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The economy has been bedridden far longer than we realize -- and you can blame lying statistics for at least some of it.
So says Rob Arnott of Research Affiliates, a Newport Beach, Calif., investment management firm with some $50 billion under management. He argues in his monthly newsletter that, contrary to popular belief, the roots of our current malaise predate the financial crisis – and not by a little bit.
More trends that arent your friend
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, 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."
That seems hard to believe. The late 1990s are sometimes remembered as the last time the U.S. economy was consistently doing things like generating wage gains for people other than CEOs, and even the housing bubble-fueled 2000s are widely assumed to have not been a total wash.
But the signs are there. 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 (see chart, right).
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.
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.
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A great article exposing the fake prosperity of the Bush presidency. It is a fact that the appearance of prosperity can be bought by deficit spending - at a personal level or at a country-wide level.
This article also exposes supply-side economic theory for what it is - nothing but a shame. Cutting taxes and then borrowing the difference is a large part of what has resulted in this economic mess we are in.
Wealth is generated by making something that hangs around for a while after you make it; the investment in it is stored in the thing. For the time period the author discusses, we have been giving more and more market share in manufacturing to cheaper overseas rivals, undercutting our wealth generating capapbility.
We masked that by borrowing money for a decade or so, but then the debt got to high for lenders to give any more and the bubble burst.
So we are left with an economy where we have big debts and reduced wealth-generating ability to pay them off.
I think we are in the sorry state of affairs the Japanese have been in since their bubble burst in 1990.
Believe it! And it's only going to get worse. Take this case example... A man buys 4 properties all on credit during the housing bubble. He then takes out lines of credit on those properties to buy a business. The housing market tanks so he gives it all back to the bank at half of what they were all purchased for. Then investors come along and snap up these "bargains" whilst taking out more loans to cover the price of this "great deal". What happens to the unpaid original loans? Multiply this a few thousand times across our great land and you get a vision as to why the massive chasm between GDP and Credit Market Debt! I don't see how the U.S. is getting out of this without some form of debtors prison. Really.
CUT those non-existant corporate taxes! The Middle Class is ENJOYING ITSELF, FAR TOO MUCH! Tax them...they GOT MONEY! And don't forget to reward those corrupt politicians HELPING YOU....send ALL YOU CAN to their TAX FREE re-election campaigns, NOW!
Real tax receipts will go up when real jobs return to the country.
More M$M Wall St shilling. Wall St gets $1.5T bailout, the Auto Ind, corporations shift jobs overseas, the financial sector a major part of GDP, and somehow the middle-class is to blame and must pay. This is all Shock Doctrine. Same as recent S&P phony rating on US credit rating. Where were they on the mortgage leveraging by all the financial firms. They're lining up for the kill. Wake up people!
The response that begins "Can we distinguish between GDP and the Trade deficit" reminded me that Taxes in genral are changing by the nature of the economy as it is today. If wages are largely unchanged or not rising in the past decade then Federal Taxes also are largely unchanged versus State Sales Tax which has seen a signifaicant increase as the household debt has made massive leaps upwards keeping consumer spending advancing beyound a single household income.
Leslie please - Obama has already added trillions to the deficit in the past two years. If you are going to politicize the discussion, don't forget how much debt we've added the past two years.
Misunderstanding and misinformation is rampant in some of the comments to this article. For example, one commenter claims half of Americans pay no tax. This is nonsense. They pay payroll taxes (Social Security and Medicare) at a rate that replaces any income tax not paid.
Another example is that lost sales tax is a huge problem. This is also nonsense. Online sales are about $125 billion per year. Assume that none of the online companies collect sales tax (this is untrue; most of the larger companies do). At a 6% sales tax rate, this would mean 7 or 8 billion, barely a rounding error in times of trillion-plus deficits.
The possibilities for borrowing is already becoming much smaller for US, and the USD is dropping in value quite fast- But american companies are more competitive, they start to earn real money (and pay taxes). Next step is higher taxes, this is not a choice but a necessity! When the USD continue to drop faster nobody want to buy US debt. And the trade balance does not balance. Then USA has a problem. Higher taxes can not be awoided. many greetings Jacob Schonberg , Danish citizen
Today's economy may feel different, but many of the social and economic underpinnings are the same as a decade ago. As our nation wrestles with financial issues: quantitative easing policy, debt ceiling limits and deficit discussions, it seems we are again at a crossroads. It has been "A Decade of Bubbles": http://informationrewind.com/2011/04/19/a-decade-of-bubbles/
Real per-capita Federal Revenue rose about 2.5% a year from 1950 to 2000. Then began a declining trend in 2001. Had revenue continued growing at the historical pace George W Bush with the same spending would have had budget surpluses rather than increasing the national debt 77%.
We have a spending problem that must be addressed with cuts, but the source of the problem is rooted in weak or negative growth in the economy and Federal revenue.
Finally someone is looking at credit card spending which is out of control. Take away the credit cards and spending would come to a halt - no one uses cash anymore so they don't pay attention to the fact that paychecks have not been keeping up with prices.
This is consistent with my family's behavior and I suspect many others in the US. We have borrowed more money against the rising value of our home over the last 15 years to finance our lifestyle and more recently, college for three kids. Fortunately, we still owe less (~70%) than our homes value even in today's market. The cost in all of this, is we will have to work longer to reduce our debts before we can retire comfortably... for my wife and I, 5 years longer than originally planned (60 instead of 55).
Can we distinguish between GDP and the trade deficit (the private sector economy) and the governmental budget deficit and taxes (the "debt")? I thought you were talking about Americans' credit spending fueling a false economy vs. wealth, but then you started talking about Congressional policy on taxes and spending. If these are interchangable, please explain?
From gasoline price crude oil makes $0.65 and ther rest is oil companies profit, speculation and taxes.
I don't know why, but the fact that half of the country doesn't pay federal income tax is seldom mentioned in deficit discussions. Instead, the argument always centers around class warfare and the richest 3% - who in truth pay almost half of the taxes.
Leslie:
I believe you are overlooking one very small detail: the rise of internet shopping. I don't think most people fully understand how much tax revenue is lost due online purchases. So yes, poor tax collection is a massive problem.
At last, the "honest" truth.
Statistics do lie!
I suspected that something like this was the case. And combine this with super-low house values, a dollar that's worth less than the Canadian dollar, crazy high unemployment for years, a possible double-dip recession later this year, the S&P downgrade, and low wages and short work weeks, expensive gas and food, well that's not good is it?
We also won't be raising taxes on the wealthiest until at least 2012, so forget about taxes to help the economy. And it's even likely that taxes will be lowered if the GOP has enough power.
And after seeing that the regular McDonald's seasonal hiring has become national news and a big hopeful event for the millions of desperate job seekers, well that's really alarming.
I can see that the economy is not improving.
Leslie - you must have read a different article than I did. What the writer is clearly saying is that the real GDP in the US has not changed. We've fooled ourselves into believing that Financial Services is "where it's at" - and largely, since the late 90's, what growth has been recorded was the result of people using their houses as ATMs.
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