A Reasonable Argument Showing How We Are Poorer Than We Think As A Country
The following Fortune article makes some interesting claims about the US economy:
Accordingly, Arnott takes little solace in the observation that inflation-adjusted, per capita GDP has recovered to within just a few percent of its 2007 peak. While that statistic suggests the economy is recovering steadily, if a little less quickly than we’d like, Arnott contends that most of the GDP gains we have seen since 1998 are attributable to debt-financed spending, rather than real wealth creation.
We are, in a word, considerably poorer than we imagine – something politicians of all stripes should, but probably won’t, consider as they grapple with our massive deficit.
“GDP that stems from new debt — mainly deficit spending — is phony: it is debt-financed consumption, not prosperity,” Arnott writes. “Net of deficit spending, our prosperity is nearly unchanged from 1998, 13 years ago.”
The problem with so many of the “official numbers” of our economy are that they are miserably flawed in how they calculate what they’re supposedly calculating. I’ve discussed the ridiculous way the unemployment rate is calculated many times here. GDP is no different as stated by this author.
He goes on to give some suggestions on how the calculation could be improved:
One way to look at it is to strip out deficit-financed consumption – a method that leaves us with a result Arnott tabs structural GDP. Alternatively you can eliminate the government spending component of GDP, which yields what he calls private sector GDP.
Either way, Arnott estimates, true, wealth-generating U.S. output is at 1998 levels.
While the solution to that problem surely lies in more responsible policy – lower spending, a less ridiculous tax code — Arnott says it’s imperative we start using more meaningful economic statistics, lest politicians miss the message S&P tried to send this week.
If we continue to focus on GDP, while ignoring (and even facilitating) the decay of our Structural GDP and our Private Sector GDP, we’ll continue to borrow and spend, mortgaging our nation’s future. The worst case result could include the collapse of the purchasing power of the dollar, the demise of the dollar as the world’s reserve currency, the dismantling of the middle class, and a flight of global capital away from dollar-based stocks and bonds.
Even Democrats and Republicans can probably agree, with only a few hundred pages of riders and stipulations, that that is an outcome best avoided.