There is a big difference between statistical measurements of economic growth, such as an increase in gross domestic product, and the improvement of actual circumstances for the average individual. During World War II, gross domestic product jumped dramatically, simply because government spending is a major component and they spent mountains of money on activities that didn’t increase the welfare of the average person and which literally destroyed vast amounts of wealth. That very high economic growth was a phantom, a sham. The average person was subject to shortages of almost all goods, to rationing, to maximum wage caps, and so on. He or she was not at all better off because a statistic said the economy was booming. Even though it had a lot of popular support, the war was very hard on most families, not just the soldiers.

Real economic growth comes only from productivity increases, from investments that produce more things that customers will trade for in markets. By investing in capital, in productive capacity, business firms increase the total amount of goods that are available to society. That increase in quantity has a strong tendency to reduce real prices over time. On average, it now takes significantly fewer hours of paid labor to buy goods and services than it did a century ago.

Actual dollar prices are higher, but only because the central bank continually manipulates the supply of money, with the actual stated goal of increasing consumer prices. They have succeeded, and the dollar now buys about three percent of the consumer goods it could a century ago. Wages have also risen during that time along with productivity, so the net effect is that people with jobs can usually keep up. The poor, those on fixed incomes, and those who don’t have money to invest are a different story. The increase in productivity should be driving the cost of living down, but average prices, including those of financial investments, factories, and machines, as well as consumer goods, are related to the quantity of money. In general, the more money in relation to all things money buys, the higher the average prices will be.

Monetary and fiscal policies are considered by politicians and their supporters in main stream economics as essential tools to boost GDP. The Keynesian rationale is that, if private spending is too low, government and the central bank have to step in and take up the slack. Since government spending is a direct component of GDP, it appears to work. The real question is, however, whether or not the artificial increase in a statistic helps the actual people in society? People who get cash or stuff from government agencies are certainly better off, but at what cost? The existing money comes from productive people and businesses, and new money to finance government debt dilutes purchasing power of everyone else. At best it is a wash, but, more likely, cronyism, bureaucratic inefficiency, and ineffective pet programs waste much of it.

People, individuals, strive to improve their own lives. They want to be better off in some way tomorrow than they are today. They will invent new processes and things. They will learn new skills. They will find more efficient methods and materials to get better results. They will increase their own wealth by increasing their productivity or decreasing their consumption or costs. There will be ups and downs, as there always have been, with business cycles induced by monetary policy and perverted political incentives, but regardless of what the federal government does, as long as property rights and voluntary association are honored and protected, people, families, businesses, and communities will grow and prosper over time, and that is what real economic growth is made of.

Dan McLaughlin is the author of “Compassion and Truth-Why Good Intentions Don’t Equal Good Results.” Follow him at daniel-mclaughlin.com