I was momentarily taken aback when I read the following bit (in bold) from RDQ Economics:
The private economy continues to expand at a solid pace as manufactured output growth averaged 5.2% over the last two quarters, and private-sector job creation has averaged 202,000 per month. For the year as a whole, we are projecting 2½% real GDP growth and, with the share of real government spending in real GDP at a recorded low, we believe much of the measured fiscal ‘drag’ is behind us and we expect the stronger private-sector growth rate to show through in the overall GDP data over the balance of the year.
Wait, what? Is it true that the “share of real government spending in real GDP” is at a “recorded low?”
Well, as the above chart shows, it is true. Real GDP, you might recall from high-school econ class, is Government + Investment + Consumption + Net exports.
Now the government part is actually “Real Government Consumption Expenditures & Gross Investment.” It includes federal, state, and local government spending. On the federal side, you can think of it as discretionary spending. Government buying stuff.
But transfer payments are a different breed of cat. Federal bookkeepers describe transfer payments as “income payments to persons for whom no current services are performed. They are payments by government and business to individuals and nonprofit institutions.”
But should, say, Medicare and Medicaid payments, be counted as personal consumption (C) or government consumption (G)? Garret Jones argues for the latter:
Here’s one big area where I think we should change what we call one type of government spending: Medicare and Medicaid. Currently, these types of spending are counted as transfer payments and so when we measure GDP they show up in C, consumer purchases. I think they should show up in G, government purchases. These medical purchases are so tightly controlled by the government that doctors–oops, “medical service providers”–have become and should be considered government contractors just like defense contractors or construction firms.
Indeed, here is what really goes into the personal consumption category:
This is why economist Michael Mandel argues that the rule of thumb that says the consumer makes up 70% of the economy is misleading:
In fact, by my very rough calculations, the money that people actually pull out of their paychecks and bank accounts to pay for domestically-produced goods and services drives about 40% of economic activity in this country. That’s still large—but the U.S. is nowhere near as dependent on consumer spending as people think.
Total federal outlays are currently around 23% of GDP, several points above the post-WWII historical average, though down from a recent peak of over 25% in 2009. Discretionary spending is falling, though transfer payments and entitlements are rising. So there is some “fiscal drag” as economists would term it, though government spending overall is atypically high.