Is the U.S. growing, or just issuing debt?

The collective output of the U.S. has increased modestly in the most recent quarter, as Reuters reports:

Gross domestic product expanded at a 2 percent annual rate, the Commerce Department said on Friday in its first estimate of the third quarter, a pick up from the second quarter’s 1.3 percent pace.

This is positive news, but did the economy really expand? Or is it possible that the government just issued more debt that flowed into the economy and was picked up as “growth”? More reporting from Reuters:

The report was a bit better than economists had expected, in part because of a surge in government defense spending that was not expected to last. Defense spending rose at its fastest pace in three years, combining with the rise in household consumption and a jump in home building to strengthen domestic demand.

You can see in the chart above that the amount of U.S. debt issuance far exceeds the dollar amount of growth for the national economy. Part of the debt issuance is used to repay old bonds that reach maturity and must be repaid. According to the Treasury Borrowing Advisory Committee, which is chaired by Matthew Zames of JPMorgan, $276 billion of third quarter 2012 debt issuance was “new money,” beyond what was needed to pay off old bonds. The real dollar growth in the GDP was $190 billion, much less than the amount of “new money” debt issuance. Treasury bond issuance seems to have financed all the growth in GDP.

Republican governors want control of Medicaid

Thirty-one Republican governors have petitioned the Congressional supercommittee to devolve control of Medicaid to the states and away from Washington where it is currently supervised.  Medicaid is the government health insurance program which covers low-income earners and the elderly committed to nursing homes. Unlike other federal social entitlements, states pay a portion of the costs of the Medicaid program. The Republican governors claim that the federal government constrains their ability to develop more flexible and effective coverage. In essence Republican governors are asking that the program be transformed into a block grant rather than a proscribed benefit program. From Bloomberg:

Medicaid, the U.S. health program for the poor, should be overhauled to limit spending and let states design programs without federal interference, Republican governors said.

“The United States literally cannot afford to have the status quo on Medicaid,” said Mississippi Governor Haley Barbour, a Republican who has called for overhauling the program by ending federal oversight. “We should not have to come to Washington on bended knee and kowtow for waivers to do these kinds of things.”

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