Editor's Note: This post originally appeared on the author's personal blog, Enlightened Economics.
By Ron Robins
American political and economic elites are forever spinning the idea that self-sustaining economic growth is imminent. And this time the spin might be working — but only for a while.
Underpinning the spin are U.S. government economic statistics. Unfortunately — and it seems unknown to even most economists — there are huge methodological and philosophical issues with these statistics, some of which I detailed in a recent post entitled Dubious Positive Biases in Revised U.S. Economic Statistics.
In that post I investigated how unemployment rates, payroll numbers, the consumer price index (CPI), savings rates and gross domestic product (GDP), have seen their statistical philosophical and methodological foundations changed. And these changes almost always make the economy appear in better shape than it would have been by using prior statistical methodologies.
Furthermore, these changed methodologies have not occurred by only wanting to make the statistics more honest. No. In fact, political interference (documented by Shadowstats) is behind most of the major changes so that the government of the day appeared in a better light.
The spin of this ‘growing’ economy has been taken to heart by the richest 20 percent of families — those who have been able to borrow for next to nothing and invest in foreclosed homes, stock and bond markets. They have invested and seen their investments rise markedly. They are happy.
But for most people — the other 80 percent — they are neither happy nor convinced of the efficacy of the present government’s economic spin. (See the exit polls of the Nov. 4 midterm elections.) Truly illustrating the difference in economic well-being between the rich and everyone else are the results of a recent Gallup poll.
In August, Gallup found that, “Americans with an annual household income of $90,000 or more continue to have more economic confidence than those who live in households with less annual income. Upper-income Americans had an index score of -2 in August, up slightly from -5 the past two months. Lower and middle-income Americans, on the other hand, averaged -18, similar to -19 in July.” Recent data from multiple sources indicates this divergence continues to exist.
The difficulty for most working Americans is that according to the Bureau of Labor Statistics (BLS), workers' incomes over the past few years are barely matching — if at all — their rising cost of living as measured by BLS’s own (politically influenced) consumer price index (CPI). But ask most workers and they will tell you their living costs are up much more than the government’s CPI.
This is verified by independent inflation measures such as the Guild Basic Needs Index (GBNI), which includes only food, clothing, shelter and energy (thus covering most of the expenses for the majority of people). Using their latest data points from July 2009 to July 2014, the GBNI rose by a significant 22.8 percent compared to the10.6 percent rise in the CPI over the same period.
Interestingly, while living costs have risen and left individuals with less disposable income, savings rates have increased. It seems the experience of financially difficult times for most people in recent years, including unemployment, severe losses in home equity and for many the need to save for a fast-approaching retirement, has convinced them to save more. Savings rates are now averaging above 5 percent, says the Bureau of Economic Analysis (BEA).
But again, savings rates would be much less if previous methodologies were used. For instance, in 2006 and 2007, savings rates were about -2 percent but had become +3 percent after methodical revisions. Savings rates prior to 1985 were mostly above 10 percent.
Perhaps of even greater concern is that consumer debt is once again growing much faster than incomes -- indicating the U.S. is on the continuing treadmill to further financial crises. Between July 2011 and July 2014, Federal Reserve data show consumer debt grew from $2.722 billion to $3.233 billion, a rise of 18.8 percent, compared to personal income gains over the same period of just 11.8 percent ($13.294 billion and $14.860 billion).
The real concern with consumer debt was highlighted by Constantine Van Hoffman, writing for CBS Moneywatch, on Sept. 11, 2014. She wrote that, “[quoting CardHub] ‘By the end of 2014 U.S. consumers [with about $7,000 each in credit card debt] will be roughly $1,300 away from the credit card debt tipping point, where minimum payments become unsustainable and delinquencies skyrocket.'” And this is with ultra low-interest rates. What happens when they rise?
Rapid debt accumulation in excess of income growth indicates people demanding goods and services now no matter the eventual financial cost to themselves. To me, such a mindset illustrates deep inner insecurity and lack of personal fulfillment. Unbeknownst to our political and economic leaders, this mental state is really the central issue that has to be resolved before lasting economic sustainability can be gained. (See my 2007 post, The Missing Ingredient in Economics — Consciousness.)
Government and financial institutions are aware of the harm caused by excessive and irresponsible debt growth and asset valuations. Alan Greenspan, former Chairman of the Federal Reserve, has remarked that central banks are afraid to ‘prick’ asset bubbles for fear of causing market chaos. So, our economic elites believe they must continue to spin the illusion of economic good times no-matter the reality. Eventually, as in 2008, the illusory good times end, and sadly, financial difficulties and ruin occurs for many.
As understanding grows about the spinning of government economic statistics, as increasing savings rates restrain consumer spending, and as consumer debt rises far faster than incomes, it is just a question of time before the spin stops working and a bust ensues. For now though, the spin is working for the 20 percent. And they are happy.
Image credit: Flickr/401(k) 2012
For over forty years Ron Robins has engaged in, and devoted himself to, the fields of economics, finance, and the development of human consciousness. He is deeply concerned about America's economic and financial problems and is writing a book on how he believes they can be fixed. The book's working title is "Resolving America's Economic Quagmire," with a subtitle, "People gaining inner fulfillment is the key.” For all of his economics and ethical investing writing, see Ron Robins, MBA. Visit Ron's globally popular and respected ethical investing website at Investing for the Soul. To contact Ron, click here.