Newspapers have been covering Benjamin Bernanke’s mid-September statement that the recession may be “technically over”, by which he presumably meant that U.S. Gross Domestic Product (GDP) was no longer shrinking. Should we pay attention to GDP statistics or whether or not we see business investing and people getting hired for non-government-related jobs? The technical definition of GDP includes government spending. If the government were to double all of its employees’ salaries, printing sufficient money to cover the increase, GDP would increase. The government could end any recession in 10 minutes by doubling all the amounts paid to doctors and hospitals through Medicare and Medicaid. The government could send out $500 checks to every American in exchange for people filling out a survey on what TV programs they watched in the preceding week (survey results were produced!). There is no subtraction from GDP for government borrowing that must eventually be repaid.
A statistic that can be manipulated as easily as GDP should not be used to gauge the economy’s health. The obese sedentary guy who takes a statin will end up with a low measured cholesterol level… and he’ll drop dead of a heart attack all the same.
What could we look at? How about private investment. Without investment there won’t be growth in productivity, wages, or jobs. Government investment isn’t sustainable in the long run because eventually there has to be some private activity to be taxed to feed the government. Data on private investment as a component of GDP are available from www.bea.gov. The NIPA table released on August 27, 2009 (direct link that may rot) shows that “gross private domestic investment” was falling in 2007 and 2008, mostly due to residential housing being lumped in. Investment was falling at a rate of 50 percent per year in the first quarter of 2009, at a rate of 25 percent per year in the second quarter (Q3 data are not yet available). The fall was not simply due to Americans deciding that they could live with their parents. Investment in “Equipment and software” was falling at a rate of 36 percent in Q1 of 2009 (after three years at that rate of decline, American business would only be investing one quarter as much as it had in 2008… in the U.S.; they might be investing vast sums in China or India but those don’t add to our GDP).
An alternative statistic would be the total number of private sector jobs. The number of jobs that the government can extract taxes from is about the same as in 1999 (earlier posting). Despite a larger population, the U.S. has not added any private sector jobs over the last 10 years. I like this statistic better than anything having to do with earnings because it is not subject to distortion from the financial sector (a few Wall Street guys collecting $100 million bonuses can make it look like the economy is growing sustainably). Nor is it subject to distortion from America’s pension system. The 41-year-old retired Boston city transit workers and the 48-year-old retired autoworkers get and spend checks every month, but an increase in the amount of money society allocates to paying people not to work is not a sustainable path out of a downturn.
It surprises me that people are willing to pay attention to the GDP statistic, at least in the currency that the U.S. government can print. If we must use GDP, shouldn’t we at least look at it adjusted for what the dollar is worth against a basket of foreign currencies? Usually currency traders aren’t fooled by our politicians’ shenanigans. The Euro was introduced in 1999, ten years ago, and was worth about $1. Today it is worth $1.46. Nominated in dollars, it looks as though the U.S. GDP grew from $9.5 trillion to $14 trillion . Nominated in Euros, however, the U.S. GDP is about the same as it was in 1999. Due to population growth, this would mean that the average American should be slightly poorer than he or she was in 1999, aside from any benefits that stem from improved technology.
Should we be putting on our King Bush II-style Mission Accomplished flight suits and celebrating the end of the recession because our government has figured out how to borrow more money and then spend it faster than ever?
In contrast to the Iraq war, giving the impression that “the worst is over” might increase consumer/producer confidence. At least, that is what politicians (and central bankers) like to think. So, any number that looks positive is happily adopted as a signal that the worst is over. Then, keep your fingers crossed and hope that people start spending.
The big question, of course, is whether people are ‘fooled’ by government-spending inflated GDP numbers. If they are, it might actually work! The same holds for inflation: if people’s expectation of inflation does not rise, printing money might actually work. If they don’t believe it, however, the worst is still to come. It might be interesting to sketch a doomsday scenario, balancing your US-recovery plan. (like: what could happen if we keep on following the same path as today. )
In Europe, there are some countries that have, in the past, elected reform-oriented, cost-cutting governments in a recession (Netherlands 1980s, Germany today?). How is that in the US? The ideas in your US-recovery plan are very inspiring, but is there any evidence (state level maybe?) of officials being elected on a “painful, but necessary” reform-ticket?
Very good post. However, a couple of points:
1. GDP is adjusted for money borrowed from overseas. I think most of the federal deficit is financed by foreigners.
2. I don’t think its right to pick out the Euro as a currency to quote the US economy in. If you’re going to quote it in non-nominal terms, use purchasing power parity, or PPP. in PPP terms, the US economy is 1/7th smaller as a percentage of the global economy than in real terms. In PPP terms in 1999, the US was 36% of the global economy (30% in real terms).
I think the importance of psychology is overstated. Even if one doesn’t know the Fed is printing money, that information is communicated in the market through pricing mechanisms. Similarly with GDP, even if the government tells everyone that things are hunky dory, the pricing system communicates to them the true cost and scarcity of resources.
It is a good thing to debunk GDP. If you inspire people to spend in an economy that is crashing for a good reason, you prolong the malinvestments made before the depression. This is exactly what government has been trying to do with the bailouts… they’re trying to preserve all politically connected industries built upon screwy monetary policy.
Consumption is not always good. Saving is not bad. It tells entrepreneurs that consumers will not consume now, but consume in the future, because we’re in a depression now and that sucks. This causes owners to liquidate current malinvestments and build for the future in an attempt to earn what people are saving now.
Enough with these hairbrained monetarist/keynesian theories. Keynesians were laughed out of economic conferences 30 years ago. What’s with this nonsense?
A few random thoughts:
1. Looking at private sector jobs ignores deficit neutral government programs. One might snidely quip that they don’t exist, but that’s not really clear. For instance, there might be government research that would be taken up by private industry anyway. The method of payment for this research in the first case is taxes, and in the second case would be higher product costs. Those two costs are ideally equivalent.
2. Looking at just GDP also biases against consumption of goods that reduce measurable consumption. To take a sci-fi example: the Star Trek universe has machines that could synthesize any kind of food. If such a device were to exist, it would wipe out a large portion of the restaurant industry, but we would all be better off for it. Fantasy? Well, that’s sort of what’s happening in the music industry with the proliferation of the iPod, the greatest copyright infringing tool/incentive ever invented.
3. Professor Hamermesh at UT has done some work on hidden output. For instance, when people are unemployed, they tend to work on capital improvements to their homes, which is not reported in GDP measures.
4. Measuring GDP against foreign currency is problematic if other countries are also increasing spending because of the same fundamental worldwide problem.
5. What about using poverty rates as part of a bigger measure, or perhaps defining a comfort line? Because really that’s what we should care about — that the general wealth of the nation is high.
@Arjgen
So, any number that looks positive is happily adopted as a signal that the worst is over. Then, keep your fingers crossed and hope that people start spending.
When consumer confidence is restored than I am quite certain that we’ll exacerbate our economic problems via the debasing of the U.S. dollar. There are trillions of dollars sitting in reserves (M1) that will begin to trickle out when consumption starts again. Since the U.S. effectively has no savings it’ll require another credit induced haze. But I think the party will be short this time around.
The mal-investment via credit drunkedness + inflation + government stimulus == disaster.
So, any number that looks positive is happily adopted as a signal that the worst is over. Then, keep your fingers crossed and hope that people start spending.
This assumes the (utterly ridiculous) Keynesian notion that recessions are caused by “animal spirits”, and boosting “consumer confidence” is the way out. But if the recession is caused not by non-existent magical forces but by real errors in economic decision-making in the past (e.g., caused by bank credit expansion), the way out is to correct the errors, not induce greater resource misallocation.
To pile on Arjen, few people pay attention to GDP, but Joe Sixpack looks at HIS PAYCHECK and knows the difference between a healthy raise, a trivial raise, and a layoff notice. A “jobless recovery” isn’t.
And after years of trivial or nonexistent wages followed by record layoffs, people are not easily misled by government statistics.
@Wes: regarding #5, see Paul Krugman on “the 80/20 myth.” The upshot is that with private employment stagnant and population growing, even when wages were growing, it was only noticeable to the top 1% or so. Forgetting the poor, even “educated professionals” have experienced stagnant wages for the past decade…and this year the layoffs hit.
Very good point on separating private vs government investing, I don’t think too many people take this into consideration. I guess the government is hoping those companies like GM will grow and provide a return on investment, but historically this has never been the case as far as I know. Government can invest in basic scientific research that all companies can take advantage of, but it is very poor at picking successful companies.
An interesting note from up here in Canada is that one financial institution, Scotia Capital, did a study and found out that Canadian households are sitting on $635 billion to $1 trillion in cash or near cash, which is about $19k to $30 k in cash for every person in Canada. So now the banking industry is saying please invest the money in something else than the money market or else the economy will not recover. So they are telling everybody to join the stock market lottery so that the company stocks will go up and the boards of directors and executives can increase their bonuses. I hope the general population in both the US and Canada will demand change to the financial system, but it looks like it will be the same old policies that will prevail. There will be a point where both the US and Canadian governments will run out of money to support all these inefficient industries and government projects, at this point society will collapse. I don’t think society will react until its too late.
It looks like we have pockets of intelligent people with reasonable solutions to the financial problems, but its always looks like the governments are run by a bunch of monkeys.
You hit the nail on the head. There is a reason that GDP growth and inflation always rise proportionally and in a similar fashion. Ist is because the GDP is fueled by inflation. And by inflation I mean new money, not just price rises. This recession was ended by what they call “quantitative easing”, or drowning the markets in fresh money(debt).
You measure the US GDP in Euro, but that is also not accurate, you should measure it in a basket of hard goods, like oil,gold,agricutural goods, minerals. The Euro currency has also been inflated to the heels, just a bit less than the dollar.
For now the collapse has been postponed, we’ll see what happens in 5 years, when the next bubble bursts,whatever it will be.