October 28th, 2011 at 6:58 pm

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.


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3 comments in reply to "YAIA"

  1. John M says:

    I believe that your second questioner was referring to limits on resources such as clean water and fossil fuel, as well as food production. I’ve encountered too many economists overly complacent about such issues — the cornucopian, Julian Simon types. The structural issue is huge at best. We have literally tens of millions of cars in the USA alone, practically all of which run on gasoline.

    I believe that the future of energy is electrical, regardless of the actual source (wind, solar, nuclear fission, fusion, others). Liquid hydrogen may have a niche as an alternative carrier for perhaps aircraft and maybe even automobiles — bearing in mind that its a carrier, not a source. In fact, solar and wind power is favorable for market solutions — ranging from a single rooftop to huge solar and wind farms — as long as there is an electrical grid to connect to.

    The Obama Administration had (and still has) a wonderful opportunity to work to upgrade our grid and spread it throughout even the most inaccessible areas, and create jobs in the process. There’s plenty of wind, and plenty of sunlight.

    Apart from energy, population growth is a critical issue. Any kind of conservation or increase in efficiency is guaranteed to be wiped out by population growth. Find a way to reduce usage of resources by 20%? Increase population by 25%, and we’re back to before. Our population may be several times the carrying capacity of the world even now.

  2. pjr says:

    Regarding the first question, the reduced taxes as a percentage of GDP, although GDP is back to the 2007 level, cannot be attributed to the Bush tax cuts that existed in 2007. Individual and corporate income taxes are about 15 percent of GDP rather than 2007’s 18.5 percent because of Obama’s tax cuts or some other changes that are unclear to me. For example, the payroll tax “holiday” would account for some of this, though clearly not all. Perhaps income is even more concentrated post-recession in forms other than wages to the middle class (where payroll+income tax rates are relatively high). Also, effective corporate income tax rates may be lower today for some reason beyond Obama’s business tax cuts.

  3. Michael says:

    @Jared: you didn’t engage the question. They weren’t talking about labor limits, they were talking about resource limits.