Saturday, October 27, 2012

About that Reported Economic Growth

So GDP is growing at about 2 percent. (That's not the same as "the economy.") The rub is that it's driven by consumer and government spending. Real economic growth requires investment, and investment has not recovered. But private (real) investment requires savings--that is, deferred consumption. So increased consumption is not a path to economic growth. Increased sustainable consumer spending is an effect not a cause of economic growth.

Government of course tries to stimulate consumer spending, since policymakers are stuck in the Keynesian mindset (that is, uninterested in the time structure of production). One way it does this is by keeping interests abysmally low. Why save if you get so little for your money, perhaps less than the increase in the CPI? You're just losing purchasing power.

1 comment:

D. Saul Weiner said...

In Paul Craig Roberts' latest piece, he refers to John Williams work and makes the following statement regarding the alleged economic growth:

Williams concludes that "the official recovery simply is a statistical illusion created by the government's use of understated inflation in deflating the GDP." In other words, the reported gains in GDP are accounted for by price increases, not increases in real output.