GDP: The Nation's Report Card

Why do I care about the GDP?

As my blog readers have noticed, from time to time I have railed about the dangers of runaway government spending. I am not an isolationist. I am a moderate. I believe that debt - in moderation where there is the ability to repay - is a sound business strategy. This strategy works in government as well as business.

The problem arises when the strategy is abused. There are some telling signs that our friends in Washington are heading past moderation. Economists consider the Gross Domestic Product (GDP) and its relationship to other countries’ GDPs to be our “economic report card”. In its simplest terms, the GDP measures the output of a country’s goods and services. In the past, the United States raced ahead of the world in GDP. Relative to the rest of the world, we enjoyed lower interest rates, greater purchasing power, and lower costs of goods and services.

Recent report cards haven’t been so good. The U.S. has fallen behind both Japan and Germany in GDP. What is most interesting is that both Japan and Germany have experienced deeper drops in GDP than the U.S. So what does this really mean?

First, it is a not so subtle reminder that we live and operate in a global market place. This global market affects the costs of many the products that we use in our daily lives. The computer that this blog is written on is “Made in USA”. Well, sort of. The chips are engineered and created in the U.S. but are manufactured overseas. The boards and drives are created in the U.S. but are manufactured overseas. It is “Made in USA” only because HP is located in the U.S. Most of the products that we use in our daily lives follow similar paths. The strength of the dollar is tied directly to the GDP. This affects our purchasing power and ultimately the end cost (consumer cost) to us.

Second, the GDP affects our cost of money. The U.S. is currently the recipient of billions of dollars in overseas investment capital. These overseas countries and investors buy the bonds and money instruments that the US Government issues to run the day to day operations of our government. As the strength of the GDP declines versus the rest of the industrial world, the value of the dollar decreases. As the value of the dollar declines, the desirability of U.S. money funds decreases. When U.S. money funds become less desirable, the government is forced to pay higher interest rates to attract investors.

Why is this so important to your small business? Even the smallest “mom and pop” businesses are connected somewhere to companies that are caught in the global marketplace. Let’s say for example that you run a corner Taco Stand. Your suppliers are Sysco Foods, H.E.B., Wal-Mart, etc. All of these giants purchase their products in a global market. No matter how small you may think you are, you are never outside of the “global market place”. The GDP report card affects you.

Now let me apply this thought process to the US government. The government has a relatively fixed amount of revenues annually. If expenses exceed revenues (called deficit spending), the government goes to the market and borrows money. When the dollar is weak, the U.S. government must pay a higher interest rate. Since revenues are fixed, the increased cost of debt service (interest) leaves less money to fund other programs. If you can’t cut costs, what do you have to do? Raise revenue – and to a government, that means increasing taxes on its citizenry.

Think about this. In 2000, the amount of our GDP needed to pay the interest on the nation’s debt was 2%. In 2010 it is expected to be a similar amount. Under current revenue and expenditure rates, the 2020 rate is projected to increase to 3%. By 2050, the rate is expected to be 5%. These are huge increases when you consider that we are talking about interest on trillions of dollars in debt.

In the long run, we have to manage our debt – both in our personal lives and in our government.

--Steve Cook is managing shareholder for cook and Associates, PLLC a CPA firm with offices located in San Antonio and San Marcos, Texas.