This post is the first in a series of articles that will explain the new economic theory I proposed in Five Short Blasts. With readership of this blog expanding dramatically, I want everyone to have the opportunity to understand this important new theory. Do I like selling books? Sure, but that wasn’t my motivation for writing it. My primary interest is in spreading the word about this new theory and its ramifications for public policy issues that are scarcely being addressed, if at all. Nothing less than the “American way of life” is at stake. If you’re someone interested in globalization, trade, overpopulation or immigration, I think you’ll find this series most interesting. The connection may not be apparent at first, but stick with me. With that said, let’s get started!
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Out of necessity, our nation’s economic leaders, including our top economists, put all of their focus on macroeconomic measurements. They can’t be that concerned with “microeconomics” – the economies of individual citizens – because there are over 300 million of us. You and I would be dead long before they got around to paying us any attention! So they put all of their faith into the precept that if the overall economy is growing then, on average, our citizens will prosper too. On the surface, it seems to make sense. It’s held true throughout most of human history. Notice that I said “most.” Is it possible that there could come a time when macroeconomic growth – growth of the total economy – could actually become harmful to individual citizens’ standard of living? That seems counter-intuitive, doesn’t it? Economists would sneer at such a suggestion.
But I’m already getting ahead of myself. Let’s get back to measurements of economic growth and begin with a look at economists’ favorite measurement, Gross Domestic Product, or GDP. It’s the measure of all of a nation’s economic activity. It doesn’t matter if it’s beneficial or harmful activity. The cost of educating a student gets added to GDP. So does the cost of incarcerating a criminal. The cost of building a new car is added to GDP. So too is the cost of junking it.
So how has America been doing as measured by GDP? Great! Since 1962, our economy has grown at an annual rate of 7.3%, expanding from less than $600 billion per year in 1962 to $13.25 trillion in 2006. Wow! That means that Americans are twenty-two times as wealthy as they were in 1962, right? Uh, no.
A big part of this “economic growth” is nothing more than inflation, which helps no one. Since 1962, the Consumer Price Index, or “CPI,” has risen by a factor of 6.7. Take inflation out of the equation, and we find that “chained GDP,” GDP adjusted for inflation, is about four times what it was in 1962. By the way, I should point out that CPI is a price index, not a measure of the cost of living, which it actually understates. “But still,” you’re probably thinking at this point, “that’s pretty phenomenal economic growth.” “We’re still four times richer than people were in 1962! Right?” No.
We haven’t yet taken population growth into consideration. Population growth isn’t true economic growth. It’s contributes to the size of the overall “economy” but, beyond a certain optimum level (a concept we’ll explore in more detail later), does nothing to raise individuals’ standard of living. That is, if I apply the same economy to a population that is double the size, I still have the same economy from an individual point of view. The economy will be twice as big, and it will double the sales volume and profits for corporations, but for individuals it will have no effect on their incomes. From 1962 to 2006, our population grew from 186 million people to 299 million, a 60% increase. Factor this out of “chained GDP” and we arrive at a figure known as “per capita chained GDP” which, since 1962, has actually increased by 161%, an annual growth rate that is now down to 2.2% from the original “GDP” figure of 7.3%.
Well, OK, but we’re still 161% wealthier than folks in 1962. That’s not as exciting as being 2200% wealthier, like the raw “GDP” data would have suggested, but it’s still a decent increase, right? I mean, we’ve adjusted GDP for inflation and population growth. What else could there be?
Productivity. Every bit of this 161% increase in per capita chained GDP is due to productivity improvement – the amount of economic output per person. Finally, some good news here! We all know that increases in productivity lead to higher wages. At least that’s what everyone says – our politicians, our business leaders and especially economists.
Really? Are you that much wealthier than someone who did the same job as you back in 1962? Well, if you’re a top corporate executive, almost certainly. The rest of us? Probably not. Are you any wealthier at all? Maybe. Maybe not.
That is what everyone says – that productivity leads to higher wages. But it’s not true. There is absolutely no correlation between productivity improvement and higher wages. Productivity improvement does nothing to drive wages higher. If anything, it tends to drive wages down. Something else drives wages higher. Something that we’ll explore in Part 2. Stay tuned!