Some interesting thoughts in this blog....
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The end of the recession, determined by GDPphilg - September 29, 2009 @ 1:05 am · Filed under Uncategorized
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 is 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 because it is not subject to distortion from the financial sector (Wall Street guys collecting $100 million bonuses from their shareholders and then from the taxpayers). 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 spends 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?
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