8.04.2014

A Little Government Cheese (about $300B worth) Goes A Long Way

Although some might be surprised, the economy does depend on the government as much as it does on other economic sectors.  To the tune of over $300 billion dollars. That and a few other things is what the Upshot crew at the NY Times uncovered in an interesting data analysis.
The economy keeps underperforming. Yes, new G.D.P. data last week werebetter than expected. But the United States is still producing around $800 billion a year less in goods and services than it would if the economy were at full health, and as a result millions of people aren’t working who would be if conditions were better. 
But why? Where is this gap coming from? To get at an answer, we needed a more basic question: What would the economy look like right now if it were fully healthy, and how is the actual reality of the economy right now different from that? 
We started by examining how large a proportion of G.D.P. that various sectors have accounted for historically — over the two decades ending in 2013, to be precise. (Initially, we looked at the full history of G.D.P. data, going back to 1947, but the economy was sufficiently different in the immediate postwar period compared with today that it seemed more sensible to limit it to more recent history.) 
Then we multiplied those percentages by the Congressional Budget Office’s estimate of what the United States’ potential output was in the second quarter of this year. That gives us a sense of what output “should” be in each sector if we had a healthy economy and those historical proportions held.



Sectors Holding Back the Economy*

A handful of sectors, including housing, government spending and spending on durable goods, are at fault for the continuing underperformance of the American economy.

Gap between actual output and estimate of output in fully healthy economy (in billions)
Services consumption
Business inventories
Intellectual property investment
Net exports
Business structures
Nondurable goods consumption
Federal government
Business equipment investment
Durable goods consumption
State and local government
Residential investment
62.6
53.1
28.9
21.3
-15.3
-74.4
-118.5
-119.9
-178.7
-189.2
-239.4




The following, however, are the five pieces that are the major culprits in the nation’s economic malaise, each vastly undershooting what they would look like in our model of a healthy economy: residential investment; consumption of durable goods; state and local government spending; business investment in equipment; and federal government spending. 
Together their deficit adds up to $845 billion — in other words, if those sectors returned to their typical share of economic potential, the economy wouldn’t just be doing well, it would be in an outright boom.
If government spending resumed normal levels, 1/3rd of that $845 billion would be reduced.  And that spending would ripple out and lead to more jobs, consumer spending and infrastructure investment which would all improve the overall economy.    

*Model based upon Congressional Budget Office’s estimate of potential G.D.P. in the second quarter of 2014 and the average proportion of G.D.P. of each sector from 1993 to 2013. Numbers are annualized.

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