The United States is in much better shape than Greece, a failing country which has defaulted on its debt. Right? The numbers tell us something different.
In my previous discussion, I addressed Greece’s financials and what they mean. Now I’m going to compare Greece to the United States and show that the United States may, in many ways, be worse off than Greece.
In order to understand why this is the case, let’s ditch the usual method of making comparisons between countries, which is to divide by nominal GDP and instead let’s use full production capacity. Why use this figure instead? The answer is, a recession or a bubble can cause a figure, adjusted by GDP, to rise or fall when there really is no meaning behind that rise or fall. For instance, consider a nominal deficit of $500B and GDP of $15T. The deficit, as a percentage of GDP would be 3.33% Now let’s say there’s a bubble and GDP rises to $18T. The new deficit as a percentage of GDP would only be 2.78% Wow! Government just became more fiscally responsible, right? Obviously not. Any gains made from the economic boom will be short lived and will be lost during when the bubble finally bursts.
For this reason, it may be more reasonable to use full production capacity: Gross Domestic Full Production Capacity (GDFPC).
Greece
I won’t be using the same figures that I used in the previous article, since those spending figures appear to be central spending figures rather than total government expenditures, although for Greece, the difference seems minimal. Total government expenditures in Greece, as of 2014, were roughly €88.37B [1] while GDP was €241.72B. So expenditures came to 36.6% of GDP.
Now let’s look at production capacity. In the last article, I addressed that Greece is currently producing far below capacity. Assuming that 2010’s GDP (€329.86B) was full capacity (GDFPC), Greece’s total government expenditures actually amount to only 26.8% of its full production capacity.
What about the total deficit? Revenue in 2014 came to roughly €82.02B creating a deficit of €6.35B or about 2.63% of GDP. But what would happen to that deficit if Greece returned to full production? Assuming an even distribution of an increase in taxable revenue, the 36.6% increase in GDP would bring total revenue to €112B resulting in a surplus of €23.6B Or in other words, 7.14% of GDFPC.
And finally we can talk about the debt, which came to €317B in 2014, or 131% of GDP. However, that’s “only” 96.1% of GDFPC.
United States
First, it’s important to note that the United States is producing more than it has since, at least 1960. In other words, we can assume that it’s near full production right now. Total government spending in the United States, as of 2014, was roughly $6T [2]. Meanwhile, GDP in 2014 was approximately $17.4T or roughly 34.48% of GDP. Since we can assume that the United States is already at full production, this is also the amount of government spending as a percentage of full production capacity.
Now let’s consider the US deficit. Total revenue, in 2014, came to roughly $5.8T resulting in a deficit of $200B or about 1.12% of GDP/GDFPC. Luckily for the federal government, states seem to make up some of the difference and help balance the budget, otherwise the figures would be a bit different.
And just as with Greece, let’s consider the debt. Total US government debt adds to $20.8T. This equates to 120% of GDP/GDFPC. That’s less than the debt as a percentage of GDP, but a lot more as a percentage of GDFPC.
So how do the two nations compare? Well, in terms of current GDP, the United States is obviously far better off. However, in terms of GDFPC, Greece actually has the upper hand.
Further Reading