From peak to trough during this recession, the US economy lost about 3.8% of GDP – or roughly $560 billion in real output. This is generally considered a “national emergency” by economists like Brad DeLong. The economy has since gained a little of that loss back.
To put this in perspective, consider that federal government tax revenues represent about $2.5 trillion each and every year. For argument’s sake let us consider that every single last penny of those revenues are wisely spent, and produce even a dollar-for-dollar amount of value for taxpayers (stop laughing and keep reading). This is as conservative an estimate I can get on the impact of government on the economy. The amount of total government extraction is probably closer to $6 trillion, and a generous estimate of what value we get from those expenditures is half of that (in my view it is much less … to see this, ask yourself, if you were promised that no one else would free-ride and everyone else would contribute, how much money would you pay to have a company provide the same exact quantity and quality of service that the government is currently providing us? Right.)
Conventional estimates of the “dead weight loss” of taxation in the US (I believe this is from the income tax, but I understand the other taxes the government levies to be even more distortionary, so again this is a conservative estimate). This “dead weight loss” simply means economic activity that never materializes because the sand thrown in the wheels due to the tax (distorted incentives). At 30% of $2.5 trillion, that represents a loss of GDP on the order of $750 billion each and every single year by virtue of the government merely existing.
And where are the government polyannas screaming about this national emergency that is inflicted upon us year after year after year (of course all in the name of economic efficiency and social justice). To put this in perspective – the distortions created by our tax system cause the US to lose an amount of economic activity the size of Sweden and Denmark combined and this happens each and every year. Contrast this to the $560 billion loss due to the most severe contraction since the Great Depression – which has occurred over the course of nearly two years (so approximately $300 billion lost per year) and comes around only once or twice every decade.
If the socialists in this country think the welfare states of Sweden and Denmark are so great -by simply reducing the federal tax and spending we do, we could recreate the value they create every single year – and this is on top of the other $13 trillion of value we generate each and every year.
So what exactly is the national emergency?