Fast growth under the Obama administration

One part of this post may be popular, the other will get a “mixed” reception. May be popular: gross domestic product (GDP) is a poor indicator of economic success. Controversial:  according to a better indicator, the Obama administration oversaw an economic boom.

Much better than GDP for judging our economy is the net worth of American households. The Federal Reserve puts it at $92.8 trillion at the end of 2016. The figure rose $36.6 trillion from end-2008. There are many criticisms of President Obama, but national wealth generation on his watch was stunning.

One criticism of Obama could be weak GDP growth, except no one should care much about GDP. Or at least no conservative should. GDP combines aggregate indicators in contrived, often dubious ways. It is then presented as relevant to ordinary Americans. This is convenient, if you like central planning.

REUTERS/Pete Souza.

The easy way to reveal flaws in GDP is examine the simplest method of calculating it, known far and wide among economics undergrads: Y (GDP) = C (consumption) + I (investment) + G + X (exports) – M. (This misses inventories.) Here, endlessly expanding the government – ‘G’ – is always good for GDP. If you treat GDP as representing the economy, as many do, you then sound like Paul Krugman. Conservatives should avoid this.

Or consider ‘M’, imports. According to the GDP expenditure definition above, all imports are harmful. The US navy could blockade our own ports and GDP would rise. If you then treat GDP as representing the economy, you sound like Peter Navarro or the AFL-CIO. Conservatives should also avoid this.

These attacks may seem silly. But GDP per person is the same regardless of how GDP is calculated. It is almost universally used and means almost nothing. An individual’s share of gross capital formation or product taxes (elements of GDP)? If you believe your GDP per person is meaningful, try spending it.

Why use GDP per person when we have the real thing – how individuals and households are actually doing. If GDP rises but individuals and households aren’t prospering, this is no success. Net worth flows directly from real-world results, not an accounting equation. Current income for individuals or households is better than GDP but net worth captures income over time and is therefore more comprehensive.
GDP per person is the same regardless of how GDP is calculated. It is almost universally used and means almost nothing.

Net worth is measured by household rather than individual because some members of households don’t have net worth yet (divide by average household size for an individual figure). The $36-trillion increase while Barack Obama was President is greater than all the household wealth the US created from our founding thru 1997. Not bad for a socialist.

Yes, there are important qualifiers to attach. The President isn’t directly responsible for household net worth (thankfully). He is directly responsible, in part, for federal debt. Nearly as much federal debt was accumulated under President Obama as in all of American history thru 2008. Ugly. Still, the $9.5 trillion federal debt added 2009-16 looks more affordable given the explosion in household net worth.

Another blow may be more telling. Probably the most important contributor to rapid wealth creation the past eight years has been unprecedented loose money. It’s much easier to make money when it’s very cheap to raise money. See the stock market.

And here’s the hitch. The populist anger supporting President Trump and Senator Sanders isn’t about GDP per person. It’s about those with good access to financial markets piling up wealth in staggering fashion while the majority of the country sees little or no gains. You can’t capture this with GDP; you can with household net worth. Aggregate wealth soared on Barack Obama’s watch, but ordinary people felt left out and demanded change.

This is a cautionary tale for the Trump administration. We’ve already had fast growth in a concrete, very important indicator. Faster GDP, which has no immediate connection to people’s lives, will not help unless it delivers wealth to people who have missed out. This will involve much more than simply striving for four percent GDP growth.