Economic Populist Commentary

Economic commentary by a pro-capitalist, economic populist. Demand-Side Economic theory. Consists of author's economic views. Questions & comments appreciated. Dissenting views are VERY welcome and encouraged. Main "agenda" is crafting and advocacy of a "populist" economic agenda. A secondary goal is prevention of an economic Armageddon. Encouraging open discussion of US economy.

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Location: Southern California, California, United States

The author is a physician by profession, and a "student economist" by necessity. The current status of our economy necessitates the latter. The intent of this blog is to explain and discuss economics in layman terms. It is designed to promote thought and discussion. It is written by a layman. Comments and critiques of these theories and letters are welcome and ENCOURAGED. Dissenting comments are also WELCOME! They form the basis for discussion.

Tuesday, June 28, 2005


The GDP equation is as follows:


Economists state that consumer spending, or consumption, is 2/3 of all economic activity. It's the generally accepted consensus that consumer income is the biggest determinant of consumer spending. Logically, it is essentially the only long-term determinant of consumption. (Consumption financed by borrowing cannot last indefinitely.) Thus, consumer income is the biggest determinant of GDP.

Interestingly enough, debt-financed consumer spending is also included in the GDP equation. So consumer spending includes the sale of goods bought with money that doesn't even exist. Much of consumer spending is financed with money from home equity loans. Does such spending really indicate economic "growth," or is it economic "fantasy"? Does increased debt really indicate economic "growth"? Don't we have to pay that back some day? Does the overvaluation of assets in the real estate market and stock market really indicate economic growth? When money borrowed off these overvalued assets is used to prop up consumer spending, does that really contribute to economic growth? Should this "overvaluation-financed" spending really be added to GDP? The truth is, the GDP equation becomes a less accurate indicator when workers are compensated more poorly.

Investment, and investment capital, only have value if they increase the amount of goods SOLD. (It's SALE of goods that create profits, not production.) If consumer spending is low, obviously less investment capital is needed. In spite of this, the equation allows for investment capital to actually make-up for decreased consumer spending. This is simply illogical. If consumers are NOT spending their money and buying more goods, what benefit is there to building more factories? How can anyone call that economic "growth"? Basically, this allows the government to falsely state that the economy is "growing," while the sale of goods is declining.

Also included in the "investment" category is unsold inventory. So by this equation, the economy can "grow" by building more unused production facilities, and producing more un-sold goods. So if someone produces goods nobody can afford to purchase, the "assumed" value is simply added to the total.

If income is reduced, shouldn't it affect the other factors? If so, how would it affect them? Let's start with investment. Investment will not make any real contribution to GDP if consumer spending declines. Increased investment is supposed to increase production. If income falls, so does demand for production. If demand falls, there is NO benefit to increased investment. There is no need to build more production facilities or provide more services, if there is no demand for them. Excess "investment" would simply go into corporate coffers, in the form of CEO salaries, stock holder dividends, "cash-on-hand" and bank accounts. In actual reality, as opposed to economists' "pseudo-reality," this investment would add absolutely NOTHING to GDP in the long-term. (It's mis-allocated money that would have contributed to GDP, if it had it gone toward consumer spending.)

How about government spending? Government spending is financed exclusively from taxes. Taxes subtract directly from private wealth. Thus, government spending reduces private wealth, dollar-per-dollar. However, the "marginal propensity to consume" concept needs to be considered here. (Which basically states that the more affluent devote a smaller percentage of their wealth towards consumption. The more affluent they are, the smaller the percentage.) Taxes on lower income individuals reduce consumption more than those on higher income individuals. Taxes directed mainly at consumers, such as sales tax, reduce consumption spending dollar-for-dollar. In contrast, taxes on corporations primarily reduce investment spending. Thus, the type of taxation affects how much it subtracts from consumer spending. But it is clear that government spending subtracts significantly from consumer spending. In addition, reduced consumer income reduces the money availabe for taxation. Government spending cannot make up for consumer spending reduction. Not only does it depend on consumer income, it subtracts from consumer spending directly.

In summary, the GDP equation is almost overwhelmingly dependent on consumer income. Labor cost reductions reduce income, and GDP. When $90/day workers are replaced with $2/day foreign workers, consumer income drops. Consumer spending then drops as well, further reducing demand for goods and services. The increased profits made from the labor cost reduction do NOT help the economy. The increased investment capital that results has NO benefit when consumption drops. It merely provides a short-term gain in profits, at the expense of a long-term loss in GDP. Unfortunately, many "experts" have a blindspot to this simple mathematical reality.





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Anonymous Anonymous said...

Another problem with GDP is that they don’t subtract from it. So when much of New Orleans was destroyed that destruction does not show up in GDP only the rebuilding that occurs latter. It’s the broken window theory of economic growth, if you go around breaking peoples windows this will improve the economy since the glass makers will get richer, the fact that the window owners got poorer is left out of the equation.

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You've made an excellent point. The "depreciation," or the "capital consumption" from Katrina is not subtracted from the GDP. The money to replace that capital consumption comes from borrowed money. The Bush junta has been trying to "grow" the economy through deficit spending since he took office. Katrina gives him the opportunity to add to the GDP with borrowed money for rebuilding while digging our economy into a still bigger hole from deficit spending.

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