Monday, June 15, 2009

A "Small" loss in GDP Growth.

I was watching the Bill Maher show, and some colossal bag of ignorance stated that, "We can stand to sacrifice a small amount of GDP growth" for the sake of social programs. He admitted that conservatives are correct that such social programs do stifle GDP growth, so at least the conservatives are winning on that front.

What is amazing to me is this man claims to understand the economy, if I went up to him and asked him, "should start saving for retirement now or ten years from now?" His response to my question would be to start saving now. So I am sure that he understands the concept of compound interest, but why can't he understand that it affects the country in the same way. Lets look at a table of how different GDP growth rates would affect a country year to year. We start with country having a base GDP index of 100.


As you can see from the table above, even a small delta in GDP growth in a human life span is absolutely staggering. What is even more interesting is if you assume that each one of these is a country. The country that has the Annual GDP growth of 8% per year might have little to no social programs, however, its economy is 17 times larger then the economy with 5% growth, and 114 times larger then the country with 3% growth at the end of 100 years. This means that even the "poor" in the country with 8% GDP growth are most likely better off then the people receiving services in the countries that have 5% and 3% GDP growth. We see exactly this in America, although our assistance to the poor is low from a GDP standpoint, we don't have to assist that much because our per capita GDP is so high. If you reduce that per capita GDP it means you need more social programs, its a self destructive cycle. We also see this when we look at the history of the USA and Mexcio, in the 1850's the two countries economis where about equal, now the USA economy is much stronger the Mexico's, the GDP growth of the USA was simply much larger then Mexico's.

The key here is the power of compounding, the fact that so many people can ignore the effects of compounding in the long term is why we don't have more people saving at a young age. So when you are looking at the effects of compounding remeber it is always a powerful force wether it is your retirment account, or the strength of the country that you live in.

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