Sunday, October 4, 2015

Quality Of Growth A Growing Concern

Quality Problems Can Often Lurk Below The Surface
Anyone with a knowledge of economics will concede that quality is a major factor when it comes to the issue of growth. All economic growth is not created equal. Often when you spend money and afterwards have little to show for it you have simply wasted your money. Sadly, much of the money America claims to invest in itself each year falls directly into this category. True economic growth is well directed and focused in a way that is both sustainable and yields long lasting benefits. Proper planning often means improving and rebuilding rather than replacing and destroying everything currently on the ground. We need growth that makes economic sense and is at the same time in harmony with the environment.

Much of our poorly directed growth can be directly blamed on poorly crafted laws and government programs that create or place investment incentives that interfere with the laws of free markets. One example was the "Cash For Clunkers" program that destroyed many fine cars because they qualified as a trade in. Another massive program that should be called a disaster was how America handled the switch from analog to digital television that causes the premature death of literally hundreds of millions of functional television sets. Most of these hit the curb for trash pickup and found their way into the nations landfills. Little effort was made to collect and recycle these units. To make the situation even more harmful to America was that so few of the replacement sets were made in this country. This means the money Americans spent on replacement units quickly left our shores and added to our massive trade deficit while providing few jobs for Americans.

At times it seems our government has excelled in promoting poorly directed growth. Government programs have poured money into hospitals and colleges that many Americans can no longer afford to visit or attend. While these are totally different institutions what they have in common is that both have been propelled into the future using tax dollars that has influenced where and how they are built as well as their design. Colleges have spent billions on theater style classrooms, massive parking garages, spacious student union buildings, and student housing that competes with the private sector. Hospitals often flee the city and construct entire communities on the edge of town leaving a hole in the neighborhood they left, this often results in the closing of long time local businesses and urban blight.

Growth need not be ugly and destructive, but when using huge amounts of other peoples money common sense is often the first thing to go as planners seek to create a clean slate where those in power can construct a monument onto themselves. Historically government has a poor track record when it comes to spending our money well, it seems those making the decisions are easily swayed by self interest or because they have no "skin in the game." Often this results in their failure to demand a fair return on the money spent. This is the main reason many tax payers remain skeptical about claims that infrastructure spending is the silver bullet that will be able to move us forward.

Quantitative easing and artificially low interest rates have acted as a false tailwind pushing the economy along but comes at a huge price and should have ended long ago. We currently live in an abnormal monetary environment that pulls demand forward encouraging consumers to increase debt at the same time it robs and punishes savers of reasonable interest on their savings that play such an important role in our economy. All this feeds into distorting values of goods and markets while encouraging risk and leverage. We have been presented with a "get out of jail" card that is far from free, money by its nature is not free and the withdrawal of this program by its design will create its own headwind.

Governments across the world have further muddied the water by making minor changes in how they measure economic growth by revising how they calculate their GDP. This has given the false illusion of the existence of more growth than really exist and has lowered GDP to national debt ratio thus making government debt appear less dramatic and crushing. Some countries have even gone as far as to including things like prostitution and other illegal activities in a way to boost GDP and in effect lower their ratio of GDP to government debt. This number as with most numbers once put out there is subject to full blown manipulation and spin. We must never forget that money issued to people in the way of such things as food stamp vouchers loop back into retail sales and appear in the figures issued by companies like Wal-Mart. Obamacare has perpetuated the same effect in healthcare.

Quality Directly Effects Value
This means the GDP number we are spoon fed and await with such glee has little to do with real growth but more likely mirrors, or can be nothing more than a reflection of monetary pumping. This number fails to highlight a slew of important factors that feed directly into our standard of living and the health of our economy. In 2013 in advice to their government the UK's Natural Capital Committee highlighted some of the failures of GDP when they pointed out its focus on flows can allow an economy to run down its assets while recording high levels of GDP growth until a point is reached where this begins to impact future growth. They went on to make it clear the recorded GDP growth rate is prone to overstate the sustainable growth rate.

The quality of growth directly effects its value to both the economy and eventually society, but sadly government shows little interest in a more honest reflection of economic growth. Absent in almost all government numbers is a reflection of how bankruptcies and the fact many debts don't get paid off but are simply written off effects the economy. In a post a while back I wrote about how new business start-ups propel the economy forward when created but often leave a wake of destruction behind that last for years when they fail after a very short life. In the recent decades following each recession jobs have returned more slowly than in the one before, this trend should be considered a troubling sign that should not be tied to just the changing world economy, but also to government actions. Small business in many ways responsible for creation of most jobs is under assault.

Today many regulations are tilted in the direction of favoring big business and weigh far heavier upon small firms. To make the playing field even more difficult big business has a slew of options in regard to raising money that are not available to the small entrepreneur. When small  firms fail and their customer base shifts to their larger competitors, this shift is not the creation of "real growth" it is merely a shift, this is one of the main reasons this recovery is so weak. Those who claim lower interest rates as the answer should never use as a comparison the recession America experienced in 1982 to our current woes. That recession was self induced when Fed Chairman Paul Volcker raised interest rates to curb inflation. The reason behind that recession is far different than what we face today making invalid any claims of similarity, and that is why back then dropping rates did indeed bring back a surge of activity.

Footnote; Your comments are welcome and encouraged. If you have time please check out the archives for other post that may be of interest to you. The post below are related to this article.


  1. Hi! I'm enjoying your blog, just had a quick question why when a small business goes under, and then they decide to go to Walmart instead, why is it not considering "real growth?" I know its not a good thing but why is it not real growth. Thanks and keep up the good work!

  2. Thanks for your comment, As to your question, yes this will show up as increased sales for Wal-Mart, but if we are looking at a sale that was merely "transferred" away from another store no real gain in total overall sales takes place.