GDP versus net GDP

[Dr.Who]

I learned a bit more about two numbers today.

GDP - Gross Domestic Product - the total output of all private industry in the country.

Net GDP - Net Gross Domestic Product per Person (the GDP less the amount of government spending at all levels divided by the current population.)

We would hope that the GDP would be larger each year since it measure how much we are producing and therefor how successful our economy is. We would also hope that the Net GDP would grow each year too since it is the private industry that creates wealth while government only moves money around.

There is a very interesting table at this site:

http://www.americanthinker.com/2011/06/obamas_america_prosperity_lost.html

The table shows, using government data, that as government spending goes up Net GDP goes down. Common sense that the more one subtracts from GDP the smaller it would get.

The table also shows that as Net GDP goes down (and government spending goes up) unemployment goes up too. That is common sense too.

But for me the shocker was that using the government data the percent of the economy controlled by government is expected to be 60.5% in 2030. Which of course leaves the Net GDP at only 12,450, down from a high of 26,445.

What do you suppose will happen if Net GDP is cut by more than half?

 

[PLC1]

I learned a bit more about two numbers today.

GDP - Gross Domestic Product - the total output of all private industry in the country.

Net GDP - Net Gross Domestic Product per Person (the GDP less the amount of government spending at all levels divided by the current population.)

We would hope that the GDP would be larger each year since it measure how much we are producing and therefor how successful our economy is. We would also hope that the Net GDP would grow each year too since it is the private industry that creates wealth while government only moves money around.

There is a very interesting table at this site:

http://www.americanthinker.com/2011/06/obamas_america_prosperity_lost.html

The table shows, using government data, that as government spending goes up Net GDP goes down. Common sense that the more one subtracts from GDP the smaller it would get.

The table also shows that as Net GDP goes down (and government spending goes up) unemployment goes up too. That is common sense too.

But for me the shocker was that using the government data the percent of the economy controlled by government is expected to be 60.5% in 2030. Which of course leaves the Net GDP at only 12,450, down from a high of 26,445.

What do you suppose will happen if Net GDP is cut by more than half?

The writers of the American Thinker think that any money collected in taxes is simply gone, vanished, useless. Now, that may not be entirely false, but consider this:

The money that is collected by the health insurance industry and spent on health care, salaries of company employees, dividends paid to stock holders, and money spent on lobbyists to keep their industry alive is all a part of the GDP and on the plus side of the register.

The money collected by the government and spent on Medicare, and on salaries of bureaucrats who administer the program, is all government spending and therefore on the negative side of the register.

Why is that?

 

[Dr.Who]

The writers of the American Thinker think that any money collected in taxes is simply gone, vanished, useless. Now, that may not be entirely false, but consider this:

The money that is collected by the health insurance industry and spent on health care, salaries of company employees, dividends paid to stock holders, and money spent on lobbyists to keep their industry alive is all a part of the GDP and on the plus side of the register.

The money collected by the government and spent on Medicare, and on salaries of bureaucrats who administer the program, is all government spending and therefore on the negative side of the register.

Why is that?

The question is not whether or not the money is spent or is gone. It all gets spent either way. The question is whether or not any added value is produced in the process. When ABC company uses its money to buy raw materials and then turns those raw materials into a usable product that is worth five times as much as the raw materials it has created wealth. When Uncle Same takes money from ABC company and then pays a doctor with it Uncle Sam has not made the money worth any more. In fact Uncle Sam needed to keep a little for himself and so it is actually worth a little less.

Is 100% of the money that flows through Washington not creating any wealth? I doubt it and suppose that some is probably creating wealth. So why did the economists who invented the concept of Net GDP not account for some of the money creating wealth? I don't know but it would incorrect to think that AT invented the concept as biased as they are.

I will agree with you also that 100% of the money that flows through ABC is not turned into added value. Your example of a company paying lobbyists is probably accurately described as not creating wealth. It is no doubt not easy to determine when money is used in ways that create wealth and when in ways that does not.

Generally though companies are in business to create wealth (because they exist to keep some of it) and governments are not supposed to be in the business of competing with private industry by creating wealth.

 

[PLC1]

The question is not whether or not the money is spent or is gone. It all gets spent either way. The question is whether or not any added value is produced in the process. When ABC company uses its money to buy raw materials and then turns those raw materials into a usable product that is worth five times as much as the raw materials it has created wealth. When Uncle Same takes money from ABC company and then pays a doctor with it Uncle Sam has not made the money worth any more. In fact Uncle Sam needed to keep a little for himself and so it is actually worth a little less.

Is 100% of the money that flows through Washington not creating any wealth? I doubt it and suppose that some is probably creating wealth. So why did the economists who invented the concept of Net GDP not account for some of the money creating wealth? I don't know but it would incorrect to think that AT invented the concept as biased as they are.

I will agree with you also that 100% of the money that flows through ABC is not turned into added value. Your example of a company paying lobbyists is probably accurately described as not creating wealth. It is no doubt not easy to determine when money is used in ways that create wealth and when in ways that does not.

Generally though companies are in business to create wealth (because they exist to keep some of it) and governments are not supposed to be in the business of competing with private industry by creating wealth.

According to that model, then, the only activities that create wealth, and so add to the "net" GDP would be those that create some product: manufacturing, agriculture, perhaps mining. Everything else is just moving that wealth around. The retail business doesn't add anything, just buys and resells. The government adds nothing until it builds something from raw materials, such as roads or bridges.

I'm not so sure that the American Thinker, or the author of the article in question at least, has thought through his idea.

 

[Dr.Who]

According to that model, then, the only activities that create wealth, and so add to the "net" GDP would be those that create some product: manufacturing, agriculture, perhaps mining. Everything else is just moving that wealth around. The retail business doesn't add anything, just buys and resells. The government adds nothing until it builds something from raw materials, such as roads or bridges.

I'm not so sure that the American Thinker, or the author of the article in question at least, has thought through his idea.

I think there is a difference between moving money around and adding value to it. It would be simplistic to think of adding value only as manufacturing. The retail store like Wal-mart allows a person to buy a hundred different products from places as far away a china all in one trip instead of going to each manufacture separately. You are right to list government building a bridge as adding something.

The general rule is that government does simply move money around and porivate industry does add value but it is not that black and white.

I believe the notion of net GDP comes from economists and not merely from American Thinker - they are just the reporters. If this is the way economists always operate then how can we trust any of their theories as anything more than rough approximations of reality?

So is the approximation good enough so that when it predicts government Net GDP falling to half of what it is at best should we be concerned? I suspect that the approximations are accurate within 10% of reality.

 

[PLC1]

I think there is a difference between moving money around and adding value to it. It would be simplistic to think of adding value only as manufacturing. The retail store like Wal-mart allows a person to buy a hundred different products from places as far away a china all in one trip instead of going to each manufacture separately. You are right to list government building a bridge as adding something.

The general rule is that government does simply move money around and porivate industry does add value but it is not that black and white.

I believe the notion of net GDP comes from economists and not merely from American Thinker - they are just the reporters. If this is the way economists always operate then how can we trust any of their theories as anything more than rough approximations of reality?

So is the approximation good enough so that when it predicts government Net GDP falling to half of what it is at best should we be concerned? I suspect that the approximations are accurate within 10% of reality.

I'd be more inclined to listen to the economists than to a blogger with an obvious agenda. The model of all private spending adds to the GDP while all government spending detracts from it is overly simplistic and inaccurate.

 

[GenSeneca]

The model of all private spending adds to the GDP while all government spending detracts from it is overly simplistic and inaccurate.

Where does that government money come from?

A. It's taxed out of the private sector.

B. It's printed, causing inflation and a devaluing of the dollar.

C. It's borrowed against future taxation of the private sector.

Is there another possibility I don't know about that doesn't involve taking money away from the private sector or devaluing the currency?

 

[PLC1]

Where does that government money come from?

A. It's taxed out of the private sector.

B. It's printed, causing inflation and a devaluing of the dollar.

C. It's borrowed against future taxation of the private sector.

Is there another possibility I don't know about that doesn't involve taking money away from the private sector or devaluing the currency?

From Dr. Who's post above:

The question is not whether or not the money is spent or is gone. It all gets spent either way. The question is whether or not any added value is produced in the process.

which sounded to me like a good criterion.

Now, when the government builds a bridge, a dam, a road using that money collected by taxes, is it or is it not adding value to the raw materials purchased?

 

[dogtowner]

The writers of the American Thinker think that any money collected in taxes is simply gone, vanished, useless. Now, that may not be entirely false, but consider this:

The money that is collected by the health insurance industry and spent on health care, salaries of company employees, dividends paid to stock holders, and money spent on lobbyists to keep their industry alive is all a part of the GDP and on the plus side of the register.

The money collected by the government and spent on Medicare, and on salaries of bureaucrats who administer the program, is all government spending and therefore on the negative side of the register.

Why is that?

Because money in the government's control is money that was removed from the economy while salaries etc were derived from wealth created by the economy.

Government is a parasite. We require it for certain things (they'er enumerated in the constitutions of the national and state governments).

 

[GenSeneca]

Now, when the government builds a bridge, a dam, a road using that money collected by taxes, is it or is it not adding value to the raw materials purchased?

Also from Dr.Who:

I think there is a difference between moving money around and adding value to it. It would be simplistic to think of adding value only as manufacturing.​

I took his comments as meaning adding value to the money spent, i.e. generating wealth, not adding value to the raw materials. I'm sure he can specify.

While we wait... I'd like to point out that using the leaky bucket of government to purchase any materials comes at a significantly higher cost than a private company acquiring the same materials.

Then there is the labor aspect, again, leaky bucket of government who doesn't need to make a profit vs. the private contractor who does need to make a profit. The government's inefficiencies and dismal record of resource allocation, not to mention legacy costs, are enough to put any private contractor out of business.

I would also like to reiterate my point about the source of government funds that went to purchase the raw material and cover construction costs, it's either taxed out of the current economy, borrowed against future economies, or printed and thereby devaluing the currency. So if you believe that the government has added X amount of value to the raw materials, then you need to subtract Y (source of revenue) and Z (inefficiency) to determine whether or not X is still a positive integer.

 

[PLC1]

Also from Dr.Who:

I think there is a difference between moving money around and adding value to it. It would be simplistic to think of adding value only as manufacturing.​

I took his comments as meaning adding value to the money spent, i.e. generating wealth, not adding value to the raw materials. I'm sure he can specify.

While we wait... I'd like to point out that using the leaky bucket of government to purchase any materials comes at a significantly higher cost than a private company acquiring the same materials.

Then there is the labor aspect, again, leaky bucket of government who doesn't need to make a profit vs. the private contractor who does need to make a profit. The government's inefficiencies and dismal record of resource allocation, not to mention legacy costs, are enough to put any private contractor out of business.

I would also like to reiterate my point about the source of government funds that went to purchase the raw material and cover construction costs, it's either taxed out of the current economy, borrowed against future economies, or printed and thereby devaluing the currency. So if you believe that the government has added X amount of value to the raw materials, then you need to subtract Y (source of revenue) and Z (inefficiency) to determine whether or not X is still a positive integer.

The money spent by private parties to build and manufacture wealth also has to come out of the economy in one way or another. There is no such thing as free money, after all.

Private industry is not always as efficient as it could be. You do have a point about government inefficiency, however.

On the other hand, who but inefficient government is going to build highways, bridges, dams, and conduct wars?

Imagine private capital doing any of the above.. well, maybe building dams, at least on private property.

 

[GenSeneca]

The money spent by private parties to build and manufacture wealth also has to come out of the economy in one way or another. There is no such thing as free money, after all.

This is true, however, you're forgetting an important factor... Value.

Private Sector Scenario: Company A wins a contract to build a bridge and new sections of road on either side. This increases the value of company A. Company B supplies company A with the materials it uses for construction, that same contract increases the value of company B. Both companies are now more attractive to investors, value has been added to the economy.

Public Sector Scenario: Company A and company B pay taxes that help to fund the same public works project. Neither business is seen as having gone up in value, and therefore, no value has been added to the economy.

On the other hand, who but inefficient government is going to build highways, bridges, dams, and conduct wars?

The private sector is perfectly capable of building highways, bridges, and dams. As for the military, I believe government could become very efficient at protecting our rights if we limited it's role to doing just that and nothing else.

 

[PLC1]

This is true, however, you're forgetting an important factor... Value.

Private Sector Scenario: Company A wins a contract to build a bridge and new sections of road on either side. This increases the value of company A. Company B supplies company A with the materials it uses for construction, that same contract increases the value of company B. Both companies are now more attractive to investors, value has been added to the economy.

Public Sector Scenario: Company A and company B pay taxes that help to fund the same public works project. Neither business is seen as having gone up in value, and therefore, no value has been added to the economy.

That model works if company A and company B have to pay in its entirety the cost of the building project they have contracted to do, that is to say, if they're working for free.

But yes, Company A that won the contract, and Company B that provided the raw materials, have both added value as a result of building the bridge. Further, the employees of companies A and B will be spending money in companies C,D,E,F and so on, thus adding to their value as well.

It really is no different than Company G, that makes widgets, adding to the value of the raw materials it buys from Company H and making a product, whatever that is.

And, the market for that product is much improved due to the employees of Companies A and B, as well as their stockholders and creditors.

and all of those companies, A-H, being more profitable, will pay more in salaries, in dividends, and in taxes than they would had the bridge never been built.

The private sector is perfectly capable of building highways, bridges, and dams. As for the military, I believe government could become very efficient at protecting our rights if we limited it's role to doing just that and nothing else.

Private sector highways and bridges? Sorry, that just is not practical.. Oh, darn, there's that word you hate again.

To efficiently build a highway, the government has to exercise imminent domain. Further, the government does not have to post a toll booth at every intersection in order to collect money for its construction and maintenance. Just how else could a highway or bridge project possibly be profitable for private enterprise to build?

 

[GenSeneca]

That model works if company A and company B have to pay in its entirety the cost of the building project they have contracted to do, that is to say, if they're working for free.

Are you trying to say that government taxation used to pay government employees to construct the same infrastructure adds more value to the economy than it subtracts?

Private sector highways and bridges? Sorry, that just is not practical.. Oh, darn, there's that word you hate again.

I only dislike the word because you misuse it so often... Like claiming that having government tax money out of the economy to pay government workers to build infrastructure is somehow more practical than the same project being either, a. privately funded, or, b. government funded using private contractors.

To efficiently build a highway, the government has to exercise imminent domain.

So once again you equate "practical" to government's monopoly on the legal use of force.

Further, the government does not have to post a toll booth at every intersection in order to collect money for its construction and maintenance. Just how else could a highway or bridge project possibly be profitable for private enterprise to build?

It's a good thing government funds the construction of every single parking lot and driveway in the US, otherwise we wouldn't have any... After all, it's not like it would be profitable for private enterprise to build those things.

 

[PLC1]

Are you trying to say that government taxation used to pay government employees to construct the same infrastructure adds more value to the economy than it subtracts?


I only dislike the word because you misuse it so often... Like claiming that having government tax money out of the economy to pay government workers to build infrastructure is somehow more practical than the same project being either, a. privately funded, or, b. government funded using private contractors.


So once again you equate "practical" to government's monopoly on the legal use of force.



It's a good thing government funds the construction of every single parking lot and driveway in the US, otherwise we wouldn't have any... After all, it's not like it would be profitable for private enterprise to build those things.

Parking lots and driveways are private property, built for the use of the owners of said property and their clients.

Highways are public, are build for the use of the public. There is a big difference.

How do you think private enterprise could possibly build highways today? How would they make a profit? How would they cross private land belonging to someone else?

It just isn't practical.