That’s “You Ask, I Answer”…a regular feature here. BTW, we recently made a video version of this feature that I’ll try to post next week. Here are a few Q&As and I may add more later, time permitting.
Q: GDP is back to the pre-recession level but its composition surely has changed. Are we still collecting 15 percent of GDP in taxes?
A: The composition of GDP typically changes somewhat in a downturn as some components, like investment, are particularly cyclical. The table below shows the shares of consumption, investment, gov’t, and net exports (Nx) for the peak quarter (2007q4) and the most recent quarter. The decline in investment as a share of GDP largely reflects the housing bust (decline in residential investment).
The 15% of revenues—probably up a bit now—is largely a function of the weak economy, though the Bush tax cuts play a role here as well, probably sucking 2-3 percent off of that revenue share.
Q: You say in this post: ‘We should be applying fiscal policy to generate growth.’ I agree in general principal with what you are saying here. But what do you think about those who argue that growth is basically gone, and we are running up against our resource limits, and we can’t realistically grow much more?
A: I say fuggedaboutit…with more than 20 million people un- or unemployed and lots of slack in most sectors of the economy—manufacturing, construction, services—there’s lots of room to grow without straining resource limits. Take a look at this figure from my CBPP pal Chad Stone on the gap between actual and potential GDP (the latter being how large the economy would be absent the Great Recession)
Now, this is a cyclical argument having everything to do with the downturn. But your question may be more structural, i.e., if we were fully utilizing the resources available to us, would we be up against resource limits?
Well, humanity has had a habit of finding new resources. I believe, for example, we’re approaching a limit on fossil fuel resources, but not on renewables. Re food and water—hmmm—I’ve read stuff that makes me nervous about those, and they’re kind of important. And it’s not like we’re being smart custodians of such resources.