Visions of Phony Economic Growth
The Europeans are trying to find a way out of their debt mess.
“Paris and Berlin in last-ditch Greek talks,” says this morning’s headline at The Financial Times.
Americans are studying maps and watching the stars too.
Meanwhile, over on the other side of the globe, the Chinese seem to be checking the trees for moss.
All the authorities are lost. They wandered into a swamp and forgot to drop bread crumbs. The poor little lambs. What can we do to help them?
This morning we were struck by the illusion of comprehension. That is, for a brief moment, we thought we could see what is going on. For the benefit of central bankers, policymakers and dear readers everywhere, here is what we saw:
It looked a bit like a rhinoceros. But dressed in a pink evening gown. It seemed to have had too much to drink. Or maybe it was just stupid. Every time someone approached, it said: ‘Put the bunny back in the box.’
What does this strange vision mean? Well, it’s obvious, isn’t it?
Let us explain.
In the 18th century, part of the world began an epic growth spurt – made possible largely by harnessing stored up energy in coal, and more importantly, in oil.
By the late 20th century, the developed economies were far ahead of the rest of the world. But it was also at the point where they could no longer deliver high rates of growth. First, the marginal utility of further energy inputs – increasingly expensive ones – declined. Then, after the crises of the ’70s, in order to continue making material progress, households and governments leveraged their balance sheets. That is, they switched to debt financing, effectively consuming goods and services that should have been left to future generations. In 1949, when debt expansion in the US began, the private sector held only about 30 cents of debt per dollar of GDP. By 2007, it had risen to $2.60 to every dollar of GDP. And for every dollar of extra GDP in the ’50s, it took only about $1.40 in credit. By the end of the cycle it took more than $5 in credit to do the same job. In other words, the marginal utility of further inputs of debt had declined…to the point where more debt was unwelcome as well as ineffective.
As demonstrated by Reinhart and Rogoff, when government debt hits 90% of GDP, growth rates fall by 1%. This is just what has happened in the US and elsewhere. The US used to run at about 3% GDP growth per year. Now it is at 2%.
Meanwhile, the un-developed countries, those that have not fully taken up the energy-guzzling ways of their more advanced brethren, are able to grow at rates the US and Europe haven’t seen in years. China, India and Brazil are all growing at more than 5% per year.
And while the middle class in the US is threatened with extinction, in other places it is booming. The Financial Times:
In the past 10 years, the income of the poorest 50% of the [Brazilian] population grew 68% in real per capita terms, while the income of the richest 10% grew 10%.
The trouble with 2% is that it isn’t enough. Especially when much of it is phony, government-driven ‘growth.’ Today, one of 6 Americans is on Medicaid. One of 4 children is on food stamps. A record 44 million all together get food stamps. And 59% of Americans now get some of their money – one way or another – from the government.
Two percent GDP growth is not enough to absorb population growth and bring idle workers back into the active labor force. And it isn’t enough to keep the US economy from dipping into recession from time to time; it is too near ‘stall speed.’
More important, it is too low to allow the feds to ‘grow their way’ out of debt. Au contraire, the debt gets worse and worse…until the system blows up. The US deficit is about 10% of GDP. At 2% GDP growth, the debt is growing – net – by about 8% per year. Not getting this debt under control is ‘suicide,’ wrote Glenn Hubbard, former chairman of the Council of Economic Advisors to George W. Bush.
He’s right. But so what? The present version of the US economy is going to die anyway. With growth depressed, the only thing that can be done is cut spending and raise taxes. Those things – if you could do them politically – would further depress growth rates…making the situation worse, and probably tipping the US into a Second Great Depression.
There. Is that clear? Hope so.