GDP: Share of GDP

We have noticed how GDP is a rather weak measure of the economy. GDP does not indicate change in jobs or change in wages or change in opportunity or change in standard or living. This was painfully evident in 2003. The GDP rose as employment remained flat and wages stagnated. It was this "jobless recovery" that gave us the powerful hints that the usefulness of GDP needed to be questioned.

Draft: May 2012

 

Part 1: Share of GDP

The first question that these insights raise is "what share of the GDP has been going into raising wages and creating jobs?" We can answer this by comparing the GDP reports to the reports on employment and wages. Just as we have suspected the share of the GDP going to the middle class has been falling. In fact, the share of the GDP going to the middle class and poor is down 20% to 30% from where it was in 1970.
It's down about 10% from where it was as recently as 2000. Relative wages are down. They declined rapidly from about 1988 to 1993 and again from 2000 to 2008. We saw this decline in our study of income distribution.
To put this in perspective we need to do some comparisons. If the same share of income were to go to the middle class as did in 1970, 31 million more jobs could be created at current wages. Conversely, given the same number of jobs, middle class incomes could have been 20% to 30% higher.

Returning the share of GDP going to the middle class and poor to 1970s levels could create 15 million jobs plus raises of $5000 for workers.

Thus, the recent crash and current recession might best be understood in terms of the decline in the share of the GDP going to the middle class. If that share of the GDP had still been going to the lower classes, the lower classes would have had enough money to pay their mortgages.

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Part 2: Investment Bubbles

Since the GDP growth between 2000 and 2008 wasn't going into creating jobs or raising incomes, we need to question, where was it going? We get some hints if we look at the investment component of GDP. The share of GDP going into investments increased from about 12% in 1993

to more than 17% in 2000 and 2003. Both the dotcom bubble and the housing-commodities bubble where characterized by a rapid rise in share of GDP going to investments.

A rapid rise in the share of GDP going into investments, or the share of GDP dedicated to investments going above 15%, appears to be an indicator of a bubble. This would seem particularly ominous combined with a drop in the share of GDP going to the middle class, as occurred between 2001 and 2008. The implication is that nearly all the growth between 1999 and 2009 was investment bubbles.

 

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