Friday, March 2, 2012

The Lost Decade – United States Economy Has Given Back 10 Years of Economic Progress

Time to Party Like Its 2002

For those who have been economically successful in the United States for most of their lives, the economic and financial progress has been steadily upward.  In fact, a majority of U. S. residents have experienced a life where each year brings higher income, a more expensive automobile, a better house, and an overall higher standard of living.  Vacations have increased from one week to three or four, and camping has given way to resorts. 

Most of those people who have enjoyed this success would argue that there is some unwritten rule that says economic conditions, at least for them, must improve every year.  Alas there is no such rule.  There is no guarantee that future generations will have better lives than current generations.  In fact, over the last decade the level of economic conditions has actually regressed, and on average most western economies are lower today than they were a decade or so ago.

The Economist magazine has developed  a set of measurements to determine the extent to which an economy has advanced or declined, and if it has declined, to what year it has declined back to.

In order to assess how much economic progress it has undone, The Economist has constructed a measure of lost time for hard-hit countries. It shows that Greece’s economic clock has been turned back furthest: it has been rewound by over 12 years. Elsewhere in the euro area, Ireland, Italy, Portugal and Spain have lost seven years or more. Britain, the first country forced to rescue a credit-crunched bank, has lost eight years. America, where the trouble started, has lost ten        

Looking at the economy in terms of real GDP per person, which is the best measure of income per person adjusted for inflation and population growth we have this.

A different measure of GDP is needed to see how well consumers are doing. Inflation needs to be stripped out since it is higher output, not higher prices, that make people better off. Population growth also needs to be taken into account, since living standards are best measured on a per-person basis. Measured by real GDP per person a third of the 184 countries the IMF collects data for are poorer than they were in 2007. These 61 countries have each lost at least five years.

Some have not yet learned the lesson that economic growth is not inevitable.  The IMF is one of them.

The IMF predicts that in three years Italy will be the only G7 country with real GDP lower than in 2007. Within this group, America, which is already growing again, is in a better position than Britain, which is not.

But exactly why that would be the case is not clear.  It is certainly not the situation in Europe

Unlike income and GDP, there is no reason why unemployment statistics should improve year on year. But many advanced countries had managed to reduce joblessness to new lows in the years before 2007. The crisis blew all those gains away. In America the unemployment rate stands at 8.3% of the labour force, its 1983 level. In Britain it is at its worst for 17 years.

And what policy is Europe implementing.  They are putting programs that will reduce rather than increase growth.  The spectacular failure of Britain’s policy has resulted in even more austerity, and austerity in France, Spain, Italy, Portugal and Greece can only make things worse.  Ireland is the only place of hope, not because of policy but because it is a small country whose economy may recover due to exports. 

But one of the few absolutes in economics is that not every country can have a trade surplus.  Really, it is, you can look it up. 

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