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On the Continuing Zombification of the US Economy
How much of the economy is now in zombie hands? Cindy Williams, of MIT’s Security Studies Program, figures that the US now devotes about 6.2% of its GDP on “defense” and related activities, including international affairs, homeland security, veterans affairs, and intelligence. She was not trying to figure out how much the nation could spend effectively, only on what it could afford. That, she calculates, is between 2.1 percent and 3.4 percent of GDP. If this is true, we could say that about 3% of GDP is either wasted, unnecessary, or unaffordable. That’s about $450 billion right there.
As to health care…we can assume that the standard of health care is acceptable in those countries where people live much the way Americans live…and tend to live longer. In those countries — mostly in Europe — people spend about half as much as they do in the US, giving us an overspending of about $2,500 per person, or about 5% of GDP…or about $750 billion. Education expenditures are twice what they were, in real terms, when US students got the same results they get now. The US currently spends about 6% of GDP on education. This suggests that 3% is wasted. That’s another $450 billion.
As for finance, it is impossible to measure how much of it is worthwhile and how much is just money-shuffling and debt mongering. But we will take a guess anyway. In 1940, the financial industry accounted for just 2% of the economy. By 1960, it was about 3%. Today, it is 8% or 9%. Before the big run-up in debt began — in 1980 — the financial industry probably averaged about 4% of GDP. The extra 4% is arguably wasted…it merely transfers money from the wealth-producing parts of Main Street to the wealth collecting parts of Wall Street. Four percent of GDP is another 600 billion, or so.
Adding it up, education, health and defense together may be costing the nation $1.65 trillion — almost exactly the amount of the 2011 deficit. In other words, if the squandering were stopped, the US budget would be in balance. Add the waste in the financial industry, and you are up to $2.25 trillion — or 15% of GDP. Compare that to the IMF’s calculation of total national savings at 10% of GDP. (We don’t know how the IMF got this figure…it seems high.) And now let’s return to our small farmer to try to understand what these numbers mean.
The small farmer wants to get richer. So, he creates a surplus of 10% per year. This he will invest in greater production so as to increase his output (his wealth) year after year. But he invests poorly. He plants in swampy areas. His seed gets wet and rots. Birds eat his grain before he harvests it…then, he waits too long, and much of the harvest is lost. Imagine that he squanders 15% of his output. Result? He grows poorer, not richer, at a rate of 5% per year. That is the price of a zombie economy. You get poorer. If the economy appears to grow, it is usually growth in unproductive industries. If people appear to live well, it is because they are living off the accumulated capital of the past. At the present pace, over the next 10 years, the real value of America’s output will fall nearly in half. Measured in terms of output, Americans will be only half as wealthy as they are today. Get ready for it, dear reader.”
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