Answer to Question #42954 in Economics for bobby

Question

What caused the GDP drop in 2010 for the USA?

Answer 1

America’s economy has not shrunk since Q2 of 2009. Yet, if the Congressional Budget Office’s estimates of just 1.4% real GDP growth this year proves true, America will have experienced its worst four consecutive growth years of GDP in the Bureau of Economic Analysis’ data going back to 1930. Even if 2008 (-0.3%) and 2009’s (-3.1%) negative annual GDP percentages are dropped (something undone for the other periods) and only the 2010-13 period is averaged, the result is just 1.95% – still over a full percentage point below the previous decade’s.

That there was heady growth in the two decades following WWII makes sense. The U.S. had emerged as the world’s lone economic Super Power, with the rest of the world’s major economies either shattered by war or shuttered by communism. To understand America’s economic advantage, consider that of the IMF’s top ten 2012 national economies, only Brazil (#7)
and India (#10) – accounting for just a combined 6.1% of today’s global GDP – were relatively untouched by WWII.
As shattered economies recovered, and shuttered economies opened, with communism’s fall across much of the world, the global economic gap began to close. America’s economic growth slipped gradually but consistently – from 3.18% to 2.99% – over four decades.

There has been a concerted government effort to compensate for the recentcrisis – through tax cuts, “stimulative” spending and historically low interest rates. It is therefore natural to look at government actions over the last seven decades.

Interestingly, taxes as a percentage of GDP do not show the great discrepancy that might be expected. In 1948, federal revenue equaled 16.2% of GDP. Under CBO’s estimate, taxes will equal 16.9% of GDP this year. Nor have they been high during the post-crisis period: 15.4% in 2011, 15.1% in 2010 and 2009, and 17.6% in 2008. All of these are below
CBO’s calculated 40-year average of roughly 17.9%.

However, federal spending has been an entirely different story. In1948, federal outlays equaled 11.6% of GDP. CBO estimates that they will equal 22.2% in 2013 – almost doubled. And they have been far higher of late: 22.8% in 2012, 24.1% in 2011 and 2010, 25.2% in 2009, and 20.8% in 2008. In 2007, prior to the crisis, they were 19.7% and CBO calculates their 40-year average at 21% – all far higher than their 1948 level.

It is quite clear that America’s economy has not only been “stimulated” by extraordinarily high government spending in the crisis and post-crisis period, but has become increasingly affected by high government spending over the longer-term too.
At the same time government spending has increased as a share of the economy, private sector activity has necessarily
declined in proportion. While this has been obviously true during the current post-crisis period, the longer-term effect, while more gradual, is equally clear.