Is a growing U.S. economy always a good thing? Most of us hear “growing economy” and we think it means more job opportunities and more financial security. Let’s look at what it really means. Gross domestic product (GDP) is what economists roll-up each quarter to determine whether the economy is growing, staying steady, or declining. It was created shortly after the Great Depression and World War II, as the ultimate measure of a country’s overall welfare.
GDP = personal consumption + business investment + government spending + net exports.
The most important thing for you to know about the U.S. GDP is that for decades it’s been dominated by personal consumption expenditures. In 2018 personal spending was 69 percent of the total GDP. Business investment and government spending each contribute about 17 percent and net exports were a negative 5 percent.
What’s interesting and problematic about GDP is that it treats expenses we’d like to spend less on as equivalent to other expenses thereby creating perverse incentives to keep expenses high for those that rely on it as their measure of success (or failure). Ask yourself: are longer work weeks better? Is disease better? Are natural disasters better? Are big mortgages and credit card debts better? Are bigger grocery and energy bills better? Of course not. Yet they all add to GDP favorably without distinction. You may think, but wait, doesn’t spending money indicate people have more wealth? Not necessarily. These levels of personal spending require a whole financing and debt system. Consumers carried $422 billion in revolving credit card debt alone in 2018. So the next time you hear either good or bad news about the economy, take a moment to search the web for the details and ask yourselves whether what’s growing or shrinking is a net positive or a net negative. You may be surprised.
Some countries, like Bhutan, have adopted new indicators to measure things that GDP ignores. If you think a country measuring Gross National Happiness seems strange, ask yourself, which is more ludicrous, treating increasingly higher costs of living as a favorable welfare indicator or measuring the happiness of one’s citizens? If you’re interested in learning more about how our financial systems and economic policies get in the way of sustainability and what’s being done to create a roadmap to a more resilient and regenerative economy, please take a look at the work of the Capital Institute, founded by a former managing director at J.P. Morgan, John Fullerton.