US GDP — Not As Pretty As Otherwise Indicated, or Perhaps It Is Just That New Math Again….

If you looked at the basic U.S. Gross Domestic Product (GDP) numbers, you would conclude that the U.S. is gaining economic ground.  [Note: GDP is the total market value of all recognized goods and services produced by a country or state.  Typically not in the GDP are illegally traded items–drugs and so forth.]  A measure of the relative wealth of a country is often referred to as Per Capita GDP (not the income per individual, but rather the amount of value produced per individual in the country).

In the first table are the nominal and real (not-inflation adjusted and inflation adjusted) GDP levels since 2008 and respective annual rates of change.  Both the Real GDP (adjusted for inflation and stated in 2005 dollars),  and nominal GDP (not adjusted for inflation) indicate that the 2011 GDP is greater than the 2008 GDP.  Good news—correct?


 These data would lead you to believe that the U.S. economy is not only back from the recession, but that it also has made up all lost ground—even after adjusting for inflation.  In reality, however, that is not the case.  Take for example, an individual that makes $100,000 per year but spends $110,000 per year.  How can they do this?  By borrowing the $10,000.  Is the $110,000 the true income of that individual or their actual productivity?  Not at all.  In reality this individual is implicitly giving up future consumption for current benefits.  So now let’s look at how GDP is calculated.

GDP is defined as:

GPD = Consumption + Investments + Government Spending + Exports – Imports

Thus, in the previous table, Government spending includes the deficits incurred in that year.  So what would GDP have been had we not run deficits in each of the past four years?   The following table is based on the previous, but in each year GDP is reduced by the actual deficit incurred by the U.S. government.  Again, following economic tradition on government statistics, the deficit numbers for inflation adjustment purposes are stated in 2005 dollars to be consistent with the real GDP data, adjusted by using the GDP Implicit Price Deflator.


 After reducing the GDP by the borrowed amounts (the deficit—which is financed by selling U.S. Treasury obligations), both the real and nominal change in GDP declined from 2008 to 2011.   Real GDP is even more constricted.  That is explained by inflation, which from 2008 to 2011 was a reported 3.9 percent. 

Since Per Capita GDP is a recognized measure of wealth, and our population has grown in this four-year period, that economic contraction is even greater.

The last table shows the real and nominal per capita GDP for both pre- and post-deficit considerations.  If you ignore inflation and the increased debt (via the deficit), then 2011 per capita GDP  is 3.11 percent greater than in 2008.  If, however, inflation is considered, or if you subtract the increased spending supported exclusively by debt in the GDP, per capita GDP declined.


 The bottom line is that the economy is not performing as well as you might think.  The U.S. is giving up future consumption for benefits today.  If the deficit was an investment in an asset (like borrowing money to buy a cash-flow positive real estate investment), then you could argue that current borrowing would enhance future wealth and ultimately consumption.  Unfortunately, I see the current deficit as merely living beyond our means.  Just like the straw person in the previous example earning $100,000 per year, spending $110,000 and increasing their debt and obligations by $10,000, they are trading future benefits for current consumption. 

The economy has not recovered, and without jobs, that recovery is pushed further to the future. 



  1. Ken Brand

    Thanks for the simple explanation. Cheers.

  2. Ken Brand

    Thanks for the simple explanation. Cheers.

  3. Phil Colling

    Excellent point. Unfortunately there are still many “economists” who believe in the Keynesian tooth fairy and don’t realize that deficits, like all borrowing, must eventually be paid back.

  4. Phil Colling

    Excellent point. Unfortunately there are still many “economists” who believe in the Keynesian tooth fairy and don’t realize that deficits, like all borrowing, must eventually be paid back.

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