Paraphrasing Thomas Paine: These are the times that try men's and women's souls ... especially if they're economists.
It's an economic law: population growth plus productivity growth equals GDP growth.
Well, the United States has the population growth, and for the past 20 years or so it's had the productivity growth. But GDP growth? Of late, that's been an empty chair at the party, as the United States remains in the grips of its worst recession in more than a generation.
U.S: In uncharted water
Further, although the 1.0% decline in Q2 GDP confirmed that the recession appears to be bottoming, economists are not jumping for joy, and investors can understand why. The three traditional engines of growth that the United States typically relies on to jump-start GDP -- consumer spending, housing, business investment -- remain in a slump, and it's an open question as to whether they will reappear as "factors of significance" capable of moving the GDP needle. And that's the main reason economists are concerned at this juncture of the current economic cycle: we're experiencing a record slump in demand, and so far it's prevented GDP from growing, despite population growth and productivity growth.
Over time, economists say GDP must increase, if a nation's population increases and its productivity does simultaneously. If they're correct, the U.S. recovery should start soon, like in Q3/Q4. On the other hand, the U.S. economy has never experienced structural changes like the ones its currently processing -- something that probably will work against GDP growth, at least in the initial stage of the recovery.
The above also underscores the need for the United States to identify/create new engines of growth: if the classic engines -- consumer spending, housing, business investment -- remain absent, the new engines will provide the fuel to "get this economy moving again," to quote President John F. Kennedy.
However, if the classic engines appear, the new engines will just add to growth, and job creation. That could cause the economy to begin to overheat -- grow at too fast a rate -- accompanied by an increase in inflation.
Rapid growth. Lots of new jobs leading to a rise in inflation. Oh, does the Fed wish it had such problems right now.
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Reader Comments (Page 1 of 1)
8-02-2009 @ 4:45PM
Iridium said...
You left out debt funded growth. As in the only way the economy grew over the past 15 years.
Productivity increased per worker only because each worker needed to do more at each job. There are many workers that do the job three workers used to do before. You also have to look at the level of productivity modern technology has added. There are manufacturing plants that have replaced hundreds of workers with robots. This does not add to consumer led GDP growth.
Thomas Paine could not have foreseen a future where population growth did not fuel economic growth due to having no need for the population. There is no need for a productive class because we have outsourced this to other countries and technology. What has resulted is nothing more than a consumption class. This consumption class can only exist based on access to credit. Because this class does not produce anything of value it has nothing to trade other than debt.
Look at what the past 20 years of population growth has given us. I don't think anyone can argue that the greatest level of population growth has centered on the lowest rung of the economic ladder. Through immigration and welfare we have transformed America. Low income families have been rewarded with higher levels of handouts if they have more children. It is now common for a low income minority woman to have three children by age 20. All of this population growth hinders GDP because the handouts have to be first taken from the productive areas of the economy in the form of higher taxation.
GDP growth fueled by debt can only go so far as well. Without an engine to lend debt you cannot use it to finance a consumption boom. Only the gentlemen's agreement between countries keeps the secret that the total off the books debt of the worlds banks far surpasses global GDP by a substantial margin. We have been funding debt generated growth for the past half century or more. However the acceleration of this only happened after the gold standard was abandoned. It was abandoned for that purpose. By unlinking currency from a fixed asset the central banks could print money to finance growth. As long as every country participated in the practice they were all in the same boat if the scam was ever revealed. The entire global economy would collapse and every government on Earth would be overthrown.
That is why there was a concentrated global effort to bail out the system last fall. The scam was in danger of being exposed and that is why the Fed will never be audited. The truth can not be known.
8-02-2009 @ 10:33PM
william lindblad said...
I bet that John Gresham could figure this out - too bad he is long dead. While this blog mentions Thomas Paine, it fails to consider that WE gave him the boot. Good old Tom was a real firebrand and his next stop was France. They had a revolution over there too, and he was a major contributor. Tom liked revolutions, but in this mess, would have been a babe in the woods. But I will give you this Joe, it sure is right out of star trek - "where none have gone before".
I guess you could put a variety of names on things, like "growth engines" or similar. The finance community put a variety of names on packaged (next to worthless)debt, managed to put the government between a rock and a hard place, and managed to get us poor taxpayers to bail the mess out. Between those on the hill and those running finance, we sure do have a world of problems. Iridium is correct. It is a debt funded society of consumption that produces little or nothing on a world scale. All one has to do is compare imports to exports to become a believer. Gone is the great manufacturing base and also, the agricultural ability to "feed the world". In fact, we are now hard pressed to "feed ourselves".
I doubt that we are going to see "hyper inflation" due to an overheating economy any time soon. I DO NOT doubt that we will see inflationary trends in core inflation by the start of 2010. This could be a real "fly-in-the-onitment" as there will be a major part of the population on fixed income, retirement, public assistance or unemployment at this time. Scam or no scam, illusion or no illusion, the fact that GDP is consumer driven remains real. If you remove at least 30% from 70% you have a minimum of 40% that will still be spending and that is not enough to turn this around.
To paraphrase another well know man. "The truth is what is perceived to be so by the consensus of opinion".
Arthur C. Clarke hit the nail on the head. It does not have to be true - you just have to believe it!
8-03-2009 @ 5:25AM
al coholic said...
There is no easy way out of this stupendous amount of debt we have saddled ourselves with. I look at my grandchildren and am embarrassed that they are going to inherit our debt.
Iridium correctly points out that leaving governments to their own devices with regards to monetary policy is like giving criminals the keys to the store. Soon enough the curtain will be opened and the Fed "Wizzard" will be shown to be merely the pretender he really is.
Japan is now entering it's 3rd lost decade. An arguement can be made that we are about to enter our second.