GDP: Do You Know What It Means?

GDP: Do You Know What It Means?

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Many Americans are confounded by all of the business language that they are hearing surrounding the stimulus package now working its way through Congress. Unless you are an economics major or tax professional, more than likely you’ve been forced to Google up a term or two to try to figure out what people are saying.

moneyThis is unfortunate because the language doesn’t have to be so difficult nor should it be told in ways that the average American cannot understand. One of the worst perpetrators of economic goobledygook in this generation was Alan Greenspan the former Chairman of the Federal Reserve. Greenspan would often couch his economic pronouncements in flowery, circuitous language that even the experts had difficulty understanding.

Plain Talk Express

On SayEducate, we try to discuss plainly without giving you meaningless phrases, helping you cut through the hype without forcing you to seek out many other sources to uncover what we’re saying. After all, we want you to stop back by frequently, not be chased away by silly talk.

One term that you may have heard a lot of lately is GDP which stands for Gross Domestic Product. You’ll want to familiarize yourself with what GDP is all about as the stimulus package and other bills soon to be approved by our beloved political leaders will be added to the national debt which will impact GDP.

What is GDP?

But, before we talk about debt, exactly what is GDP? In short, the gross domestic product is all of the income and goods produced by Americans in any given year. Economists include consumption, investment, government spending and exports (minus imports) in calculating the GDP. The GDP works as a barometer which measures the health of the economy.

Naturally, you want the GDP to increase, but not every aspect of it. Producing more goods for export is good especially when exports outweigh imports. Increasing investment is also good as it provides money to support private projects such as building homes, investing in businesses, etc. Finally, consumption is also important because when consumers spend their money that provides the biggest injection of capital into the system.

Government Spending and the GDP

What I left out above was government spending. Government spending actually takes away from the other aspects of GDP and creates debt which must be repaid. However, our political leaders continue to add to the debt and are only paying interest on that debt. This means that no capital payments are being paid on the debt, just interest.

With the stimulus package now being considered, some of that money will be used to create jobs which means that people will go back to work, produce income and add their monies to the tax pool. However, analysts are saying that the percentage of the proposed $900 billion package (which will be added to our national debt) that will actually create jobs is no more than 12%, hardly the stimulus our country needs. Instead, most of the money will go to fund pet projects around the country, expanding government services, but not bringing in any money in the process.

A Big Government Expansion Is Coming

So what you have now is a package that uses the word stimulus but actually is a huge expansion of government. Most of the funds will not even become available for two or three years which by that time we should be well into a recovery. However, with new programs kicking in or others greatly expanded, those funds could put a drain on the economy and bringing about another slowdown. Worse, with debt needing to be repaid, taxes will have to be raised which will lead to inflation.

Ask anyone who lived through the last big recession of the late 1970s and early 1980s and they’ll tell you that prices jumped and high interest rates (15%) on mortgages held the housing industry back and depressed home prices. Unemployment was high and consumer spending was down.

It wasn’t until President Ronald Reagan cut taxes did the economy begin to recover, which led to a sustained 25 year economic boom. That boom ended because of federal tampering with the housing industry which fueled the subprime mess that led to the current financial collapse.

Are You Still With Me?

Okay, maybe explaining GDP isn’t that simple to understand after all. But, my main point is this: if government spending continues to increase ($700 billion TARP money plus $900 billion “stimulus” plus whatever else is planned) then debt will become a greater part of GDP.  Right now, America’s GDP is $13 trillion annually, but our debt is increasing rapidly having reached $10.6 trillion ($34,700 per person) recently. Factor in the coming $900 billion stimulus package and the numbers surge even higher.

The U.S. isn’t likely to default on its debt obligations, but the more debt created the more money will have to go toward servicing that debt. How will that money be gotten? Through taxes, both personal and corporate — the former you’ll notice when you fill out your 1040 form, the latter as companies increase their prices to cover the higher taxes. The result of both is something that we call inflation.

Adv. — SayEducate.com encourages our readers to stop by a new site established to help you take on the recession with confidence. SayRecession.com has been developed to equip you to make the life decisions you need to not only survive, but thrive during tough economic times. Learn how to pay off your mortgage as well as how to set aside emergency income in the event that you lose your job.

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