Larry Burchall: GDP and Economics 101

December 4, 2010

business report(Written by Larry Burchall) The headlines scream GDP DOWN 5.8%. To most people that’s gobbledegook – until the GDP stuff kicks them in the backside.

Then, too late, most people will wake up and wonder WTFH? Here’s a clear and simple explanation – Economics 001 – that will let you see the ‘kick-in-the-backside’ that is already on its way to that part of your anatomy.

First, GDP is a figure that economists created so they could ensure and compare changes in an economy. Basically, it’s a measure of all the spending that goes on in a whole national economy. It has been around since the 1930’s.

Take the Dept of Statistic’s just-released GDP figures, look at ‘GDP per Capita’, and remember that like your blood pressure numbers, it is just a measurement. In blood pressure up is bad, down – not too far down – is good. GDP is the reverse. UP is good. DOWN is bad.

In 2008, Bermuda’s GDP was $6,067,898,000. A year later, in 2009, Bermuda’s GDP was $5,715,300,000. That was a 5.8 percent DROP. A drop in GDP is BAD!

Look at GDP per capita. In 2008 it was $92,693 (per person). In 2009, it was $86,875 (per person). That’s a drop. You now know that is BAD. That difference means that GDP per person was $5,818 LESS in 2009 than the year before in 2008. That too, is bad. But you know that.

On balance, then, in 2009, the GDP measurement tells us that there was less money spent and people had less money generally. Now that’s not an exact and precise statement of how much money is or was actually in or went through your pocket. Instead it is a measurement of what 62,000 people and businesses and tourists (but drug-dealers are not counted) were doing with their money.

So in 2009, a helluva lot less spending was going on in the private sector. The DoS Report shows that without exception, every segment of the private sector saw a reduction in economic activity.

Whoa! Different story in Government. In Government, there was a 3.3 percent INCREASE in spending. However, the DoS Report also shows that there was only a teeny-weeny increase in Taxes and Duties on imports. That increase was 0.62 percent. That means that for every ONE cent more that came in from Taxes and Duties, Government spent an additional FIVE cents.

Clearly, the DoS measurement is showing us and telling us that while Government income was not rising (LESS than ONE percent); Government spending was rocketing up (UP over FIVE times as much as the teeny-weeny increase in activity).

Since Government only ever gets it money from taxes and fees from the private sector (60,000+ people and businesses and tourists – but not drug-dealers), this measurement is telling us that Government was taking more out of the national kitty than was coming into the national kitty.

Two ways governments can do that. Way number one is to simply take out faster than what’s coming in – which empties the kitty real fast and puts everybody out on the streets scratching for pennies and peanuts. And leads to bloody revolutions.

Or, Government can borrow like crazy and put borrowed money into the kitty which artificially keeps the kitty full (some people call this Stimulus). This too, eventually stops happening because Debt servicing costs begin to rise and rapidly reduces the amount that finally reaches the kitty. And this, too, leads to bloody revolutions, just happens in slo-mo.

Unlike the USA, Bermuda cannot exercise the third option and just print more dollars. Well, we could if we got a neat little machine that ran off (US)$100 bills at 50,000 a day. However, it’s likely that a few guys (that guy in the Oval Office for one) in the USA would be unhappy with that and just might complain to the United Nations (or just drop in the 101st Airborne). That would also lead to a bloody mess.

With that quick education in Economics 001, here’s the story behind the headlines, and a view of the kick-in-the-arse that’s coming.

“Bermuda Government income is down, because national economic activity is down; but Government spending is still up. Government has not yet cut back on spending in any material way, so Government is taking money out of the kitty faster than money is going into the kitty.

Government must either cut back on its spending or borrow more money. However, Government borrowing rose precipitately between 2004 and 2010, going from $130 million to $1,218 million in those six years; and Government’s annual Debt servicing costs are now over $82,000,000 a year. This indicates that the cost of borrowing even more money will become large and even larger.

From all the current national economic indicators, it is clear that GDP for 2010 is unlikely to rise by the one percent that the Minister of Finance, Paula Cox, predicted in the February Budget Statement. In fact, all the national economic indicators are pointing a further drop in GDP in 2010.

If, as is increasingly likely, this drop has already happened, then the Government’s income will fall – has already fallen – even further because economic activity in the already shrunken private sector will have, and already has, fallen off even more.

Comparing 2009’s GDP with the past, The DoS report shows that GDP in 2009 was less than GDP in 2007. It is likely, given 2010′s economic indicators, that GDP for 2010 will be even lower and could approach that of 2006.

Ultimately, the Bermuda Government’s spending must adjust to the economic activity that is actually taking place in Bermuda’s private sector. The only other solution is to increase the footprint presence of International Business – or create a brand new foreign exchange earning process that operates out of Bermuda – and that starts generating foreign exchange inome tomorrow.”

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  1. Veebyes says:

    Thankyou Larry for putting something very complicated into terms that those of us who can at least & comprehend what we read, will understand.

    You really don’t need to be an economist to get it.

    Now, how do you get the other 52% Kool Aid drinking voting population, a large number of them products of an education system that has graduated them unable to read, to understand the mess the Brown/Cox Government has gotten Bermuda in & stop drinking the Kool Aid?

  2. Hmm says:

    Larry…another great Article…that said, you need to stop referring to the PLP as a government. They are not. The PLP is now a Monarchy and that is why we are in the mess we are in…and why the international community now views us as unstable. The king is dead, long live the Queen!!

  3. Rockfish#2 says:

    A simple and straight foward explanation!
    Trouble is, many people will ignore it until they feel the pain, which is inevitable.

  4. Mr Burchall has long been a voice crying out to be heard. His tanacity regarding this and other issues facing Bermuda has been duly noted! We as Bermudians have to face the reality of our current economic situation and our government needs to start being forthright about our current situation. There has been way too much spin and pie in the sky economic soundbites thrown our way. The reality is that people are hurting and it is going to get a lot worse before it gets better. And guess which Bermudian demographic will bear the brunt of this recession? Need I say more?!!

    Wake up from ya sleep and slumber Bermuda!!!

  5. Common sense says:

    Now all we have to do is to wait for the Honourable Senator, Laverne Furbert to explain to us all how Larry has got it all wrong (she says that about many articles he ever writes) and tell us how good it is for Bermuda and the economy that our GDP has dropped so dramatically. Come on Laverne. We need to hear the other side of the story! Don’t let Larry get away with telling us like it is. Dr. Brown would never have let us in such a mess – would he?

    • Yup says:

      Yeah…please don’t disappoint us…bring it on…the Jerry Springer re-runs are boring the hell out of me!!!!

  6. S Beach says:

    To assume that the people on the rock actually read any relevant news is the first error. Then to assume a connection to the important information given that will impact their future is the next error in judgment. How could this be true when I can still take two to three trips a year and spend hundreds to thousands of dollars on “stuff” that I “want”?

    These aren’t sheep… at least they know the grass is greener on the other side. These are ostrichs… with heads buried really deeply in the quicksand… cuz there’s no pulling them out.

  7. David E. Chapman says:

    The overall general economic health of Bermuda is an obvious extremely crucial determinant in the quality of lives that Bermudians as a collective people are able to lead. Hence, getting as many Bermudians as possible, regardless of education, wealth and socio-political factors, to reflect on Bermuda’s economic health is important. I applaud Bernews by way of Mr. Burchall for providing an opportunity to stimulate dialogue on these types of issues. I also agree that macro-economic assessments and the associated terminology that often accompanies these assessments can be complicated and Mr. Burchall’s efforts to dialogue on the topic on a more grassroots level accessible to the general public is laudable. Although I cannot but agree with Mr. Burchall’s concern with the economic picture that the recently released Bermuda Department of Statistics report has shown for 2009, I believe that parts of his analysis are somewhat misleading to the same public that may be able to benefit from these type of open access opinion pieces and the discussions that they promote.

    First, Mr. Burchall’s statement that GDP is “a measure of all the spending that goes on in a whole national economy” is too simplistic, especially in the context of Bermuda. The GDP figure is constructed by the accumulation of various economic output measures that, in the main include industries and sectors dependent on public spending, but also include production (growth) by industries achieving their growth by input coming from outside of Bermuda. By this I mean the profits of the various international business components that exist in Bermuda and that underpin Bermuda’s GDP at least for the past two decades. Before I am told “this is the same as saying spending in the economy” by the various bloggers that may comment on my contribution, I do recognise that any decline in international business company profits, and the associated services that benefit from these profits locally, will obviously impact local spending. However, I make the point only to state where I think Mr. Burchall’s analysis was misleading in that he does not “connect the dots” with the global economy. The effects of the global economic recession has undoubtedly been the main factor contributing to Bermuda’s negative GDP, not government mismanagement, specifically as a result of the connection between the key economic output measures and the key local industries such as international business, financial services as well as tourism (through decreased spending power by tourists) and even construction (through decreased spending power by international business on infrastructure as well as the knock on effect of the international recession on local’s spending power). This is made obvious in the Bermuda Department of Statistics report which highlights the decline in production in the sectors of international business, hotels and restaurants, construction and transportation. I think this is an important reality to be clear of, as in Bermuda’s highly politicised environment, locals are too often and too quick to place blame unfairly on the “government”, when actually it might be more productive to be square about the real solutions to our challenges. A quick look at the GDP figures of all the world’s major economies will also show negative “growth”, some as high as 5%. With this in mind and considering Bermuda’s reliance on international business, the local 2009 GDP figure is more accurately put into context. Although the local government is not perfect by any means (which one is?), and while I do agree that more austerity could have been practiced in “boom” times, these factors mentioned above were and still are mostly beyond the local government’s control.

    Mentioning austerity, which I believe is Mr. Burchall’s main point in regards to the role that local government has played, his view on government spending is also somewhat skewed. He neglects to discuss the connection between government spending as an economic output to the local economy and the economic input available to locals, especially those of the middle and lower economic strata. I am a full proponent of small government, promotion of competition, and compassionate austerity models by national governments. However, I am also well aware of the negative effects that major or too rapid reductions in government spending can also have on the economy, especially those in need of recovery. The UK is grappling with this challenge right now and most often in these cases, it is those without wealth that suffer the most. Any moves towards austerity then must be treated very delicately and sensibly or else those same persons that are crying out due to the economic indicators for 2009 will be gnashing their teeth at such measures to cope and prepare for these lean times.

    • Bottom Line says:

      News flash David!!…the readers of Bernews have ADD. Can you summarized that Tolstoy War & Peace?…otherwize me thinks you are wasting your time.

    • John Steele says:

      David,

      Great points. Your comments remind me of a question I’ve been meaning to ask – what is all this Government spending I’m hearing about, actually being spent on? I get the impression from the comments here that it’s all spent on champagne, iInternational junkets, empire building within government departments, servicing our debt.

      However, I suspect the truth is more nuanced. Could it be that the majority of government spending is on support of social services and other programs that not only keep the country running, but help those less fortunate than us?

      Can anyone point me to a source where I can see this broken down?

      Thanks,

      • Bottom Line says:

        No they can’t because the majority of govt spending is not on social programs. Also, owners of construction companies and politicians are not less fortunate than us. The PLP monarchy is now starting to fall apart. They can’t even maintain our high schools anymore.

        • John Steele says:

          I’ve been hearing this stuff about the PLP “falling apart” for years now, yet they keep getting reelected, yet they keep getting reelected, so they’re doing something right.

          I’ll ask again – what is government spending all our money on? Anyone know?

          • Bottom Line says:

            John…you’ll never get an answer to that till the next general election is over.

  8. Joe says:

    Great article but ruined by the comment “which Bermudian demographic will feel the brunt of it”, thereby insinuating race into the dynamic. Who has felt the brunt? perhpas the few thousand expats whose permits have already been canceled and who are already looking to start new lives elsewhere; perhaps Bermudian university graduates out looking for hard to find first time jobs; maybe retired Bermudians worried about their pensions and health insurance costs; maybe professional Bermudians with a new house and family worried about their tenant moving out and not not making mortgage; maybe that assistant working for an exempt company talking about outsourcing; maybe a construction worker who sees nothing on the horizon; or a self-employed truck driver; a house painter; a bookkeeper. I don’t see these people as belonging to one particular racial group. Get with the new Bermuda -this problem affects us all as Bermudians.

    • wondering says:

      It is a comment that inevitably will be noted – sometimes by racist Bermudians who can only survive on that premise and by others wo are making a simple point.

      The biggest fact is that Bermuda is predominantly a Afro-Bermudian, Black, Negroid, whatever the hell you wanna call it society.

      Years ago, the “white man” was the problem, now what is the problem? Bermuda must remember that we are only now JUST realizing that Bermuda IS NOT ANOTHER WORLD and have started to get our feet wet in the GLOBAL economy which has only affected us directly in the 1930s, 1980 (late) early 90s and now.

      Forget Black White Purple……Bermuda is for Bermudians and all those who come here to benefit the country and as a result are compensated.

      We need nationalistic attitudes as that is the ONLY way out of any rut…teamwork not divisiveness.

      We already know the demographic split (60% Black, 40% white or some nonsense like that)…..get over it and do the simple mathematics that all BERMUDIANS (including expats, naturalised persons and PRC holders)we will all suffer or progress together……….

  9. gms says:

    Sadly the real GDP number of -8.1% is the one to pay attention to. That number removes the effect of inflation which masks the effect of the decline by inflating the value of 2009 incomes over those of 2008.

    These are frightening numbers. But, come on, it’s nothing to worry about. I can see no reason to stop antagonizing the sector that contributes 85% of Bda’s income. We all know that if this sector dried up that tourism could easily sustain the high incomes that we have all become accustomed to. Thankfully the efforts of the government these past 12 years have completely resuscitated the formerly moribund tourism sector and raised back to the levels Bda enjoyed back in the heyday of the 60s and 70s.

    Wake up!

  10. Truth is killin' me says:

    When Bermies can’t take two and three shopping trips a year or take 2 cruises a year and crime is rampant (not far from it now) then you might see a grumble from the blind. Until then THE UBP DID IT…SO WHAT!!! (UNLTRA SYNICAL BTW)

  11. Rockfish#2 says:

    “A man whose stomach is full, seldom complains”

  12. Common sense says:

    Thanks to David Chapman for an excellent post which does help to counter-balance the bad news of our rather disastrous drop in GDP. There is no doubt that without a thriving International Business sector we are in dire trouble, but unfortunately, there are many in our community who naively believe that all we have to do is to send more expats home and fill their positions with locals. Premier Cox hopefully understands the vital role that International Business plays in our economy, and right now the whole country needs to pull together to do everything in our power to keep these companies in Bermuda – and that includes a re-think on the 6 year rule – because they are leaving much, much faster than they are arriving.

  13. Larry Burchall says:

    David,
    Thoughtful comments. One key point that you’ve not handled properly.

    The idea that the corporate profits of Bermuda’s Re-Insurers flow into the GDP calculation is incorrect. These are outside that measurement.

    What is counted are the goods and services – stationery, rent, employees pay, fees, housing allowances, licences, hotel rooms, restaurant bills, legal fees, accountancy fees, taxi rentals, etc… Their corporate profits are not included.

    This means that the Bermuda ‘footprint’ of the Re-Insurer is critical and a big Bermuda footprint adds to GDP. If a Re-Insurer downsizes its staff or outsources work or takes any other footprint reducing action, that will reduce the impact on GDP.

    Again, the corporate profits do not factor in.

    It’s the footprint that has reduced. This footprint reduction is what has helped GDP to fall.

    This Island has a unique and complex economy that is not too well understood.

    Larry

    • David E. Chapman says:

      Understood. I inquired from the Bermuda Department of Statistics just for confirmation and they confirmed that “For international businesses, we calculate their value added (GDP) using the Income approach. Value added (GDP) would be equal to the sum of wages and salaries paid to residents (including employee investment compensation), payroll tax and other taxes and licenses paid locally by international businesses. We only include local expenses and not overseas expenses.” This is generally in line with your clarifying description of “goods and services”.

      As you said, which was the thrust of my point, there is an important and direct relationship between the financial success of international business domiciled locally and “the Bermuda ‘footprint’” they leave economically. The importance of this relationship and its potential for helping to remediate the falling GDP was the key focus of Mr. George Hutchings’ statement last week in the RG. Again, I think key to my point was a careful consideration of this IB factor in relation to the economic downturn that many of these companies are facing as well as a very measured and thoughtful approach as the local government considers potential measures to cut its deficit spending, specifically a reduction in government spending, especially on capital projects.

      Again, I think many tend to immediately look for the all-to-used “government axe” when often the scope of Bermuda’s financial challenges go beyond some of the naiveties of local politics at times.

      Thank you for taking the time to reply and clarify.

  14. @ Joe. Actually I wasn’t referring to race when I made the comment in my earlier post. I was referring to the ‘Labor” demograhic that the government supposedly “represents”. Perhaps I should have been more specific.