Bad argument drives good argument out of circulation

At Reddit recently I came across The Great American Economic Growth Myth by Lance Roberts at Streettalk Live. It's a very professional-looking site, "brought to you by STA Wealth Management" the logo says, with links to the Lance Roberts Radio Show. The site even offers "Website Help!"

The growth myth post has lots of good looking graphs, and I couldn't wait to read what Lance Roberts had to say. I was okay with it until I got to this part:

From 1950-1980 nominal GDP grew at an annualized rate of 7.55%. This was accomplished with a total credit market debt to GDP ratio of less 150%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There was a couple of reasons for this. First, lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy. Secondly, the economy was focused primarily in production and manufacturing which has a high multiplier effect on the economy. This feat of growth also occurred in the face of steadily rising interest rates which peaked with economic expansion in 1980.

However, beginning in 1980 the shift of the economic makeup from a manufacturing and production based economy to a service and finance economy, where there is a low economic multiplier, is partially responsible for this transformation. The decline in economic output was further exacerbated by increased productivity through technological advances and outsourcing of manufacturing which plagued the economy with steadily decreasing wages. Unlike the steadily growing economic environment prior to 1980; the post 1980 economy has experienced by a steady decline. Therefore, a statement that the economy has had an average growth of X% since 1980 is grossly misleading. The trend of the growth is far more important, and telling, than the average growth rate over time.

Inflation??

Not a word about inflation. Hey, I'm sympathetic to what this guy is saying. "Lower levels of debt" is definitely the key to getting better growth. The focus on production rather than finance is central. And Lance's last three sentences --

Unlike the steadily growing economic environment prior to 1980; the post 1980 economy has experienced by a steady decline. Therefore, a statement that the economy has had an average growth of X% since 1980 is grossly misleading. The trend of the growth is far more important, and telling, than the average growth rate over time.

-- contain an element of wisdom that I tried to capture and use in mine of 5 July:

... when you say "average" it suggests up-and-down variation, but it also implies stability in the value. If intermediate consumption is trending upward as a share of gross output, it is deceptive to speak of its average value.

When I was writing mine, I didn't even realize where the idea came from. That's a nice bit of writing, Lance Roberts. I owe ya one.

But I'm surprised that I got that far reading the article. The paragraph before the graph is simply horrendous. Here, read it again:

From 1950-1980 nominal GDP grew at an annualized rate of 7.55%. This was accomplished with a total credit market debt to GDP ratio of less 150%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%. There was a couple of reasons for this...

As soon as you read about economic growth reaching almost 15% sometime before 1980, you have to think of inflation. You absolutely have to. But inflation is not noted among the "couple of reasons" Roberts presents in that paragraph. Nor is it noted in the paragraph that follows the graph.

In fact, there is only one occurrence of the word inflation in the whole article:

The economy currently requires $2.75 of debt to create $1 of real (inflation adjusted) economic growth.

There is no reference to inflation's contribution to the growth numbers anywhere in the article. Personally, I think this outrageous. After reading the Streettalk Live article I went back to Reddit to get other readers' reactions. Only one other reader shared my concern. Cassander wrote:

That would be an amazing headline chart, except for the fact that it is a nominal GDP growth graph that peaks at the height of the 70s inflationary period, thus rendering it completely deceptive.

I picked up on that, and replied:

I love graphs and I approached the linked article with great anticipation. But WOW was I disappointed!
The "The Decline of Economic Prosperity" graph displays the effects of the Great Inflation, and considers it great growth. The article doesn't even mention inflation in relation to that graph. The article depends on the reader's ignorance to make its argument.

I went on to express similar disappointment with other graphs in the article. Cassander got back to me:

It's depressing, really. The charts really are extremely well done, they even have nice, nonstandard coloring. Someone clearly went to a lot of effort, but they're all complete nonsense.

I couldn't agree more.


I recreated the Nominal GDP YoY % Growth that Roberts shows in his graph. And so you could see the difference, I added inflation-adjusted GDP, in red.

Graph #4: Rates of Growth of inflating (blue) GDP and inflation-adjusted (red) GDP

On Lance's graph, before 1980, we see a trend of increasingly higher peaks as time goes by. My graph shows that, too, in blue. But if you look at the red peaks, growth with inflation stripped away, the trend is clearly down. Real economic growth was getting slower before 1980, not faster.


We definitely put too much emphasis on finance in this economy. Lance Roberts is right about that. And we definitely have too much private debt in this economy, so much that it hinders growth. And, yes, the inflation that Roberts fails to point out did help to keep debt levels low until around 1980. But the growth that he attributes to all those things that I agree with, the growth he points to explicitly -- "nearly 15%" annual growth -- must be attributed to inflation.

It pains me to say it, because I agree with so much of what he says.