On Eating Our Seed Corn; Or, Why Gross Domestic Product Measures May be Deceiving

Those raised around farms will probably know what eating one's seed corn means, but what does that have to do with Gross Domestic Product? Read on, and I will try to make the point.

Back in the 1970s on the campaign trail with my good friend Bob Krueger (former Democratic Congressman and US Senator) Bob would often use the term "we are eating our seed corn" in discussing government budgets and deficits. (Yes, Democrats, or some of them, were concerned about that in those days.) Bob was one of those rare politicians who would tell the truth, even when many people didn't want to hear it.

Of course we know that if you eat your seed corn, you have no seed to plant to get next year's crop. You would then be broke, or would starve to death. Not a good outcome.

This brings us to the current debate over the huge and growing deficits and national debt. Borrowing against the future to pay for the present is just like eating your seed corn. Our people, many businesses, and almost all of our governments have been doing this for years. The party is just about over. The train that is our economy is about to come to the abyss.

So what does this have to do with Gross Domestic Product, and how it is measured. Read on.

GDP is measured by adding Consumption (both private and business) plus Investment plus Government Spending plus Net Exports (exports - imports).

Those are the constituent parts of GDP. Note that the only net figure is the import/export number, and for over 40 years that has been a negative number.

Right now, GDP as thus measured is positive, and we are in a "recovery." Does it feel like a recovery to you? Ask the record number of long term unemployed.

Why do not we measure the net domestic product, whereby all of the spending would be reduced by the amount of borrowing that supports it? NDP has a good ring.

I am not an economist, so I cannot give any expert opinion on why the gross figure is considered better than a net figure, but I do know that relying on the gross figure has to distort the view of what is really happening in the economy.

Consider that government spending is all included although at least 44% of it is borrowed money. Is that why politicians always want to do a big stimulous when we hit a recession? It certainly makes it statistically look like a recovery. That is why we had a "recovery" this past year, and now that the stimulous is running out the "recovery" is faltering.

Back out the deficit spending and a clearer  image of the real economy emerges.

Also consider that private (consumer) spending is also a gross figure, when by all reports, much of it is again being done on credit cards. This, of course, is one reason why the Federal Reserve always wants to force interest rates down during a recession. They want to encourage the consumer to borrow and spend.(Another is to allow the banks to borrow at low rates and lend at higher rates, helping their profits.) That is a lot of what got us into this problem.

The last decades were spent on a big joyride, with consumers being encouraged to buy things (houses among them) that they could not afford. A lot of people maxed out their credit, then borrowed their home equities to buy the tickets for that ride.

The fact that the measured GDP was good enabled the politicians---of all stripes--- to get elected and reelected because times appeared to be better than they were. And they sold it as such.

Here is where the measure of GDP deceives us: the last forty years we have been eating our seed corn, and the economic measure the government statisticians, the economic statitisticians, and the politicians have been using to tell us where we are has hidden the facts. Of course, we all know about liars, damned liars, statisticians, and politicians.

What is all this about? It is very simple. Over 30 years ago, Bob was right. We were eating our seed corn then, and that has continued to this day. And many want to continue.

That train I wrote about six months ago when I last posted speeds on nearer the abyss. At some point it will get too late to stop it in time.

Somebody needs to get serious about this, or we need to throw them out.

Imagine a train

A very long train, with the United States on board. Call it the Gravy Train, for a name.

This train has been speeding down the tracks for many, many years. It has been a great party for most on board, though not for all.

At the end of the track it is running on there is an abyss. Nobody knows where the end is, but it is there.

It might be one mile away, ten miles, 100 miles; nobody can know for sure. We only know that the train must be stopped before it reaches the abyss, or there will be a terrible train wreck.

We also know that the train takes a long distance to be stopped, so there can be no waiting until the last moment to apply the brakes.

The only way to stop the train is to stop the party. Everyone will have to give up some of their gravy. It cannot be stopped any other way.

Meanwhile, the Engineer is opening the throttle. The train is picking up speed rapidly.

The rest of the crew is dithering, doing little at all to stop the train.

Some of the passengers are getting worried, many are just ignoring the speed and are enjoying all the gravy.

Very little is being done because nobody on the train wants to give up any of their gravy.

So the train keeps speeding toward the abyss. Will it be stopped in time?

It doesn't look much like it.

This little story should seem familiar. Our government has a huge and growing budget deficit and huge and growing entitlement commitments that cannot be paid for under any scenario.

The President has offered a budget proposal that will increase the deficit considerably. His party which controls the Senate is fighting to preserve current levels of spending.

The other party, which controls the House of Representatives are engaging in tokenism so far, and were split on a vote this week that would cut a mere $22 billion from the $1.5 trillion deficit.

The only conclusion that I can reach about this is that we are governed by morons.

Who will lead the political revolution that is needed?

The State of the Union

It sure didn't take Obama long to solve the fiscal crisis here in the US.

He is going to freeze spending!

This occurs at the point where the Congressional Budget Office confirms that spending at current levels will result in a $1.5 TRILLION deficit this year.

That will certainly get the job done.

The state of our union is going to be desperate until we get better leadership.

Sigh.

Throwing gasoline on a deficit fire

Sometime in the next week or so, the Obama Administration is going to deliver the delayed Mid Session Review, which is a budget document that updates the administration's economic and budget forecasts.

It was delayed because they wanted it to come out during the dog days of August when everyone was out of Washington. You can imagine why.

Keith Hennessy has an article over at Real Clear Politics entitled "Understanding the Upcoming Deficit Numbers" that gives a pretty good idea of what is coming.

Deficits are already estimated at huge numbers, but will have to be significantly increased because of actions already taken by Congress.

Growth is predicted at too high numbers already and will have to be reduced if they are honest. They probably won't be.

The deficits are so bad because they are 4 times the average the last 20 years. What does that do?

"Budget deficits crowd our private borrowing and raise interest rates. It costs more to get a mortgage, a car loan, or a student loan. Higher interest rates and their effect on the dollar cause the U.S. economy to grow more slowly, meaning fewer jobs are created and wage growth slows."

What will happen?

"The President has boxed himself in with different messages on fiscal policy and health policy. He argues we must slow the growth of long-term health spending, but has not offered policies that unbiased analysts say would achieve that goal. In health care reform, Congress is in no mood to make the painful choices needed to reduce future deficits, so the President has fallen back to a more modest goal of not increasing future deficits. If health care reform should actually become law this year, expect the long-run budget picture to get dramatically worse. Pending bills would create a rapidly-growing enormous new spending commitment that would quickly outstrip the proposed spending cuts and tax increases. In an effort to rescue health care reform the President has shifted away from a cost control message. Congress will read this signal and look for ways to avoid the pain of deficit reduction, knowing that the President will sign any bill that reaches his desk."

The President entered office with a bad situation. We all grant that. But he has determined to plow ahead and force through a liberal social program that will make a bad situation much worse.

"The President’s social policy agenda is throwing gasoline on a deficit fire."

Read the whole thing here.