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Five Short Blasts

About a week ago Pete Murphy left a comment and suggested I read his book. I took him up on his offer, and am currently in the process of reading it. The book is called Five Short Blasts by Pete Murphy and is published through Open Windows Publishing.

Pete suggested I write a review of his book. While I don’t plan on writing a review, I do plan on writing several posts about his book. Overall, I deeply enjoyed the book. While the book is loaded with graphs and tables, Murphy does not forget the importance of having a conversation or telling a good story.

Today I would like to focus on his first chapter addressing the topic, “but the economy is doing so well”. Murphy begins with a narrative of a guy at a party who shares how poorly the economy is doing. He quickly finds himself in an argument with other party goers argueing how well the economy is going. He hears arguments such as unemployment is low, 200,000 more jobs have been created, and the GDP is growing. Murphy begins with this disconnect between “lived experience” and the so called economic measures of a growing economy.

Murphy point out that the typical measure politicians use in regards to the economy is GDP. Yes, by looking at the curve, it seems our economy is increasing exponentially. Certainly, as Americans, we are better off today that we were in 1962.

Why then does it not feel that way. Murphy points out that one reason is GDP is not indexed to inflation. The dollar in 1962 does not equal the dollar of 2008. The measure that the government uses to take inflation into account is called Chained GDP.

Murphy then describes another important factor that GDP does not take into account, population growth. How much of the GDP is related to economic growth and how much to population growth? It seems, as least in the American context the only thing GDP really explains is our population growth of the last 50 years.

When you look at our population growth, one really has to wonder if our economy has kept up with that growth. The measure Murphy uses to look at this is per capita chained GPD. It more or less is GDP with population growth and inflation held constant.

So rather than the 2100% increase in GPD in the graph 1-1, we now have a 161% increase. This translates into 2.2% economic growth as compared to 7.3% in the GDP graph. This really begins to help explain the disconnect between ones “lived experiences” in regards to the economy, and the economic measures that get reported in the media.

There is one more graph that tells a lot about the disconnect one may feel with the economy. We have all heard of declining wages, so how is this economic growth being funded. If our wages are not keeping up with inflation, it must come from consumer debt.

This is kind of scary. Clearly, the only thing keeping our economy and ourselves afloat is high consumer debt. To blame consumers for high debt totally misses the boat, without that debt our economy would be in a permanent recession at best.