Real Per Capita GDP Declines at Annual Rate of 5.0% in 4th Qtr.

The Commerce Department announced this morning that GDP (Gross Domestic Product), the broadest measure of the health of our economy, declined at an annual rate of 3.8%. But GDP alone doesn’t adequately describe what happened to your share of the economic pie. A better measure is “real per capita GDP,” or GDP divided by the population of the U.S. (By the way, the term “real” means that the data is adjusted for inflation.) Since the population of the U.S. grew in the fourth quarter at an annual rate of 1.2% (adding 850,000 people in the 4th quarter), then real per capita GDP declined at an annual rate of 5.0%, from $38,413 per person in the 3rd quarter of 2008 to $37,936 per person in the fourth quarter. This is also the fourth decline in the last five quarters, a string interrupted by a small rise of 0.45% in the 2nd quarter of last year. Real per capita GDP is now lower than the 2nd quarter of 2007 when it hit $38,157. And no one expects it to do anything but decline further in the coming months.

So the question is whether population growth is helping or hurting the economy. Now even I wouldn’t suggest to you that GDP would have been the same without these additional people. Take away those 850,000 people and the GDP would clearly decline too. Every person contributes something to the overall economic activity. Even if all they buy is food, clothing and housing, no matter how rudimentary (even if they rent instead of buy), they are boosting the GDP by that amount. But if they are boosting it by an amount that’s below average, then they are a net drag on the economy, contributing just as much to the labor pool but consuming below the level needed to gainfully employ them. Well, the fact that the percentage of people falling below the poverty line is increasing is clear evidence that population growth is occurring primarily in the bottom half of wage earners, actually hurting the economy in per capita terms.

It all makes sense if you think about it. As we cram more people into the same amount of space, per capita consumption declines while the per capita contribution to the labor pool remains the same or may even grow. (As the over-supply of labor grows, putting downward pressure on wages, a higher percentage of the population will enter the work force in a bid to keep up the family’s income.) If you don’t understand the relationship between population density and per capita consumption, then you need to read Five Short Blasts.

It’s time for economists to abandon GDP in favor of a more meaningful economic indicator, one that takes the size of the population into account. Even a child can understand that a bag of jelly beans shared with three kids instead of two means fewer jelly beans for himself. Economists need to look not just at the growth in the supply of jelly beans, but also at how many kids are showing up to share them.

 

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2 Responses to Real Per Capita GDP Declines at Annual Rate of 5.0% in 4th Qtr.

  1. Robert says:

    Pete,

    I am dumbfounded, if a child can understand that “a bag of jelly beans shared with three kids instead of two means fewer jelly beans for himself.” then why in the heck can’t Obama come out and state the obvious with regards to our current economic crisis. Today he signed some executive orders to level the playing field between unions and management, why oh why can’t he be that child with the jelly beans?

    • Pete Murphy says:

      Nice to hear from you again, Robert. I almost posted about the very issue you’ve raised here – Obama’s legislative help for the unions. I see it as a purely symbolic gesture. The labor movement has been in decline because their bargaining power has steadily weakened along with the weakening demand for labor. As long as labor is in a state of over-supply, they have no ability to demand anything. If Obama truly wants to help labor, he’ll fix our trade policy and bring those millions of manufacturing jobs back home, and he’ll cut immigration to stop growing the labor force faster than they can be employed.

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