GDP Stinks

What is happening in the US? GDP figures tell us the economy is working well. Unemployment is near record lows. And the stock market is at record highs.

Monday, May 20, 2024

Bill Bonner, writing today from Dublin, Ireland

There was a young man from the city 

Who saw what he thought was a kitty 

He bent down to pet it 

And boy did he get it 

They buried his clothes without pity 

Our major questions for this week: 

How come ‘the West,’ with a 30-to-1 advantage over Russians... can’t win the war? 

And how come the richest, most dynamic, most virtuous and most honorable economy the world has ever seen — yes, we are talking about our own USA — still can’t keep current with its bills? How come it passes them along — $35 trillion worth, so far — to its children and grandchildren? 

And how come the economy — the greatest ever, or so everyone says — can produce ‘full employment’... and still not give workers a raise in half a century? How come it is more expensive for them today... in terms of their own working hours... to buy a house or a car today than it was 50 years ago?  

In short, the US economy may have a white stripe running down its back.   

Houses and cars are the bedrock ‘assets’ of America’s middle class. Most people get them by exchanging their time (wages) for them. Logically, as it takes more and more time to buy them, people have less time left over. They are poorer in what matters most – time. 

Of course, houses and cars are supposed to be higher quality than they were in the 1970s. Some economists believe that these ‘hedonic’ improvements justify the higher prices.  

But if they are better, it is because of technological advances. An auto, for example, has more electronic components than it used to. It is said to be safer, faster and more economical.  

Why are things more expensive?

Of course, the factories became more advanced too.  Competition always drives producers to make things better …and cheaper.  Parts became better made and more easily assembled. Many functions that used to require manual labor are now done robotically. 

So, the technology that made autos better should have made them cheaper, too, not more expensive. 

Likewise, we are told that houses are bigger and better than ever. They are more expensive, supposedly, because they are worth more. But just the opposite may be true. New houses are often made of flimsy composite materials that are easy to work with, but lack the beauty and solidity of genuine heartwood of oak or pine.  Besides, even houses built in 1970 or before are still expensive — and often more expensive than those of more recent vintage. 

So how come the average person has to work twice as long just for a roof over his head and a set of wheels? Is it because ‘the system’ has been corrupted? It now delivers public policies that serve specific groups of people — normally, those with a good lobbying team in Washington and a lot of money to spread around the Capitol — at the expense of the public. 

In past episodes of this journal, we’ve seen that sometimes GDP has little to do with real wealth. The clearest illustrations for this were provided by Nazi Germany and the Soviet Union. In the latter, ordinary working people got poorer — by design. The economy was organized and controlled by the elite. Industries were told what to produce and how much they could charge for it.  

The Soviet system produced a lot of products, but few that people actually wanted. And yet, as recently as the 1980s, there were still economists in ‘the West’ who were impressed by the numbers alone. 

Paul Samuelson, for example, ‘wrote the book’ on economics that was widely used as a textbook throughout the US. His Economics: An Introductory Analysis told students that the Soviet Union had achieved ‘rapid growth’ and industrialization thanks to its central planning. 

He wasn’t completely wrong. The GDP numbers showed the Soviet Union bursting with ‘growth.’ But counting the number of Lutherans in the Gestapo…or the bars of soap in a POW camp probably didn’t tell you much.  .    

In the Soviet Union the soap left such a sickly smell everybody stank of it. But since the central planners disdained competition and consumer choice, everyone had to use it. Visitors reported that in a matter of days after the Berlin Wall fell, the smell disappeared. 

The GDP numbers misled economists. 

You can’t eat fighter planes

The Nazi economy was, like the US, a ‘capitalist’ economy with pervasive government influence. And what the Nazis guided the economy toward was war. At first, the numbers looked good. Orders for tanks and planes and uniforms kept factories busy. GDP went up.

Foreign observers reported that “Hitler made the trains run on time;” they said they had never seen so much energy. At one point, unemployment dipped deep below zero (if that were possible). With so many men in uniform, Germany ran out of workers. So, the Nazi central planners brought in slave labor from the conquered countries. 

Again, the GDP numbers told a tall tale. People couldn’t eat Messerschmitt fighter planes. And with so much labor and capital invested in the firepower industry, there was little left for things that really mattered. Food, for example. At one point, the government’s own health officials warned that German women were not getting enough to eat and may be unable to bear children.  

The economy ran hot; people got poorer. 

So, what is happening in the US? GDP figures tell us the economy is working well. Unemployment is near record lows. And the stock market is at record highs. 

But there is something stinky about it. What is really going on? If an economy doesn’t make ordinary people better off... what is the point of it?  

More to come...  

Regards, 

Bill Bonner