TYR reads Lacy Hunt: “No Increase in Standard of Living Since 1997”

In the following video posted @ Casey Research, Mr.Hunt convincingly argues that the increase in debt levels in the economy  from about 240% of GDP to 350% of GDP since 1997 is the real cause behind the stagnation of the standard of living in the USA during the same period. On a broader scale, the interventionist, Keynesian, policies followed by the USA government since the 1960s, an economic model that favors consumption over production, are at the root of the present economic crisis.

He traces the onset of this “age of debt” to the 1960s, when both political parties, republicans and democrats, advocated policies that increased the involvement of the government in the economy. James Tobin, Nobel Prize winner and a Keynesian economist, gave “theoretical” backing to this government (and monetary) intervention by postulating that macroeconomic science was powerful enough to modulate the business cycle (recessions/expansions) with a positive outcome, that is, increasing the welfare of society.

Another economist Arthur Okun proposed that a way to ascertain the validity of the assertion that government involvement creates positive welfare, might be the so-called Misery Index, defined as the addition of the Unemployment Rate (UR) and the Inflation Rate (IR). For instance, if the Unemployment Rate is 5% and the Inflation Rate is 3% the Misery Index would be 8. The lower the index the better off a society would be.

Mr. Hunt uses the Misery Index to prove that since the onset of the interventionist policies (1960s), the Misery Index has always been higher than before interventionist policies were used (1950s).

Perhaps the most important consequence of the application of these interventionist policies has been the secular increase in debt levels in the USA economy. The idea was supposed to be that by inducing people to get into debt, they would consume more and so the economy would grow more creating a virtuous circle. Reality could not be more different. As debt levels have steadily risen, welfare has not increased. The reason, according to Mr. Hunt lies in that debt has positive effects only when it is used in such a way that creates an income stream (cash flow) that repays the debt, that is, when is used for productive and sound investment, not consumption.

It is important to remark that Mr. Hunt’s calculation of the standard of living probably understates the severity of the retreat in living standards. The standard of living is computed by deflating Personal Disposable Income (PDI) with the Consumer Price Index (CPI) and getting a number that is comparable across time…or so it would be if the CPI was properly computed. The fact is though, that the CPI calculation has been changed many times, most specially since the 1980s, with the result that the official CPI in 2012 is much lower than what it would be if it had been computed according to the 1980s rules, that is, the CPI is misleading and systematically understated. Since a lower CPI gives you a higher real DPI, DPI is overstated, and the standard of living has not risen from many years before 1997, making Mr. Hunt’s thesis even more valid. For a complete treatment of this crucial issue please see John William’s ShadowStats.

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