This morning as I did my news walk, I came across this article talking about the most important chart in American politics. And as you can imagine it caught my eye. I find charts and graphs to be either extremely informative or extremely deceptive. Seldom is there a middle-ground. Often the deceptive charts are constructed specifically for that purpose. It is seldom a surprise to find such charts in an article about politics.
This chart was one of the exceptions that prove the rule. But not in the way you might imagine. “The Chart” is deceptive, but I do not believe it is purposeful in its deceit. Why not, you may ask? Because the story it is trying to communicate would be stronger if the authors actually new the truth behind the problem. But, like so much today, the surface suffices to make an argument. The other details make the argument more difficult to communicate as the story can get lost in the weeds. Oh, but this story is the really important one. And, “The Chart” is actually not telling the story, it is transmitting a false initial impression from the get-go.
Lets look at “The Chart”
The Chart to the right is fairly simple. It shows three lines; one purple shows U.S. Productivity (a relative measure), one green shows GDP per Capita (a relative measure), and a red one showing Household Incomes. Looking at the chart it would appear that as America’s increased productivity has continued to rise, the GDP has risen and actual household income has not. The conclusion that gets drawn from this is based on who is doing the drawing. Democrats have used this chart to show that Middle Class Americans are getting screwed by the wealthy who have taken the money off the top and not passed it down in new jobs or other programs. Now Republicans are using the data to argue it is spending that is taking the money. Looking at the chart the conclusions drawn by either party seem logical and valid. The problem with “The Chart” is that both of these assertions are based on assumptions as to what the chart is saying and in fact they are wrong.
“The Chart” is Misleading
They are not wrong because the chart is wrong. They are wrong because the Chart is not telling the whole story. There are some key indicator lines missing. If you look at just this chart’s lines, you would come to the initial conclusion that America’s economy is increasingly productive and our GDP is growing because we are productive, therefore we must be a strong, vibrant and growing economy, and are leading the world in production. While we all seem to come to this conclusion, we also know its false. But how can we show increasing productivity, and increasing GDP and, even to some extent, increasing household income if we have been buying more products from the rest of the world than we are supplying; indicated by our constantly accumulating trade deficit, now in excess of $ 13 trillion, and also be in excess of $16 trillion in debt? The answer lies in these missing lines.
The Missing Lines
By now we should all realize that the American economy is not really growing, but we don’t. We don’t because we see charts and data all the time like “The Chart.” If we are continuing to buy more goods than we sell as a nation, and we are borrowing 1/4 of every dollar, or more we spend, how can we be growing? And how can productivity, a relative measure, be growing? Lets take a look at how these numbers come to be and what they measure. In actuality only one line needs to be added to explain the problem. If you were to add in a line showing the total amount of currency (money) in circulation (CinC) you would find the answer in the shape of the line and the timing of its appearance related to the other two indicators.
Looking at the illustration to the right, you will see a chart of the total currency in circulation since 1960. If you look at the shape of the line you will see that it is almost the spitting image of the Productivity and GDP lines in the chart above. This is not by accident. In fact if you were to overlay the data you would find that they are almost point for point comparable. It is not the point for point nature that is the problem it is in the timing. If American productivity was rising, and that was causing the rise in the GDP, and the increases in production were increasing the currency in the economy, you would see that the Productivity line was slightly earlier in time than the rise in the CinC. But that is not the case. The rise in the currency line precedes in time the rise in Productivity and the rise in GDP. How can that be? How can we have more currency before we have the economy’s engine produce more underlying value?
The Other Important Lines
In the chart to the right, you can see another of these important lines, Median Housing Prices. And you can see that Median Housing Prices, for the most part, lead the rise in the CinC. This is because of how our economy began to work after we got off the gold standard in 1972. As a nation based on fractional reserve lending, after 1972, it was not the amount of gold that was the basis for the amount of currency in circulation, it was now the amount of debt. For every dollar of debt the banks–federal reserve–could create, 10 dollars of new currency could come into being. And the biggest portion of American debt was mortgages. The more people that bought homes, the more the banks could lend, stimulating more expensive homes, bigger mortgages, more lendable money. The economy was growing. Not based on real production but on a constantly inflating index, that was being driven by its own activity. What I mean by that statement is the more houses we purchased, the more money that came into being. The more money, the more we could spend for houses, so we borrowed more and bought more and created more money. Housing prices rose because of supply and demand. This worked great. The economic number, and the underlying amount of currency just kept rising till housing prices collapsed. And, by then due to some other financial shenanigans, the problem was not a 10 to 1 problem it was then over 1,000 to 1.
Now lets look at some other lines to see where the money went. The reason we got off the gold standard was because the federal government was out of cash and due to the international gold standard could not just print more money without a significant loss of buying power. More money meant less international value per dollar. Why were we out of cash? Because we were now spending a lot of money to cover things like; the increasing trade deficit, the war in Vietnam, and the costs of Social Security, Medicare and Medicaid, and a large number of other federal programs. After 1965, when Medicaid and Medicare, and numerous disease and drug programs came into being, the federal government became an ever increasing piece of what we spent on healthcare. Looking at the dotted line in the chart above, you will see that the curve of the total spend in healthcare aligns with the rise in Productivity & GDP and both lags and matches the rise in the CinC almost point for point. Much of the newly printed money was going to cover the cost of these programs. Program costs rose, because as more money was available, smart businessmen created more goods and services, therapies and treatments, and drugs and diseases in order to capture the available dollars. More money = more spending, more spending = more drugs, services, and reasons to spend (more billable codes), and higher healthcare prices.
Why Did Household Income Not Rise as Well?
Since a big chunk of this healthcare money was going to pay for federal expenses, it did not go into the economy first, it was siphoned off the top to pay the federal bills so the average person never saw it come into their account first. They did not see a boost income in the same proportion they would have if this was through a free market approach. If this was not the case there would have been a rise in household income. There would also have been a huge increase in taxes in order to claw back the money to pay for the federal programs. In effect having the feds take it off the top to pay for services provided to more and more Americans is the main reason it does not show in personal income in the first place, not some corporate avarice or greed. In fact, with the exception of Healthcare and Housing prices, if you chart other U.S. prices you do not see much, if any, direct effect. You see that what drove the increases in these prices was the money that did make it’s way into the wages of American Workers. It was the increases in wages that was the factor that influenced these prices. As American household income grew or contracted, it was reflected afterwards in changes in these prices.
In effect, the newly printed currency was disproportionately distributed, causing corresponding rises in housing prices and healthcare costs that have been disproportionate to the American household income and ultimately the root cause of our rising debt. In effect, it may be our own fault. In realty, it is the fault of those leaders from both political parties who have failed to address the fundamentals of our economic system and who knowingly, or unknowingly set us on a path to our own destruction. Our leaders set us on this path when they changed the engine of our currency creation from that of real value gains, through the hard work and cost effective U.S. production that resulted in us being the historic supplier to the world; to that of a nation whose currency was no longer set to tangible value production but instead set to intangible value driven by debt-based Finance, Investment and Real Estate purchases.
Today, we purchase from the rest of the world more than we make, our humanistic approach to the provision of benefits to workers may elevate and define our humanity but it also puts us in a non-competitive position because our American goods are more expensive than those in the nations who do not care as much. We are left with printing even more money, based on nothing, to artificially subsidize through federal programs, the American Purchase of American products that we otherwise could not afford to buy. We therefore increase the spending of new money, at the federal level, so that it never makes it into the American workers wages and their purchasing power further erodes disproportionately.
So “The Chart” really means nothing. In fact, it is worse than worthless because it gives the false impression that America has a successful economic engine, and that there is some federal program that will cure this condition. The condition is systemic and it will require a systemic solution. Cutting federal spending is part of the solution, but it in itself will not solve the problem at all. It is beyond just spending. The other sides concepts of stimulus and subsidies likewise will not work because money spent at the federal level to boost purchasing power, or to pay for things for American’s will not filter into wages. This is abundantly clear no matter how you look at it.
America, needs to reassess who we are and what we need to be in this new global economy that is no longer dominated by the American economic engine based on efficient and cost effective production to the world. We need to get back to where we are the nation that supplies the world. But, we cant get there without some hard choices in what we expect from government and the realization that our income as individuals is now tied to what we can produce and sell to the rest of the world. If we cost too much because of wages and benefits, we loose, if we are efficient and priced correctly we win.