The Hidden Truth Behind The U.S. Economic Recovery

By Geoffrey Michael | January 23, 2012 AAA

You may have heard media reports recently about how the economy is slowly improving. The stock market has been pointing upward, consumer confidence is growing and profits for most companies have exceeded expectations. Is the "recovery" real, or is the government creating the illusion of prosperity at the expense of future generations?

There's enough evidence to suggest that the economy is being artificially propped up by monetary and fiscal policies that aren't sustainable. These policies have skewed the economic performance data published regularly by the government, such as unemployment and GDP.

SEE: Austerity: When The Government Tightens Its Belt

Unemployment

The unemployment statistics may not portray an accurate snapshot of the true job picture in the U.S. The unemployment rate is calculated by dividing the number of unemployed workers by the total labor force.

The unemployed are defined as those who are jobless, looking for jobs and available for work. Those who have stopped searching for a job or are otherwise unavailable to work are not counted, which artificially lowers the unemployment rate by an estimated 7%.

Another reason the rate runs into a shortfall is because jobs are being paid for with deficit spending. The deficit for FY2011 was $1.3 trillion and nothing has been done by the federal government to reduce spending to control future deficits. That money is flowing into the economy and paying for jobs that wouldn't exist if the budget was balanced.

For example, suppose the number of jobs paid for by the FY2011 deficit can be estimated by dividing the total deficit by the average cost per worker. The annual worker cost of $160,000 includes salary, benefits, office space, materials and supplies.

Divide the deficit of $1.3 trillion by $160,000 and the result is that deficit spending is paying for about 8 million jobs. If all those jobs were added to the unemployment rolls, the rate increases another 5%.

In summary, the current unemployment rate of 8.3% is understated by at least 12% (7% + 5% from above). The estimated total rate of 21% is higher than the 18% average experienced during the decade of the Great Depression.

Gross Domestic Product

GDP is the measure of economic output and includes government spending. The GDP for FY2011 was about $15 trillion. Government deficit spending comprised $1.3 trillion of that amount, so the "true" GDP was actually $13.7 trillion. That's a reduction of 9% from the published value, a drop that some would classify as depression-level. Thus, subtracting government deficit spending creates a different portrait of the health of the economy.

Three-quarters of GDP is now a function of consumer spending that has been fueled by epic levels of personal debt. Consumer demand has pulled back because of unemployment and credit tightening, even though interest rates are at historic lows. If rates are hiked because of inflation, then demand will take another significant hit, further depressing GDP.

There are other reasons to be concerned about GDP. Over the past several decades, the U.S. has transitioned from a production-based industrial economy to a consumer-driven service economy. This has not resulted in a GDP decline because of the way "production" is calculated. For example, if you take care of your child at home, that's not counted as GDP, but paying for your child to attend day-care is counted. The result is that all these service industries inflate GDP because we now pay for many services that we previously did ourselves.

The current GDP calculation is masking decreases in real production over the past several decades. As factories and other manufacturing facilities have closed, they've been replaced by more services that don't create real wealth. This is one reason why millions of manufacturing jobs have moved overseas with no apparent reduction in GDP.

The Bottom Line

The U.S. economy is growing increasingly dependent on escalating levels of debt, with 10% of tax revenues going to debt service this year. The remaining revenues are only adequate to pay for national defense, Social Security and healthcare. Every penny beyond that is either borrowed or printed. The strain on entitlement programs continues to grow as averages of 10,000 baby boomers retire every day.

Unfortunately, the government will continue to borrow and print money to create the illusion that the economy is recovering. It's analogous to giving a compulsive gambler who is short on change more money in the hope that he will use it to pay his bills and debts, rather than spend it on gambling. It won't seem like he's broke now, but when he gambles away that money too, who will give him more?

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