Yes, the economy is still broken. But it's not about GDP.
by David Atkins
Consumer spending is still weak--but it may be that reduced spending on healthcare is a big reason why:
The economy contracted at an annualized rate of negative 2.9 percent in the first quarter of this year. In other words, the economy in the first three months of the year actually shrank. The contraction is worse than expected: forecasters were predicting it would be just negative 1.8 percent. And to give you a sense of scale, GDP fell by 8.9 percent in the fourth quarter of 2008, at the depths of the recession. In other words, this is an ugly number...
The fall off in consumer spending— technically known as personal consumption expenditures—is what few people expected. When the BEA’s second estimate of GDP found that the economy had contracted at negative 1.0 percent, investors kept calm for two reasons: the nasty winter had slowed economic activity in a couple major sectors (housing, etc.) and consumer spending was still strong. Now, the latter reassurance is gone.
But this may be a case of bad news that’s not so bad—and maybe even good. The reason why consumer spending fell is that health care spending decreased by 1.4 percent in the first quarter. In fact, in the BEA’s second estimate, health care spending contributed 1.01 percent to the growth rate. Under the third estimate, it subtracted 0.16 percent. In other words, health care spending went from a strong contributor to GDP growth to a detractor from it—all in a quarter when millions of Americans gained health insurance.
Former Congressional Budget Office director Peter Orszag was one of the only ones to see this steep drop off in health care spending coming. But even he was surprised by Wednesday’s numbers. “Here’s what’s truly astonishing, which is that in the first quarter of 2014, there were millions more insured people and total spending fell by 1.4 percent on an annualized basis in real terms,” Orszag said. “It’s almost mind-blowing."
This is one of those cases where GDP growth is not actually the best indicator of social health. There are a lot of things that people can spend money on that don't contribute to people's well being. For instance, a family that saves its money, has one parent at home to take care of the kids and remains healthy because the nearby river isn't polluted by a slag-producing factory, contributes far less to the GDP than one whose parents both work outside the home at a polluting factor and pay for daycare and medical care for a cancer-striken child.
GDP growth is an awful way to measure social and economic health, and it's not what we should be looking at. It's much better to have a slower-growing, more equal and fairer society than a fast-growing unequal and unfair one. It just turns out that boosting the working and middle classes is also a better way to stimulate growth over the long term.
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