Monday, April 20, 2015

Why Does Economy Feels So Bad When the Numbers Are So Good?

Apart from the very real possibility that the numbers are rigged and bogus, the answer is that the numbers are meaningless.

Here is why:

Take the case of a young single person, earning, for example, $500 a week and say that his pay a few years later has gone up by 20% or $100 a week.  But if, in addition to paying more taxes on his $600 weekly earnings, he then has and is supporting a wife and three or four children, he obviously is worse, and not better off economically.

That, in a nutshell, is why growth in the nation's gross domestic product (GDP) is meaningless to most Americans.  Their individual shares of the GDP have been shrinking for decades and in recent years they have been and currently are shrinking faster than ever.

American citizens, on average, will be better off financially only if their after-tax shares of the nation's GDP increase -- in other words if dividing the nation's GDP by the number of citizens produces a higher net per capita (or per person) GDP.  That can happen only if the nation's GDP rises at a rate higher than the rate at which its population increases.

Even our inside-the-beltway dullards are awakening to the fact that the U.S. economy is growing too slowly.  But that dawning is unlikely to result in anything other than counterproductive actions.  Understanding this reality requires an understanding of the components of the GDP:

GDP = C + G + I + NX

where C is equal to all private consumption (consumer spending in the private economy), G is the sum of all government spending, I is the sum of all business spending on capital, and NX is all exports minus all imports.  

Decades of growth in government and government spending, and their recent explosive growth have resulted in severely eroding confidence and the curtailment of expanded private consumption.  This is necessarily so because government can only spend what it extracts from private individuals and businesses either through taxes or burdening them with debt.  In either case, the private sector is less willing and able to spend.

A future post will go into the details of the foregoing in greater deal but for now your not-at-all-humble blogger will offer only the following abreviated explanation of the above-stated conclusion that the government will not act in a way that would have a positive effect on the economy:  Anything the government does almost certainly will result in more government, more government action, and more government spending -- the equivalent of shackling weights to a drowning man -- rather than doing less and thus freeing the man to climb out of the swamp.

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