So, I was on a radio show, "The Takeaway," this morning at 7 am and 9 am, over at the Duke ISDN studios. (Had to leave home at 6:10 am; kind of groggy).
(Podcast of shows here, or soon will be...)
Anyway, it turns out that GDP is up 3.5%.
It ALSO turns out that that number is almost totally fake, in the sense that it does not reflect real growth. Much of it is the "my cash for your clunker" program. Cash for Clunkers was a pretty dumb program; Edmunds estimated that the program cost taxpayers $24,000 for every car sold, over and above the cars that would have been sold anyway. (Here are the Edmunds numbers....)
And the "First time homebuyers" fraud...um... program? Don't get me started.
GDP is C + I + G. Spelled out, that means that Gross (total, before exports) Domestic (what we do in the US) Product (aggregate economic activity)
equals the sum of: Consumption by consumers (C)
plus
Investment by business (I)
plus
Spending by government (G)
So, the total went up by 3.5%, and that seems like growth.
But all the increase is in G, financed by the increased deficit. It's fake. It's not real growth. It's just shifting money from taxpayers tomorrow into Obama's approval rating today.
Seriously, all we did was blow up G like a giant helium flying saucer, with no balloon boy in it. The 3.5% "growth" is fake. It's all G. Ask yourself: why is this a "jobless recovery?" Why aren't consumers going back to the stores, if this is a real recovery? Answer: it is NOT a real recovery.
Check this quote from Christina Romer:
“Data released today by the Commerce Department show that real GDP grew at an annual rate of 3.5 percent in the third quarter of the year. This is in stark contrast to the decline of 6.4 percent annual rate just two quarters ago. Indeed, the two-quarter swing in the rate of growth of 9.9 percentage points was the largest since 1980. Analysis by both the Council of Economic Advisers and a wide range of private and public-sector forecasters indicates that the American Recovery and Reinvestment Act of 2009 contributed between 3 and 4 percentage points to real GDP growth in the third quarter. This suggests that in the absence of the Recovery Act, real GDP would have risen little, if at all, this past quarter.”
Right. Without the increase in G, there would be no increase. BUT EVERY DOLLAR WE SPEND ON G IS BORROWED FROM OUR CHILDREN!!!! Keynes said that we should pay people to go out and bury jars full of money, so that other people would have "jobs" digging up the jars. No. No, no, no.
UPDATE/EXPANSION:
Simple answer: this is the Keynesian fallacy.
If I buy a refrigerator, that is a real transaction. And it counts toward C (consumption)
If I own a business, and I buy a new machine tool, or fork lift, that is real, also. It counts toward I (investment).
Real recoveries are led by C + I
The Keynesian fallacy, based on the "multiplier" theory, is that government spending causes growth. And it COULD, if the money is spent on infrastructure, keeping us safe, etc. But then the growth that it causes come from the consequent, LATER increases in C and I. (And, the multiplier is NOT 4; it's more like 0.8 to 1.1, at best. It may be negative!)
THIS growth, this GDP number today, is just an accounting trick: Suppose I borrowed $10,000 on my credit card, and then told my wife, "Look, here's the $10,000, our income has gone up by $10,000!" Then I go out and spend the "income" on a new bass fishing boat.
She would hit me with a chair! Borrowing money and spending it is NOT increased income.
Well, the income of the nation is GDP. But we are borrowing money (the deficit) to finance increased spending in G (government).
So, an accountant might say that C + I + G is going up. But if the increase is all G, and it's borrowed, then that is not real growth.
21 comments:
GDP measures the total amount of Production taking place in a quarter or year. It is estimated by looking at expenditure (c+I +G+nx) but that is a means to the end of measuring real output produced. The output is "real" not "fake". More cars may have been produced because of the dumb clunkers program, but that production is real. Same for the increase in "residential fixed investment"- new home production due to the tax rebate. Spending and production are not the same thing. At full employment the government can't magically produce more output by increasing G (resources would have to be shifted from private sector to public sector production).
But there were no new cars, or houses, to speak of.
The GDP increase is an accounting trick, taking money from the deficit and adding it to GDP, hoping it will stick.
Your "at full employment...."? I don't even know what that means. Because it doesn't mean anything.
The BEA's press release breaks down the changes. Obviously there was a lot of G, as the biggest growth was in durable goods (due to Cash for Clunkers). But there were certainly some things that look like growth in C and X. Non-durable consumption was up, as were both imports and exports.
As for I, it's true that it looks like investment continued to decline, but at a slower pace than last quarter, and there were actual increases in some of the investment categories (in addition to the obvious increases in residential property investment, triggered by the subsidy).
Lots of interesting details @ http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
I think you're right that we can't take the increase at face-value, but I disagree that it doesn't tell us anything about improvements in the real economy.
Oy.
First off, GDP does too include net exports.
Second, GDP is a measure of current production. Whether an increase is sustained remains to be seen.
Third, the point of stimulus is not to increase the long-term rate of growth. Nobody expects that. It is to help the level of GDP return to trend (the long-term rate) faster. Moderate the business cycle.
Fourth, it isn't only the purchase of a refrigerator by a consumer that adds to GDP. A frig added to inventory goes to GDP too.
Fifth, the fact that the increase is caused by a higher deficit does not make the produced output fake. See point 2 above.
Sixth, there is no problem with a deficit based stimulus shifting production from the future to the present. In a recovery GDP usually lurches above trend temporarily. A little less lurch above trend later in return for a faster recovery now is usually seen as beneficial.
Seventh, there is not necessarily any less production in the future from a deficit in the present, unless you can show the deficit precluded some private investment in the present. The debt-service in general is a transfer, so you should be ranting about that, if anything.
Eighth, your analogy to the bass boat is a non sequitur since your borrowing does not cause you to earn any additional income, unlike a deficit-financed stimulus in a period of high unemployment.
No wonder you are in politics!!
groggy, and a little bit cranky too, it would seem...but that's cool, this is a fantastic post.
I think you might be missing the point Max. I don't think anyone is arguing that the BEA miscalculated GDP. Instead, the point is that this GDP number may not be particularly useful as a barometer of the health of the economy, in that it might be temporarily inflated by the government stimulus package.
Were such a large GDP growth number to come out in the absence of a stimulus, it would be a very impressive signal of the return of sustainable growth. As is, not so much.
The stimulus is supposed to 'temporarily inflate'. That's what stimulus is. (!)
You can't blame a bus for not being an airplane.
at least GDP didn't decrease, right? That's something to cheer about, sort of.
I can't believe how many of these people defend these phony index numbers like GDP. Look; when we entered WWII, we lost 30 % of the labor force to the war and replaced what we could with far less skilled labor for the vacant positions. There were rations and companies made up for losses by reducing quality--for example, 19 of the 20 candy bars reduced there size; fat was added to hamburger meat; clothing would fall apart after once in the wash. Yet this was supposedly a prosperous time with a 13% rise in GDP between 1940-44. On the other hand,1946 was statistically a depression. However, private output increase 40% in that year alone. History ignores the "depression" off 1946 yet attributes the recovery of the economy to WWII "prosperity." These indexes do not account for the loss incurred by taking resources away from private production; or the gain from removing government obstacles and moving resources back into private production. See: Broken Window Fallacy
-Sean
Yes, Max, stimulus is supposed to temporarily inflate. That's why it's a horrible thing to do. Do you ever ask yourself if the thing should be inflated the first place? Housing prices are high and start to drop, well we better inflate those. Why? The stock market is high and starts to drop, well we better get those numbers back up. Why? Oh, the automobile industry is starting to lose ground, let's roll out some stimulus. Why? Give me some tangible reasons for doing this. How does stimulating and inflating produce actual benefits to a person? Aren't there any downsides?
The worst part of the "stimulus" is that the same could have been accomplished with monetary policy. At least then we wouldn't have the debt too. Yes, Max, its just inflation and that is exactly why it isn't real.
In the context set in the post, Mr. hell, if that is your real name, 'inflate' referred to GDP, not the price level, nor house or asset prices. If you don't know see the point of preventing a reduction in real GDP and employment, I'm afraid a dialog between us would not be of much use.
As for inflation of the price level, Mr. Calhoun, the GDP growth numbers scorned in these parts are corrected for inflation, of which there has been very little lately in any case.
The level of understanding in the post and these comments is really dismal.
"No wonder you're in politics."
-Max
What are you kidding me? He's criticizing an index number because its distorted by government spending. I wish this was the norm in politics. Or am I wrong? Do most politicians disagree with these GDP numbers that make their redistributive acts look like some kind of productive blessing?
Max, do you care to offer an opinion on whether "Anonymous" is that person's real name, too? I'm sure we'd all be interested in your thoughts given the insight you've shown so far. In any case, I'm asking in light of this 3.5% GDP increase brought on by the stimulus you support, how has it made a tangible difference in anyone's life? From my perspective I only see people who now owe more on their homes than they should have. I only see people who have traded an old car for a new debt. Your wisdom, Max, will only raise employment a little now while invariably leading to large unemployment in the future. And yet you so casually talk about shifting production from the future to the present when surely this will result in goods being created that would have otherwise gone undemanded and thus those resources would have been used elsewhere and to better effect. Long story short, I don't see the point in preventing reductions in GDP and employment if it will only lead to greater reductions in the future, which it will. Let's try to keep up here, Max.
You may not like 'G,' I may not like Justin Timberlake's latest album, but both add to GDP. There is no distortion. The composition of the national income accounts was settled a long time ago. Note in the national accounts 'G' is purchases of goods and services from the private sector. It's production, behind which is employment. It does not include transfers to persons, businesses, or state and local governments. In other words, 'G' and the Federal budget are not synonymous.
How a higher GDP implies more household debt is suggested above but not supported. Why it would lead to more unemployment later isn't either.
Debt can finance consumption, consumption drives GDP. Too much debt gives rise to financial fragility, bankruptcies, and other bad stuff. Too little right now sustains high unemployment, which is also bad. You can argue about the right balance.
I lean on the side of risking too much (public) debt, rather than all the suffering wrought by sustained unemployment. All this fussing over 'G' is deeply misinformed.
I am not sure if I still believe on what government says about the data. As far as I am concern we need more jobs.
If I went down, then the overall increase in GDP was due to capital consumption. For a short time, capital consumption can produce the indicators of prosperity (like increased GDP or reduced unemployment), but it is the economic equivalent of eating the seed corn.
If the government borrows money to dig holes and fill them in or build bridges to nowhere - does this increase GDP? If government does something we agree is useful - build a fighter jet - does this increase GDP? If government borrows and spends twice what they should to build a fighter jet does this increase GDP by twice as much?
And anticipating the answer to my above post - is there any statistic that just excludes government spending on the theory that government spending is an inherently untrustworthy measure of economic well being?
It's the best radio show! I always wake up early at the morning to heard it. The takeaway has been changing my thoughts since 3 months ago.
Your portrayed the topic well.. Especially the concluding paragraph and the mid section made a good read... keep posting...All the best
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