In Economics 101, I learned you measure the growth of an economy by calculating the change in its gross domestic product (GDP). But when I advanced beyond the basics I soon learned things aren’t that easy. For, as one savant put it, “Ask five economists and you’ll get five different answers – six if one went to Harvard.”
To make the definition even more challenging, as The Economist reveals, the United Nations published a report a couple of years ago which puts forth the notion of “inclusive wealth.” According to this concept, there are three kinds of assets:
- Manufactured capital (roads, buildings, machinery and so on)
- Human capital (people’s skills and health)
- Natural capital (including forests and fossil fuels)
In this analysis, the fun really begins when you try to measure an asset in one category, say, the talent of a sculptor, against the asset in another, like an earth remover.
Since the U.S. economy started down the chute in 2008, we’ve grown accustomed to simplistic, government sponsored metrics of its growth and contraction. One particular story the feds expect us to swallow whole is when a few numbers are up in the monthly jobs report. When job numbers are up, the economy is up – and vice versa. So goes the official narrative. Fortunately some analysts, like Jeff Spross in The Week magazine, take a more jaundiced view of the sacred federal jobs report, as he cautions us about what we should be looking for behind the numbers, “[T]he real signs of bottom-up pressure on the economy are rising rates of wage growth and rising rates of inflation. The best sign of all is probably the rate of nominal wage growth — i.e. wages including inflation.”
In other words, to gauge how well a large, complex economy like ours is doing, we have to consider a number of elements, and not rejoice at a positive reading of just one.
Another even more grossly over-simplified measure of our supposed economic health is consumer spending. In a February 8 MarketWatch article writer Jeffry Bartash falls prey to the conventional wisdom:
“The results are in. Consumer spending — the main engine of the U.S. economy — rose 3.1% in 2015 to set the fastest pace since 2005. Unless Americans suddenly turn pessimistic, they’ll keep spending at a decent clip this year and give businesses no reason to resort to mass layoffs.”
Leaving aside for a moment the fact that the layoffs have already begun, according to Bartash consumer spending is the “main engine” that drives the U.S. economy. After all, isn’t it at least seventy percent of GDP?
So what, counters Mark Skousen, who takes a more clear-headed view in his December 1 article on Townhall. GDP, he writes, is only a measure of the value of “finished or final goods and services.” A truer measure of the vigor of the economy would take into account “all the business-to-business (B2B) transactions necessary to bring unfinished intermediate products to final use.”
Viewed in this perspective, less than a third of what the Bureau of Economic Analysis in the U.S. Commerce Department calls gross output (GO) – as opposed to GDP – is tied to spending for personal consumption.
Personally, I consider the personal-consumption metric of a successful economy silly and self-defeating – like showing how much cash you have by giving it away in exchange for items that lose value, like luxury cars; or things of no real value, like designer clothes or quickly-obsolete tech products. Who cares what’s in your wallet or mine? I’m more concerned about what I don’t spend than what I do.
At the end of the day, personal wealth can only be measured by what we get to keep. As market volatility fails to subside, I’m viewing all my paper assets, including dollars, with caution. I want to be able to count my wealth in gold coins, not dollars – and that goes double for my retirement. That way, I’ll have a tangible asset tied to an increasingly sought-after commodity; one which I know will rise in value.