Last week, the Bureau of Economic Analysis reported that in the second quarter of 2011 total GDP (annualized production of all goods and services in the economy) totaled $15 trillion. The Congressional Budget Office, however, estimates that our economic potential is nearly $900 billion higher. That is, national income is some 5.6 percent lower than it might otherwise be—to the tune of $73.5 billion per month— simply because we are on the whole working less.
Now, this is not in and of itself a bad thing. As rich as our country is these days, we are free to make the social choice to work less and turn our attention to other matters. We could use a shorter workday, a shorter workweek, and more vacation days. This would mean less income as a country, but more time to enjoy it.
Unfortunately, we have not made the social choice to trade income for leisure—rather, we have chosen to give a few million workers a whole lot of “time off” in the form of massive unemployment. For the unemployed, this is an exceptionally painful choice. It doesn’t have to be this way. For example, we could widely expand work-sharing programs throughout the country.
So long as this is our choice, however-- that some arbitrary millions must be “on leave” and without wages—then it is our responsibility to make it up to them. That means as a start we must provide generous unemployment benefits and fulfill our promise of retirement security. Obviously, this price of not sharing will be an indefinite burden on those who work.
Perhaps we don’t like that, either. The next option would be...
... to get the economy back up to speed. We clearly have the capacity to employ millions more workers, but the problem is one of demand. Until people want to buy more goods and services, there will be no reason to produce more goods and services, and there will therefore be no reason for managers to pay more people to work. The unemployed will find jobs when the people with incomes spend.
And households aren’t going to spend so long as they are unemployed, underwater in their mortgages, and have nearly no retirement savings. If business is not spending because households are not spending, then it falls to the government to pick up the slack. To some extent, government can help by explicitly cutting taxes or simply sending people checks. This provides some relief to households, but their savings needs are great. Only the most cash-strapped families will spend that money on goods and services. The government could provide relief for homeowners—notably those victimized by fraudulent lenders—but such progress has been glacially slow.
Obviously, the most effective way for the government to increase purchases of goods and services is for the government to increase its purchases of goods and services.
How has the government fared in this regard? Friday, BEA updated its numbers on the American Recovery and Reinvestment Act of 2009 ( i.e., the Obama “Stimulus.”) Through March 31, 2011, there have been $373.6 billion in ARRA outlays. Of these outlays, $56.6 billion included transfers to states and new homebuyers. Another $27.5 billion went to government consumption of goods and services and another $7.0 billion to investment. The remaining outlays were paid out as transfers and subsidies, and ARRA has provided another $181 billion in tax benefits (not including the annual extension of AMT relief.)
Consequently, government stimulus on goods and services (the spending which directly increases GDP) has totaled less than $92 billion over more than two years. By comparison, total GDP from January 2009 through March 2011 came to $32,182 billion. So direct economic stimulus has come to less than 0.3 percent of GDP. This $92 billion must count as income elsewhere, so if these government expenditures induced the private sector to spend an equal amount, then we can very optimistically say that government spending on goods and services increased GDP over this time by something less than 0.6 percent.
Let’s say that again. The economy is now running about 5.6 percent below its potential, and the government’s direct impact has averaged a mere 0.3 percentage points.