Monday, 10 November 2008


Whenever governmental spending programmes are discussed we are subjected to a lot of figures that really don't mean very much to most of us, I know they don't mean much to me. If they talk of spending £1million I have some idea what they are talking about, I know which houses around my area of London have sold recently for that sum and I know it is roughly the salary of ten senior GPs. It is when they get to billions that things start to take on a somewhat surreal air because I have no easy way of comparing £1billion to anything I can identify with. To say it is 1,000 houses each costing £1million is of assistance although it is not easy to envisage 1,000 such houses in a row.

Yesterday I was reading one of my favourite blogs and a commenter suggested that Kyoto-type measures against carbon emissions should be adopted because it is better to be safe than sorry and the most it would cost would be "just a few percent of GDP". This stirred my curiosity. Because the commenter appeared to be from the USA I thought I would do a little light Wiki-ing on the subject of US GDP. The most recent figures I could find were for 2006 and they indicated GDP of $13.13trillion. That is: $13,130,000,000,000, an utterly incomprehensible number to me so I tried to relate it to average-ish American households. Taking $50,000 as the notional average annual income, 1% of the USA's GDP in 2006 equates to the total amount earned by 2,626,000 average American workers. That is roughly the population of Chicago, America's third largest city. But that does not mean 1% of GDP is everything earned by the people of Chicago each year because not all of them work, children, the retired, housewives and the unemployed do not come into the equation. If we assume one third of the people of Chicago are not in gainful employment, and make the same assumption about other cities, we have to add the working population of Philadelphia as well to find 2,626,000 working people. It's all very rough and ready, but on the assumptions I have made, spending 1% of US GDP is equivalent to the entire amount earned by the populations of the third and fifth most populous cities in the country.

If additional expenditure of 1% of GDP is to come out of income tax and the income tax rate averages 30% of income, we suddenly have to add the working population of New York City as well. 1% of GDP is all the income tax paid by the working populations of first, third and fifth most populous cities. Suddenly it starts to look like a very big number indeed. No longer are we considering a tiny thing like 1%, instead we are looking at all the income tax paid by three cities with a combined population of around 12million people.

When I pointed out that 1% was equivalent to all the money earned in one year by two-and-a-half million people on $50,000 each, the proponent of this spending sought to dismiss my approach. It was said it would only be 5,000 people if we used Luxembourg rather than the USA and that it would only be about $500 per person in the US itself. I'll leave Luxembourg aside because she was arguing for the spending to take place in America not in a tiny European Principality, and look at $500 per person instead. $500 per person means $2,000 for a family of four. Assuming, again, an average income of $50,000 and that one parent looks after the children that is an additional tax burden for that family of 4% of gross income. Now we get a better idea of just how significant 1% of GDP is, it might represent that family's annual holiday or the amount they save each year for future contingencies, or the amount they put towards a pension or health insurance, or the amount they spend on clothes for the children.

Reducing the figure to a sum per head actually increases our ability to comprehend just how large it is and how painful it would be for average people to bear that additional cost. It is also worth bearing in mind that I have made these rough calculations for 1% of GDP whereas the proposition put forward was that the spending she wishes to see would cost at most "a few percent of GDP". The very smallest number represented by "a few" is two (or three if you want to be picky and say two is a couple not a few), so the sum of $2,000 per family of four goes up to at least $4,000 - 8% of gross income.

Scary big numbers, very scary indeed.

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