an economy that is quickly transforming itself into a "transfer payment" dominated economy...

rsp,

Is the academe of economics up to the task?

rsp,