Real GDP Growth is Not an Effective Measure of How Well We Live
Using real Gross Domestic Product (GDP) to suggest that this economic recovery has been slow and weak is inappropriate and misleading. No doubt, real GDP growth that has bounced mostly between 2% and 3% since the Great Recession is slower than any decade between 1950 and 2000. During that 50 year stretch the US became accustomed to real GDP growth that averaged between 3 and 5%, depending on the decade. Certainly by comparison, the US is now growing more slowly. But such comparisons don’t adjust for a population that is now growing more slowly as well.
Real GDP growth is a measure of everything produced by all the people and companies in a country. This sounds like an effective way to measure the health of a country. But imagine 2 countries:
Country 1: Real GDP is growing at 7% per year, but the population is growing at 11% per year
Country 2: Real GDP is flat, but the population is declining at 3% per year
Which of these has a healthier economy? As measured by real GDP alone, Country 1 is firing on all cylinders. Unfortunately, on a per capita basis, the average person living in that country is worse off because real GDP is not keeping up with population growth. Country 2, on the other hand, is growing meaningfully on a per capita basis; despite experiencing real GDP growth that is 7% lower than country 1.
While the example above holds productivity growth constant as well as other factors in each economy, it demonstrates how easy it is to misunderstand the health of an economy based purely on real GDP growth. The reality of measuring the health of an economy is far more complex.
Other measures of improvement in the US paint an economy that is doing fairly well. The unemployment rate at 4.1% is lower than 86% of history since 1948 and it’s lower than 98% of history since 1970. Even the U-6 unemployment rate, which includes those working part-time, but looking for full-time work, and those that are marginally attached to the workforce as unemployed, is now better than 88% of its history since the report began in 1994. The number of people filing for unemployment each week is now at a level not seen since the 1960s and that’s without adjusting for population growth. Fewer people are being laid off. Job openings are at all-time highs and the total number of job openings is approaching the total number of people unemployed. By any measure, people are working and working more than at most times in measured US history. This is clearly very positive. But just because an economy has a low unemployment rate doesn’t mean its workers are earning more in real wages or in after-tax income.
Real disposable income is the amount of money that households have available for spending and saving after income taxes have been paid. And here we see indications that improvements in the US have been slowing over the last several decades to about 2% annual growth in the 2010s. Here we see an economy that is slowly maturing. The slowdown reflects slower population growth and slower productivity gains.
Using its disposable income, a household must first spend that money on critical items such as food and clothing. In the 1930s, average Americans spent about 10% of their disposable income on clothing and over 25% of it on food. Those figures have declined to under 3% and 8%, respectively. So households can now spend a lot more on other more discretionary purchases, such as leisure and in other areas that improve the quality and length of our lives, such as healthcare. Our lives have also improved in countless other ways. Our cars are far safer, we have cell phones, GPS, finding information has never been easier, and medical technology has allowed us to live longer and healthier lives. These improvements are very difficult for the government to accurately capture and while they try, the data has a lower level of reliability than when we were simply counting the number of widgets produced on an assembly line.
No doubt the US has some issues. The gap between the wealthiest and poorest in this country is widening, so the data provided above is only an average across the entire economy, not among the groups within it. Federal debt is also climbing to levels that are concerning and entitlement spending will need to be adjusted at some point to avoid an unbearable debt load. But the US economy is also more diverse and dynamic than it has ever been. Unlike in Europe where the unemployment rate in Spain is about four times higher than in Germany, the variation of the unemployment rate between US states is incredibly low, even by its own historical measures.
In all, the US economy continues to do well. Challenges exist, but the dynamic and diverse nature of the US economy will allow it to continue to grow in the long term. Slower population growth means that GDP growth will likely remain at the lower end of the past century’s range. However, this does not necessarily translate into lower living standards or even less disposable income. Things are improving, most are employed, and we’re spending less than ever on necessities such as clothing and food. We can live with that.
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