Those raised around farms will probably know what eating one's seed corn means, but what does that have to do with Gross Domestic Product? Read on, and I will try to make the point.
Back in the 1970s on the campaign trail with my good friend Bob Krueger (former Democratic Congressman and US Senator) Bob would often use the term "we are eating our seed corn" in discussing government budgets and deficits. (Yes, Democrats, or some of them, were concerned about that in those days.) Bob was one of those rare politicians who would tell the truth, even when many people didn't want to hear it.
Of course we know that if you eat your seed corn, you have no seed to plant to get next year's crop. You would then be broke, or would starve to death. Not a good outcome.
This brings us to the current debate over the huge and growing deficits and national debt. Borrowing against the future to pay for the present is just like eating your seed corn. Our people, many businesses, and almost all of our governments have been doing this for years. The party is just about over. The train that is our economy is about to come to the abyss.
So what does this have to do with Gross Domestic Product, and how it is measured. Read on.
GDP is measured by adding Consumption (both private and business) plus Investment plus Government Spending plus Net Exports (exports - imports).
Those are the constituent parts of GDP. Note that the only net figure is the import/export number, and for over 40 years that has been a negative number.
Right now, GDP as thus measured is positive, and we are in a "recovery." Does it feel like a recovery to you? Ask the record number of long term unemployed.
Why do not we measure the net domestic product, whereby all of the spending would be reduced by the amount of borrowing that supports it? NDP has a good ring.
I am not an economist, so I cannot give any expert opinion on why the gross figure is considered better than a net figure, but I do know that relying on the gross figure has to distort the view of what is really happening in the economy.
Consider that government spending is all included although at least 44% of it is borrowed money. Is that why politicians always want to do a big stimulous when we hit a recession? It certainly makes it statistically look like a recovery. That is why we had a "recovery" this past year, and now that the stimulous is running out the "recovery" is faltering.
Back out the deficit spending and a clearer image of the real economy emerges.
Also consider that private (consumer) spending is also a gross figure, when by all reports, much of it is again being done on credit cards. This, of course, is one reason why the Federal Reserve always wants to force interest rates down during a recession. They want to encourage the consumer to borrow and spend.(Another is to allow the banks to borrow at low rates and lend at higher rates, helping their profits.) That is a lot of what got us into this problem.
The last decades were spent on a big joyride, with consumers being encouraged to buy things (houses among them) that they could not afford. A lot of people maxed out their credit, then borrowed their home equities to buy the tickets for that ride.
The fact that the measured GDP was good enabled the politicians---of all stripes--- to get elected and reelected because times appeared to be better than they were. And they sold it as such.
Here is where the measure of GDP deceives us: the last forty years we have been eating our seed corn, and the economic measure the government statisticians, the economic statitisticians, and the politicians have been using to tell us where we are has hidden the facts. Of course, we all know about liars, damned liars, statisticians, and politicians.
What is all this about? It is very simple. Over 30 years ago, Bob was right. We were eating our seed corn then, and that has continued to this day. And many want to continue.
That train I wrote about six months ago when I last posted speeds on nearer the abyss. At some point it will get too late to stop it in time.
Somebody needs to get serious about this, or we need to throw them out.
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