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Okay, Folks, Let's Put Aside Politics And Look At The Facts... [CHARTS]

Henry Blodget

2012-06-21T16:29:00Z

The most important issue in this year's election is the economy.

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Unfortunately, this topic has now been "politicized," which means that you can't talk about it without being instantly cheered or jeered by fans of each respective political team.

But the economy is much more important than this year's election or either political team.

And both teams are responsible for the mess we're in--and so, I am sorry to say, are the rest of us.

And fixing that mess is going to take decades, regardless of who's in power.

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But we have to fix it. Or we're going to become a nation of a few million landed aristocrats and 300 million serfs.

The first step is getting past the political blame-game and understanding what's wrong.

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We've had an amazingly prosperous run for the last 70 years. But we just had a big, unusual hiccup in economic growth.

Real GDP

On a per-capita basis, this hiccup was worse: "Real personal income per capita"--the amount we each take home after adjusting for inflation--is about where it was a decade ago.

Real personal income

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So, what's wrong?

depression walk

Is it that "regulations and uncertainty and taxes are crippling our businesses?"

oranges, fruit, great depression

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No!

great depression

Our businesses are doing remarkably well. Corporate profits just hit an all-time high.

Corporate Profits

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Companies are making more profit per dollar of sales than they ever have before.

Corporate profits as Percent of GDP

What's wrong is that the amazing profits of our businesses aren't flowing through to most Americans. Except at the very top.

great depression

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The percentage of Americans with jobs is at the lowest level in three decades.

Employment Population Ratio

And wages as a percent of the economy have hit an all-time low.

Wages to GDP

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Now, there are many reasons for this, some of which are outside the control of our (lousy) government. Globalization, for example. It's cheaper to make stuff elsewhere, so companies have shipped jobs offshore. But that's not the only problem...

unemployment

The big problem is debt. Total debt across our economy has skyrocketed in the past 30 years.

Government spending

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And not just in absolute dollars. Our debt has soared from less than 100% to GDP 30 years ago to more than 350% of GDP.

Government spending

Put differently, the growth of our borrowing (red line) has wildly outpaced the growth of our economy (blue line).

Total Debt and Total GDP

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In fact, here's what the last half-century of GDP looks like when you subtract the amount we've borrowed from the amount we've made. (Yes, that's a very big negative number).

GDP minus Debt

Here it is on a year by year basis. This chart shows the change in GDP each year minus the change in debt each year.

GDP Growth Less Debt Growth By Year

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Anyone can spend when you give them a credit card. So our frantic borrowing over the past 30 years means that our economic growth has been something of a mirage.

Arlington unemployment

By the way, when people hear "debt," they immediately think of the government. But our ~$50 trillion of debt has been accumulated by ALL of us, not just the government.

depression

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There are three big groups in our economy: Household, Corporations, and the Government. Households borrowed until they had debt coming out of their ears.

Government spending

So did corporations.

Corporate Debt

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And so did the government. Here's "state and local" debt.

Government spending

And here's Federal government debt -- $15 trillion and counting.

Government spending

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Put it all together and--again--our debt has exploded relative to the size of our economy. We have to reverse that.

Total Debt and Total GDP

Basically, we got careless and lost our discipline. And there's not going to be any easy way out.

Biggest Losers

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So, how can we fix our economy? The same way we do anything hard. With sustained discipline and effort and a smart long-term plan.

marine exercise chains

Consumers need to borrow and spend less and save more. The good news is they've already started doing that.

Personal Savings Rate

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And then, lastly, of course, we have to implement a plan to eventually get our massive government deficit under control. For reasons I'll explain, we don't want to do this immediately, in one fell swoop. But we need a long term plan.

Federal revenue spending 1947

For now, let's focus on the government-deficit part of the problem.

government shutdown

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Everyone hates the government these days. All those lazy, faceless bureaucrats. Taking our money. Wasting it. Racking up huge debts we can't afford to pay.

irs taxes

The common wisdom is that the government has gotten absolutely massive. That there are just bazillions of those horrible lazy bureaucrats now living off our hard work (and getting humongous pensions).

Workers at the Internal Revenue Service Center in Covington, Ky., sort many of the thousands of tax returns arriving at the center's mail room Monday, April 14, 1997. (AP Photo/Al Behrman)

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And, yes, there are a lot of government employees. But don't forget that our population keeps growing.

Government employees

As a percent of total employed people in our economy, the number of government workers is actually far lower than it used to be. About 16% of us now work for the government.

Government Employees As Percent Of Employed

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And, by the way, let's be more specific about what we mean by "government." Is it those "state and local" governments that are hiring all those bureaucrats? The cops, teachers, firefighters, and DMV personnel whose pensions everyone's always yelling about? Well, no. State and local governments have actually been firing people in recent years.

State and Local Government Employees

And there are about the same number of state and local employees as a percent of total US employees as there have been for the last 40 years.

State and Local Government Employees As A Percent Of Total

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And state and local governments have actually been balancing their books. (Red = spending, Blue = tax revenue). So that's not where the problem is.

State and local revenue spending

So, then, is it the hated FEDERAL government that has hired all those lazy bureaucrats?

Capitol Building

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Believe it or not, no! The number of Federal government employees has stayed steady for nearly half a century.

Federal Government Employees

And as a percent of total employed Americans, Federal government workers have been dropping steadily and are now near an all-time low!

Federal employees

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So, then, what's the problem? Why has the federal government developed such a huge budget deficit in recent years? (Red = spending, blue = tax revenue)

Federal government spending

Well, federal spending has increased radically as a percent of the economy, and...

Economy

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Federal tax revenue has dropped sharply as a percent of the economy.

Federal tax revenue

No mystery, then, why we've developed such a budget deficit in recent years.

Government revenue spending

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The good news is... the solution is obvious. We have to raise taxes as a percent of GDP (blue) and/or cut spending as a percent of GDP (red). And given that there are 320 million of us who have to agree, we should probably compromise: A little of both.

Federal spending and revenue as a percent of GDP

But, before we go jacking up taxes and cutting spending willy-nilly, we need to understand that there are two kinds of government spending...

aircraft carriers

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The first kind is what we normally think of as government spending: Defense, highways, bridges, NASA, government employee salaries, etc.

Federal spending ex transfers

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Which kind of government spending do you think is bigger?

USS Wasp

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Meanwhile, the OTHER kind of government spending--highways, military, federal salaries, etc.--has actually been shrinking as a percent of the economy.

Federal spending ex transfers to GDP

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Our economy has become highly dependent on those "transfer payments." They now amount to a record 16% of GDP. If we suddenly slashed them, especially while raising taxes, we would give the economy a heart attack.

Transfers as percent of GDP

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It took us 30 years to get into this mess. (Debt = red, GDP = blue). It will probably take us 30 years to get out.

Total Debt and Total GDP

So now you know what's wrong with the economy.

florida unemployment

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So go elect someone who can fix it.

migrant depression

DEAR AMERICA: You Should Be Mad As Hell About This...

Democrats Republicans Unemployment

More...

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