Thursday, April 21, 2011

Net of Deficit, U.S. Output is at 1998 Levels?

According to an interesting paper by Rob Arnott, the headline is true.  He lays into Gross Domestic Product (GDP) as a flawed way to measure prosperity (something other countries have also cited), because it essentially focuses on consumption - rather than actual wealth generation.  And with the debt explosion in the U.S. the past decade+, consumption has soared - but not for the 'right' reasons.

Via Fortune:

  • Arnott says the U.S. economy actually went off the rails more than a decade ago. What's more, many of us have failed to realize it because the most widely watched economic indicator, gross domestic product, actually tracks consumption, irresponsible or otherwise, rather than real wealth generation.
  • 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..... Arnott contends that most of the GDP gains we have seen since 1998 are attributable to debt-financed spending, rather than real wealth creation.
  • "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."
  • Since 1998, real gross domestic product has risen at a 2.2% clip, according to Fed data  -- less than a third of the rate at which debts owed by U.S. public and private sectors have grown.
  • Arnott says we can blame this addiction to leverage on both parties, who took the turn-of-the-century explosion in capital gains tax collections as a sign money would continue falling from the sky forever. But while spending continued to grow at a rapid clip, tax collections fell off a cliff.  Real per-capita tax receipts are at 1994 levels, Arnott says. No wonder we have a trillion-dollar deficit problem.
  • 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.

It's an interesting viewpoint, and one a few of us have discussed conceptually but by putting actual measurements to it, it takes on a different significance. 3 pages I will embed below


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