What is the economy?

Gross Domestic Product, or GDP, is the measure of our economy. Whenever you hear people talking about the size of the economy, growing the economy, the economy shrinking, they’re talking about GDP. There are a few different ways of determining GDP, but they all essentially amount to “all money spent domestically.” If you pay for something– food, a new car, babysitting– that’s part of GDP. If you get paid for something– your salary, selling a house– that’s part of GDP.

Deficit spending is money that the government borrows and then spends. Money the government borrows is, generally, not part of GDP. It’s money that would have gone into savings, investment (financial products are not counted part of GDP), or comes from outside the country. The government then spends that money, at which point it becomes part of GDP.

So there is a one to one relationship: for every dollar that we reduce deficit spending, we reduce GDP by one dollar. Every dollar we borrow and then spend is also added to GDP for that year. So when the Romney campaign says “balance the budget, grow the economy” they are literally saying “shrink the economy, grow the economy.”

That doesn’t mean that balancing the budget isn’t important or worthwhile. It absolutely is. It also doesn’t mean that the two are mutually exclusive. We can find ways to reduce the deficit that have positive side effects or minimal effect on the economy, and we can find ways to grow the economy that have minimal effect on the deficit. This is why Democrats favor increasing taxes on the wealthy, because most of that new tax revenue will come out of investment rather than GDP. But balancing the budget and improving the economy are goals at odds with each other, and for the most part actions that we take to solve each problem will make the other more difficult.

The other important thing to be aware of when considering efforts to balance the budget is that a shrinking economy makes for a larger deficit. We saw that very clearly over the course of the recession as lower tax revenue and an increased need for government services caused increases in the deficit.

But conservative economists still maintain that cutting spending is the best way to recover from the recession we’re in. That is a position that the International Monetary Fund (IMF) recommended early in the crisis. They have recently released a paper explaining that countries that took that advice and made deficit reduction a priority have had worse recoveries than the ones who didn’t. It’s a very technical document, so I’ll quote this brief summary of the relevant section by Paul Krugman.

This report is a grim and disturbing document, telling us that the world economy is doing significantly worse than expected, with rising risks of global recession. But the report isn’t just downbeat; it contains a careful analysis of the reasons things are going so badly. And what this analysis concludes is that a disproportionate share of the bad news is coming from countries pursuing the kind of austerity policies Republicans want to impose on America.

O.K., it doesn’t say that in so many words. What the report actually says is: “Activity over the past few years has disappointed more in economies with more aggressive fiscal consolidation plans.” But that amounts to the same thing.

The point is: there are logical, academic, and practical reasons to believe that efforts to balance the budget will harm the economy. Romney’s economic plan rejects this evidence, not based on alternate evidence, but on ideology.


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