With all the drama playing out in the media on the various debt crises, it may be useful to reflect on some language used, and some plain and simple laws of economics to frame up the situation better.
How are we doing?
The “economy” and “economic growth” are measures of spending. And this spending is composed of three elements of GDP = C + I + G:
- Consumption – what we all buy, whether it is stored (and used over time, like a car) or used on the spot (like food).
- Investment – what is spent on assets – typically by business, that are intended to pay a return over time forward.
- Government – what is spent by all levels of government on benefits, defense, health, education.
What is missing from the discussion is “what is our Income”? Clearly, our economic health is premised on our net position, Income less our Expenses (spending above). As profit is to a business – so is savings to a household. We cannot endure for long spending more than we earn. So it goes for the country.
At each of the three levels above, we have different pressures and outlooks forward. Without confidence, business will not invest. And in the uncertain times we have, households will consume less, and save more. Meanwhile, government is spending like a drunken sailor – too often wasted – on less than ideal priorities like school libraries, home insulation, unneeded desalination plants, etc.
Thus, when we hear the economy is growing 1%, what they are saying is our spending is growing 1%. But what if our incomes are falling 5%? And our government is running a 10% deficit (of GDP).And what if after all that “spending”, we are only “growing” 1%? This is the case in the United States. They are running up the national credit card at a shocking rate simply to time-shift their problem onto the next generation. That is abominable economic stewardship by any measure.
Another element to weave into this story is the demographics driving it all. The boomer generation peaked at its top earning (less spending) age in 2007. They are now aging quickly, with a fall in incomes, and a rise in many categories of spending like health. Their outlook is not good, and they have little balance sheet wealth to speak of after the years of living month to month spending all they “earned”.