Bill Bonner

We have been exploring the zombification of the US economy. Major industries — finance, health, education and defense — have been taken over by zombies, parasites whose real interest is to transfer wealth to themselves, from the part of the economy that remains productive.

As the economy becomes more zombified, the part of it dominated by these non-productive industries increases, leaving fewer resources for the productive part. And as the productive part weakens, so does the entire economy’s ability to produce real wealth, or grow its way out of debt.

How much of the economy is now in zombie hands?

Cindy Williams, of MIT’s Security Studies Program, figures that the US now devotes about 6.2% of its GDP on “defense” and related activities, including international affairs, homeland security, veterans affairs, and intelligence. She was not trying to figure out how much the nation could spend effectively, only on what it could afford. That, she calculates, is between 2.1 percent and 3.4 percent of GDP.

If this is true, we could say that about 3% of GDP is either wasted, unnecessary, or unaffordable. That’s about $450 billion right there.

As to health care…we can assume that the standard of health care is acceptable in those countries where people live much the way Americans live…and tend to live longer. In those countries — mostly in Europe — people spend about half as much as they do in the US, giving us an overspending of about $2,500 per person, or about 5% of GDP…or about $750 billion.

Education expenditures are twice what they were, in real terms, when US students got the same results they get now. The US currently spends about 6% of GDP on education. This suggests that 3% is wasted. That’s another $450 billion.

As for finance, it is impossible to measure how much of it is worthwhile and how much is just money-shuffling and debt mongering. But we will take a guess anyway. In 1940, the financial industry accounted for just 2% of the economy. By 1960, it was about 3%. Today, it is 8% or 9%. Before the big run-up in debt began — in 1980 — the financial industry probably averaged about 4% of GDP. The extra 4% is arguably wasted…it merely transfers money from the wealth-producing parts of Main Street to the wealth collecting parts of Wall Street. Four percent of GDP is another 600 billion, or so.

Adding it up, education, health and defense together may be costing the nation $1.65 trillion — almost exactly the amount of the 2011 deficit. In other words, if the squandering were stopped, the US budget would be in balance.

Add the waste in the financial industry, and you are up to $2.25 trillion — or 15% of GDP. Compare that to the IMF’s calculation of total national savings at 10% of GDP. (We don’t know how the IMF got this figure…it seems high.) And now let’s return to our small farmer to try to understand what these numbers mean.

The small farmer wants to get richer. So, he creates a surplus of 10% per year. This he will invest in greater production so as to increase his output (his wealth) year after year. But he invests poorly. He plants in swampy areas. His seed gets wet and rots. Birds eat his grain before he harvests it…then, he waits too long, and much of the harvest is lost.

Imagine that he squanders 15% of his output. Result? He grows poorer, not richer, at a rate of 5% per year.

That is the price of a zombie economy. You get poorer. If the economy appears to grow, it is usually growth in unproductive industries. If people appear to live well, it is because they are living off the accumulated capital of the past.

At the present pace, over the next 10 years, the real value of America’s output will fall nearly in half. Measured in terms of output, Americans will be only half as wealthy as they are today.

Get ready for it, dear reader.

Regards,

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • ScottMC

    It seems the maths is in. btw, when does the next debt-ceiling show begin?

  • http://riverofliberty.com Chris Rossini

    So true…and what receives the blame for the loss of wealth? The tiny sliver of Capitalism that remains.

  • http://ChairmanOfTheBored.org/ ChairmanOfTheBored

    In the upcoming war, France will play a major role. Is France zombified?

  • bob

    Can we add our out of control legal system to the unproductive industry list. Everywhere you look on TV, phone books, billboards, and the radio are adds for lawyers wanting to sue someone. Many companies postpone hiring or move operations off-shore due to this added burden.

  • Barney

    Bill,

    You are not including the regulations loss built into the government. I just went through a long government training on exactly how to do the paperwork if you have been discriminated against due to age, sex color, sexual orientation etc. It was like advertising for victims. Contractors must follow all of this too. Once a person makes a complaint there is no way to get rid of them no matter how bad an employee they are. They are protected and a whole slew of governement agencies look over the managers shoulder. So there is vey little management going on, no sweeping changes will come about, things will pretty much stay the same. As these rules jump over to the business world I am not sure why anyone would try to build something in the USA. Your costs just in lawyers could skyrocket at any time some one decides to complain and you for darn sure have little control over your employees. All of these Federal agencies come against the company and it takes expensive lawyers to defend. This is only one set of rules for one type of infraction. I sat there and watched the costs grow as they explained the complex and never ending procedures. We did not have all of this before and we were able to protect our staff. It is like the government has turned against the business folks. It also means that very few folks employed by government will lose their jobs. We have moved away from evidence into a very murky and expensive way of doing things.

  • Marcus Welby

    At least a third of every US health care dollar spent here in the USA goes to the unproductive “for profit” Health Insurance companies. I believe that dwarfs anything spent (or even wasted) on the Imperial US army.

    There are five Insurance clerks for every doctor here in the USA. Each busy getting between patients and their doctors.

  • Montezuma’s Revenge

    The waste in the US health care dollar is incredible. All those CEOs, the buildings, and those totally unnecessary employees who could be put to better use elsewhere – flipping burgers, changing diapers at adult day care centers.

  • Jon

    The Breton Woods agreement created moral hazard for the United States. We are living the results.

  • Leo

    Waste of few billions compared to the derivatives market of 1 quadrillion is such a trifle.

  • Fish

    Though bad but not too bad. Still, overall, the world balance sheet is in balance; one debit counterweighing by one credit. NIEs may hold trillions of western bonds. If one bond holder tries to cash 10 pct or 100 billion of dollar bond to buy luxurious cars or planes from the Jap, that may cause a small dollar tumble. The breaking point maybe when he tries to cash 30-40 pct of his bond holding, where dollar abruptly fall flat to absolute zero. Then the bondholder may sustain an overwhelming 60 pct of his bond holding loss. Besides, the entire dependable lucrative export market vanishes within the immediate next second. So, more or less, the stacking trillions dollar deficit bond is for the purpose of account balancing only. For your eyes but not for anyone’s touch. If you dare to touch it, then, it dare to crumble. So, no one will be that stupid to move it. And, it will remain as a truly immovable dead and silent fixed asset while the global financial system is intact – until this falls apart.
    Strikingly, Hairy chairman was the person who has the wisdom and foresight which gives the reason why he hesitated in embarking in such massive turn-around global trade.

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