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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Commentary Of The Month
December 1, 2003
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By Dan Denning

Far be it for me to suggest that the government is inflating the GDP statistics. In fact, let's leave the question of outright fudging aside for now. Let's look at the facts and see what the GDP numbers really tell us. And by the way, this isn't simply a matter of spin... of whether I can turn a good number into a bad one. It's a matter of facts. And the truth is, the folks in Congress running for re-election and the one in the White House running, too, have a lot at stake.

The GDP number is to the economy what earnings per share is to Wall Street: namely a bogus indicator of economic health designed to allay the fears of nervous investors/voters. That said, here are a few things to keep in mind about the third quarter's 8.2% growth.

First, it came against the backdrop of massive fiscal and monetary stimulus. The Bush tax cut and the Greenspan hatchet attack on interest rates produced one spectacular quarter of massive consumer spending. So what?

Were any more factories built? Were new jobs added? Has the steady decline in average wages reversed itself? Have the massive debt obligations of the American consumer and his government vanished into thin air? And is Wall Street itself suddenly a much safer, more trustworthy and dependable place to do business?

Second, consumer spending may drive GDP growth, but that is NO indication of growing American wealth. Dr. Marc Faber explains this in a recent commentary: "Monetary, as well as fiscal, policies were 'marvelously successful' at stimulating consumption of cars (durable goods) and non-durables, but ineffective at stimulating production and net capital formation, as imports met the rising domestic demand while net capital formation occurred not in the United States, but in China and other low-cost production centers outside the United States."

The mistake you make if you use GDP growth as a measure of U.S. economic health is mistaking debt-financed consumption for real economic growth. It isn't. And it never has been. Not in this "New Era" or any other new era that's come before it.

The core of the problem is economic. New wealth is created by new production, not by increased consumption. This is the other hidden economic bias of the GDP numbers. The U.S. service economy is mostly a measure of consumption.

It's true that getting your carpet cleaned or having your taxes done by a firm might give you more free time to enjoy your lifestyle. But the service sector of the economy is a measure of the quality of life, not the wealth of the nation. If you count convenience as a measure of wealth, then services matter greatly.

But the service sector of the economy does not lead to capital formation. And without new capital, new investment doesn't take place. And without new investment, new incomes aren't created. And without new incomes, consumer spending eventually falls.

America the Flea Market

A broader discussion of the service sector is probably in order, something I'll try to do over at Strategic Insider. For now, just keep this in mind: A mature industrial economy is bound to have a larger service sector than a newly industrializing one. There are probably a lot more Kinko's in the United States than in China. And as an economy moves from producing things to trading services, productivity rises as machines replace people and the labor force shifts from making things to trading services.

The real economic question here, and the one to which there is no definite answer yet, is what happens to capital formation in an economy where the bulk of economic activity is in trading services? In other words, exactly how long can you live on importing your manufactured goods from overseas while you and your neighbors trade various services back and forth with one another? Is this what a mature market economy evolves into?

Or is it an impending economic disaster? If the American economy were forming huge amounts of capital but exporting it overseas where the return on capital invested in industrial economies is greater, then the lack of capital investment domestically wouldn't keep me up at night. But that's not the case at all.

The American economy is a net importer of capital, needing about $2 billion a day just to prevent our currency from falling.

Of course, the other way of looking at it is in terms of quality of life. Even if capital formation stagnates, you could argue that a nation is better off when its people work in office buildings and not coal mines. When the nature of economic activity shifts to economic activity based on human capital -- a business where you sell a service rather than sell your labor -- you might argue we've made a step forward.

It will be an odd world indeed if we can buy all our durable and manufactured goods from overseas, and make a living doing each other's dry cleaning, all while maintaining the value of the dollar.

Copyright 2003 Agora Publishing

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