We all gain an understanding of gross income vs. net income when it comes to tax time and many of us forget the relationship shortly after. What do these two terms have to do with our economy?
The U.S. G.D.P. (Gross Domestic Product) is an indicator of the total of goods produced with no regard to the cost of producing those goods. Gross simply indicates the positives with total disregard of the negatives. Your gross income simply states what you brought in without taking into account any costs against that income (deductions). The resultant is net income.
This becomes important in looking at how our Gross Domestic Product rose. It did not do so on the basis of productivity or demand alone. GDP rose because the government gave it no other choice. Even the White House has not argued against the fact that cash-for-clunkers and the stimulus package are totally responsible for the current positive GDP.
That means that 100% of the GDP increase came by taking money away from the economy (the private sector). We also have a measure called Net Domestic Product which would more accurately measure the strength of the true economy, but no one is talking about that number. In fact, I can’t seem to find it on the Bureau of Economic Analysis website or much of anywhere else.
Imagine that you brought in $60,000 gross income in 2009, but you spent $60,000 to get it. Obviously, you wouldn’t have gotten to keep anything and your net income would show that. You would have had a net income of $0. That’s where we really are in Q3. A GDP that was totally brought about by spending our own money. That’s a net of zero, zilch, nada, nothing.
The concern isn’t just the absolutely misleading indicator that GDP can be when the costs of that product are not quantified. It’s what happens when the input to that product are removed. For our economy, that’s the already over cash-for-clunkers, the recently-ended first-time home buyers tax credit and the White House admitting that the stimulus probably won’t provide much more than it already has. When all of that taxpayer funded productivity is gone… we have a mess in the form of a double-dip recession or W-shaped recovery. These are typically slaughters for all those that believed that the economy was improving instead of understanding that the government was just making it appear as though it was improving. Many people leverage themselves (new car loans, credit card debt, etc) or invest a large portion of their nest egg thinking that things can only get better.. only they don’t.
The government tells us that GDP made its largest gains in a long time, but then we look at the fact that consumer spending took the largest drop in more than 9 months and that real incomes (our paychecks) haven’t gone up at all during the Obama reign). 70% of our economy is directly tied to consumer spending and our money. It’s obvious where the increase in productivity came from and it had nothing to do with a basic improvement in the American economy.
Business understands this and is continuing to lay-off or hold-steady on employment and investment. Professional investors understand this and are trying to get out while maintaining some profit (lately it just looks like they’re getting out). Some Americans understand what’s going on and are deleveraging (paying off credit cards, loans, and real-estate) at an historic pace. When we look at the fact that 9 banks failed this past Friday, it would be hard to see a picture as-rosey as Obama would have us believe.