Reply #14: The Fallacy of the GDP

[Demeter]

http://www.economyincrisis.org/articles/show/3492

The methods we use to calculate our GDP growth are a matter of great controversy among the world's economic analysts. Just as the accounting of Enron differs from that of General Electric, the procedures our leaders use to calculate America's economic growth are different from those used in Germany, Switzerland, or Japan. If we used the more conservative accounting methods of most other advanced nations, our growth would not look so good. American workers instinctively know this because they are acutely aware that living standards for ordinary Americans have not improved much in thirty years.

In any case, more and more of the country is becoming owned and controlled by foreign interests. Critical chokepoint industries are being taken over, and our government is ever more beholden to foreign lenders. The cumulative trade deficit (that is the extent to which total imports have exceeded exports) amounted to $4.6 trillion in current dollars over the last 20 years and this is equal to $5.4 trillion after adjusting for inflation. The average annual growth rate in real dollars for the trade deficit has been 24 percent over the past 10 years. Even if we take our government's calculations of GDP growth at face value, this means our trade deficit increased nearly seven times faster than our GDP.

Since more and more of our consumer spending goes to imported goods, the higher our GDP goes, the higher our trade deficit goes. In the ten years to 2005, for instance, the trade deficit went from just 1 percent of our GDP to more than 6 percent. This deterioration reflects in part the fact that the share of our GDP that goes to consumer spending has increased from 67 percent to 70 percent.

The US is already losing more than $700 billion a year to foreign countries through its trade deficit and the trend worsens by the year. Many people argue that even though the trade deficit is large in dollar terms, it is small compared to the overall American economy. But this is a dangerously misleading argument.

A more meaningful way to understand the trade deficit is by comparison with America's total national assets. The net worth of American households has increased from $28 trillion to $52 trillion in the last ten years, representing a gain of $24 trillion. This sounds tremendous but even so, at $3.6 trillion over that period, the trade deficits represented fully 15 percent of the gain. It should be pointed out moreover that much of the increase in household net worth came from unrealized gains in real estate and stocks. To say the least such gains are windfalls and they are unlikely to be matched in the next ten years. Indeed we may never be able to realize them.

A much more meaningful comparison is with America's rate of economic growth. The cumulative year-to-year growth in GDP in current dollars excluding foreign trade came to $5.7 trillion over the past 10 years. By comparison the trade deficits totaled $3.6 trillion - 63% of the cumulative GDP growth excluding foreign trade.

These trends show no sign of abating and are hardly even mentioned by politicians or the media. Our trade deficit last year was a record 6% percent of GDP and increased 16% over 2004. By comparison, our overall economy grew by a mere 3.5 percent in real (inflation-adjusted) dollars. After taking out net gains in residential real estate and adjusting for inflation, the growth in net worth in 2005 was merely the 24th highest of the last 50 years. Moreover households lost net worth in three of the last 10 years (the three years following the "dot-com" collapse that began in 2000). In 2005, the gains in financial assets were well below median percentage gains over the past 50 years, while the increases in liabilities were well above their median. Personal savings as a percentage of disposable personal income was actually negative in 2005 for the first time since the great depression.

As suggested by our growing GDP, we continue to build net worth, but actual figures show we are not creating much of meaning. Popular media continues to publish the sanitized headlines of government statistics news without any real investigation. By contrast, the facts in this document and the concerns of a growing minority of well-informed citizens demonstrate that there is cause for tremendous alarm - and as we would say, an immediate nationwide decree calling for resolution to the present US economic crisis.