According to official US
government economic data, the US economy has been growing for 10.5 years since
June of 2009. The reason that the US government can produce this false
conclusion is that costs that are subtrahends from GDP are not included in the measure.
Instead, many costs are counted not as subtractions from growth but as
additions to growth. For example, the penalty interest
on a person’s credit card balance that results when a person falls behind his
payments is counted as an increase in “financial services” and as an increase
in Gross Domestic Product. The economic world is stood on its head.
It is
aggregate demand that drives the economy. Payments made on a rise in interest
rates on credit card balances from 19% to a 29% penalty rate reduce consumers’
ability to contribute to aggregate demand by purchasing goods and the services
of doctors, lawyers, plumbers, electricians, and carpenters. Contrary to logic, the fee is
magically counted in the “financial services” category as a contributor to GDP
growth. The extortion of a fee that reduces aggregate demand lowers GDP, but
builds paper wealth in the financial services sector.
GDP
growth is also artificially inflated by counting as GDP abstract concepts that
do not produce income streams. For example, for homeowners the US Department of
Commerce estimates the rental values of owner-occupied housing, that is, the
amount owners would be paying if they rented instead of owned their homes, and
counts this imputed rent as GDP.
These and
other absurdities have caused economist Michael Hudson to conclude correctly
that the “financial reality of how the U.S. economy works is no longer captured
in GDP statistics.”
https://michael-hudson.com/2019/10/asset-price-inflation-and-rent-seeking/
https://michael-hudson.com/2019/10/asset-price-inflation-and-rent-seeking/
Today we have two economies. One is the real economy of
production and consumption. The other is the financialized economy of paper
wealth. The former is doing poorly, and the latter is doing well. The
financialized economy is growing much faster than the real economy. Indeed, the
real economy might not be growing at all.
Michael Hudson describes the difference.
The stock market is at all time highs that have created massive wealth in
financial assets for stock and bond owners. In the real economy the
situation is totally different: “The Federal Reserve’s Report on the Economic Well-Being of
U.S. Households in 2018 reports that 39% of Americans do not have $400 cash
available for a medical or other emergency, and that a quarter of adults
skipped medical care in 2018 because they could not afford it ( https://www.federalreserve.gov/publications/files/2018-report-economic-well-being-us-households-201905.pdf ).
The latest estimates by the U.S. Government Accountability Office (GAO) report
that nearly half (48 percent) of households headed by someone 55 and older lack
any retirement savings or pension benefits ( https://www.aarp.org/retirement/retirement-savings/info-2019/no-retirement-money-saved.html ).
Even in what the press calls an economic boom, most Americans feel stressed and
many are chronically angry and worried. According to a 2015 survey by the
American Psychological Association, financial worry is the “number one cause of
stress in America today” ( https://www.apa.org/news/press/releases/2015/02/money-stress ).
The data
is completely clear. The rich are becoming much richer, and the rest are
becoming poorer. Michael Hudson explains:
“The
creation and trading of property and financial assets at rising prices has been
fueled by rising debt levels owed to the financial sector. This sector’s
returns therefore are best seen not as real wealth on the asset side of the
balance sheet, but as overhead on the liabilities side. And the process is
multi-layered: income accruing to the financial wealth owned by the top 10
Percent is paid mainly by the bottom 90 percent in the form of rising debt
service and other returns to financial and other property.
“In the
textbook models of industrial capitalism’s mass production and consumption, an
asset’s price is determined by its cost of production. If the price rises above
this level, competitors will offer it cheaper. But in the financialized economy
an asset’s price is determined by how much credit buyers can borrow to buy it,
not by its cost of production. A home is worth as much as a bank will lend to a
bidder.
“The
engine of industrial capitalism and its consumer society is a positive feedback
loop in which widely shared income growth, expanding consumption and markets
generated yet more investment and growth. By contrast, the feedback loop of
financial capitalism is an exponential growth of credit-driven debt, driving up
asset prices and hence requiring yet more borrowing to buy homes, retirement
income and other assets. Corporate management and investment today is mainly
about obtaining capital gains for real estate, stocks and bonds than about
earning income.
“We
illustrate this by charting the flow of income and capital gains in the real
estate sector to show the dominance of asset-price gains over net rental income
– and how rental income is used up paying interest in our financialized
economy. Likewise, corporate income is spent (and new debt taken on) largely
for stock buybacks to raise share prices. The resulting dynamic is exponential
and destabilizing.”
This
dynamic is destabilizing, because as more of consumers’ discretionary income is
drawn off to service mortgage, credit card, automobile and student debt and for
compulsory health insurance, less is left to purchase the goods and services in
the real economy. Consequently, credit-driven debt grows faster than the income
that services it, and this impoverishes the 90%. However, for the 10%, money
creation by the Federal Reserve in order to protect the balance sheets of the
“banks too big to fail or jail” drives up the values of financial assets. As a
result the distribution of income and wealth becomes hightly polarized.
Think
about the many Americans who meet their living expenses by making only the
minimum payment on their credit card balance. At 19% interest their debt grows
monthly. Eventually they hit a credit card debt cap and can no longer use the
card to cover their living expenses. But they have the burden of a large debt
balance to service without an income stream capable of servicing it.
Think
about the corporation that decapitalizes itself in order to produce short to
intermediate term capital gains for shareholders and executives by indebting
the firm in order to buy back the firm’s shares. The end result is that all
income goes for debt service.
In a
financialized economy, the only possible outcomes are debt forgiveness or
collapse.
As
Michael Hudson makes clear, the combination of nonsensical categories in the
National Income and Product Accounts and a financialized economy means we have
no accurate picture of the economy’s condition. Michael Hudson has a proposal
for correcting these problems and making GDP accounting more accurate, but as
ecological economists such as Herman Daly have made clear, GDP measurement also
omits the external costs of production. This means that we do not know whether
GDP is growing or declining. It is entirely possible that the ecological and
social costs of an increase in GDP (as currently measured) are greater than the
value of the increased output. (See Paul Craig Roberts, The Failure of
Laissez-Faire Capitalism, https://www.amazon.com/Failure-Laissez-Faire-Capitalism/dp/0986036250/ref=sr_1_2?crid=16NHZEQ9G3JRW&keywords=paul+craig+roberts+books&qid=1576440032&s=books&sprefix=Paul+Craig%2Caps%2C173&sr=1-2 )
Perhaps
the major way in which GDP is overstated is the exclusion of external or social
costs. External or social costs are costs of producing a product that the
producer does not incur but imposes on third parties or on the environment. For
example, untreated sewage dumped into a stream imposes costs on people
downstream. Runoff of chemical fertilizers from commercial farming produces
dead zones in the Gulf of Mexico and toxic algal blooms such as Red Tide that
result in massive fish kills, make seafood unsafe, cause human ailments and
adversely impact the tourist trade of beach areas. The result is lost incomes,
ruined vacations, health expenses, and none of these costs are born by the
commercial farmers.
Real
estate development produces massive external costs. Scenic views from existing
properties are blocked, thus reducing their values. Construction noise and
congestion impose costs on existing residents and reduces the quality of their
lives. Water runoff problems are often created. Infrastructure has to be
provided, such as larger highways to provide evacuation from hurricane-impacted
areas, usually financed by taxpayers. If the global warming case is correct,
the external cost of human economic activity can be the life of the planet.
Lakshmi
Sarah in the May/June, 2019, issue of the Sierra Club magazine provides an
excellent detailed account of the external costs of coal-fired power plants
being built in India by the Indian conglomerate Tata with a loan from the International
Finance Corporation, a branch of the World Bank. The ground water in the area
has been ruined and is no longer drinkable. Farmers are no longer able to grow
crops on half of the area farmland. Heated wastewater that is dumped into the
Gulf of Kutch is destroying fishing. The ecology and the livelihoods of the
population are essentially destroyed. None of these costs are born by the
private power companies.
Tired of
being doormats for capitalists and the World Bank, the residents of the
affected provinces rebelled. They have succeeded in getting their case before
the US Supreme Court. It seems that the International Finance Corporation is so
accustomed to financing projects that produce large external costs that it
overlooked its obligation to examine the environmental impact of the projects
it finances. This oversight resulted in Indian farmers and fishermen getting
their case before the US Supreme Court. The International Finance Corporation’s
lawyers argued that the World Bank lending agency had “absolute immunity.” The
Supreme Court said no and remanded the case to the circuit court to rule on the
damages.
Perhaps
the most surprising thing about this apparent victory for ordinary faraway
little people in an American court against the World Bank, a principle
instrument of American imperialism, is that the Trump administration appeared in court as a friend of the
Indian farmers and fishermen. The US Solicitor General, represented
by Jonathan Ellis, rejected the notion that international orgnizations have
absolute immunity. The
Establishment exists on its immunity. Here we see the ultimate reason that the
ruling Establishment wants rid of Trump.
Already
the senior staff of the International Finance Corporation have come to the
realization that they have other responsibilities than just to shuffle money
out the lending shute. If the Indian farmers and fishermen succeed in
protecting themselves from ruination by external costs, perhaps Americans who
suffer external costs will follow their lead.
Perhaps economists will also come to
the realization that they owe us accurate GDP accounting and not fanciful
accounts that serve elite wealth in the financialized economy.
https://www.paulcraigroberts.org/2019/12/16/neoliberal-economics-destroyed-the-economy-and-the-middle-class/
