In the 1980 campaign, Reagan would regularly say that a recession is when your neighbor loses his job. A depression is when you lose your job. It was a pithy line that got at something that was always missed by the politicians at the time. That is, the economy is not the same for everyone. You can have a good economy but there will be people who are not doing so good. The reverse is also true. Even in the Great Depression, there were people doing fabulously well.
That is the problem facing the political class this year. According to their court wizards, the economy is growing at a blistering pace. The fourth quarter of last year saw growth at over three percent and inflation falling down to two percent for what the wizards call personal items, while overall inflation was under two percent. The definition of “personal items” is one of those things that makes sense to the people doing the counting, but not to anyone who is doing the actual spending
Does it feel like the economy is growing at a blistering pace? Most people do not think the economy is great. In fact, most people think we are in difficult economic times, despite relatively high employment. This was one of the top reasons people voted for Trump in Iowa and New Hampshire. Under Trump, people perceived the economy as strong while under Biden it seems to be weak. The main reason is inflation. Every trip to the store sees prices higher than the last trip.
For the sake of comparison, the last time Americans experienced significant retail inflation was in the 1970’s. The court wizards back then used different rulers for measuring things like inflation, but everyone agrees retail inflation was higher than what we have experienced the last few years. The economy also grew at a faster rate most years during this time. The recession of 1974 was followed annual growth of near five percent the following years.
Five percent growth in 1976 did not keep Gerald Ford from losing to Jimmy Carter and it did not keep Reagan from beating Carter in 1980. The reason is GDP is not a great way to measure the economy. The formula for calculating GDP is Consumption + Government Spending + Investment + Net Exports. If inflation is roaring, consumption and government spending will also be roaring. You can have a growing GDP while people are seeing their budgets ravaged by inflation.
Of course, we live in the managerial age and managers can always be counted on to do one thing very well and that is lie about what they are doing. In the case of the economy, the court wizards keep tinkering with how they measure things like inflation to make the number look smaller. Shadow Stats keeps track of these changes and reframes official economic numbers in the old way of measuring them, so that we can compare today with the past.
When we take an honest look at the economy over the last few years, we see that inflation was comparable to the 1970’s, but not quite as high. People who buy food will tell you that prices are rising again, despite some relief last year. In the end, we could replicate the 1970’s in terms of the pattern and duration, even if overall inflation figures are not quite the same. The reason people think the economy stinks, despite the official numbers, is that is does stink for people who buy things.
That brings us back to that Reagan quip and another key point. The American economy over the last thirty years has transformed into something that is really good for people in finance, government, the academy and corporate governance, but it has not been great for people who make things and fix things. The nurse practitioner, which is really a government job, is doing great, but her patients who work in the honest economy are finding it hard to pay those health insurance bills.
Returning to that magic formula for measuring GDP, if the Investment side grows, but consumption remains flat, then GDP rises. Since government always grows and that growth is fueled by the Fed creating debt through the banking system, GDP is just about guaranteed to grow every year, even if the economy is in recession. Put another way, debt-driven government growth not only corrupts the nation but it corrupts the way in which we can measure the corruption.
This corruption has been highly effective. The typical American has barely noticed that it requires two incomes to have the life that used to be possible on a single income, at least for the middle-class. The baby boomers grew up in one income, intact two-parent homes, but they lived as adults in two income, often broken homes. The relative material prosperity came at the cost of social capital. The new way of measuring things masked the real trade-offs that came with the new economy.
We may be reaching the end of the line with the new way of measuring things, which is why people are not buying the official numbers. Those bulging baby boomer portfolios cannot mask the fact that their kids are saddled with debt and are struggling to maintain a lifestyle the parents took for granted. Of course, the next round of young people will enter adulthood in debt and looking forward to paying the pensions and health care costs of eight million retired people.
What all of this gets to is that measuring is necessary, but it is not how things are measured that matters. It is who does the measuring. That was the subtext of that Reagan quip half a century ago. Americans are pessimistic about the economy because it is not good for them. It may be great for the people doing the measuring, but that does not change the fact the typical American is not experiencing great times. That is because of who is in charge, not how they got there.
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