Free Markets, Free People
This week, the podcast is 1:07, but, really, the last fifteen minutes or so is such an arcane discussion of GDP calculations that it’s probably unlistenable. But, first we discuss Benghazi and the recent poll that shows 29% of Americans think they may need to grab a rifle and head off into the hills to raise an in the next few years.
The direct link to the podcast can be found here.
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Seems easy enough. That way you can claim to be improving it even while nothing is actually improving in reality:
The Bureau of Economic Analysis announced last week it would be changing the guidelines with which it calculates Gross Domestic Product, more familiarly known as the GDP, the standard by which the size and growth of the economy is measured.
The change comes after more than five years of economic stagnation that, despite frequent claims of a strengthening recovery, have seen high unemployment and extremely slight growth in the size of the economy.
GDP is calculated by adding up the total amount of private consumption, investment, government spending, and net exports. The new changes, which will include definitional changes to expand what is counted in GDP, are expected to add 3 percent to the GDP report, while not changing the actual output of the economy.
The agency claims the changes in calculation “more accurately portray the evolving U.S. economy and to provide for consistent comparisons with data for the economies of other nations.”
Note the emphasized text. Realize that the addition of 3% to future GDP reports will be made without any explanation that a) there have been changes in the way it was calculate and b) in reality, the actual output of the economy has not changed at all.
But the administration will claim victory and the low information voters will buy it while the “no” information voters (those on the left who refuse to challenge anything put out by this administration) will crow about the “improvements” that the administration has brought to the economy.
Meanwhile the unemployment picture will remain the same (about 7.5%) until they can find a new way to calculate that and take about 3% off . Then we’ll be officially “fixed”.
U.S. economic growth pulled back further during the second quarter of the year as consumer spending slowed–a reading that suggests domestic fiscal worries may becoming a more significant drag.
The nation’s gross domestic product–the value of all goods and services produced–grew at an annual rate of 1.5% between April and June, the Commerce Department said Friday. The reading is down from the upwardly revised 2.0% growth rate during the prior three months and a 4.1% rate in the fourth quarter of 2011.
Economists surveyed by Dow Jones Newswires had expected 1.3% annualized growth during the second quarter.
That performance redefines the word “pathetic”. But, you know, that’s not something we really want to talk about during this election season, so let’s concentrate on frivolous things instead, shall we (hey, I thought the left hated manufactured controversies?)?
Real bad according to J.P. Morgan:
This morning we lowered our tracking of Q2 GDP growth from 1.7% to 1.4%. For some time now we have noted that our Q3 GDP call — which was already below consensus at 2.0% — had risks that were skewed to the downside.
After the latest round of data we have decided to lower our projection for Q3 to 1.5%. The strength in inventories reported this morning suggests that businesses may have got caught offsides when final demand weakened this past spring. That inventory build should weigh on production growth in the third quarter as already-cautious businesses seek to work down stockpiles. Added to this downside, the weakness in June real consumer spending will make the arithmetic for Q3 consumption a little more challenging.
Finally, the decline in gasoline prices — which had been seen as an important support to the economy — has partly reversed itself in recent weeks, thereby lessening the impetus to growth from that source. For 2012 as a whole, we are now looking for growth of around 1.7% on a Q4/Q4 basis, about the same as last year and 0.2%-point below our tracking last week. On a year-ago basis real GDP has been growing at a below-trend pace since early last year. If our forecast is anywhere near correct, that pattern will persist for at least another year, and perhaps even longer.
Q2 – 1.4% growth.
Q3 – 1.5% growth
Q4 – 1.7% growth
For the year, under 2.0%.
The word “pitiful” doesn’t even begin to connote the severity of this forecast. And note the bottom line of the JP Morgan forecast: “If our forecast is anywhere near correct, that pattern will persist for at least another year, and perhaps even longer.”
And here we are doing the usual – talking about distractions like Bain Capital.
Yesterday, this came out (and, most surprisingly, on Ezra Klein’s blog, although not by Ezra Klein):
What’s the real harm of a massive government deficit? Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff find that high public debt is associated with a significantly lower level of GDP in the long run.
In a new paper for the National Bureau of Economic Research, the researchers examined the historical incidence of high government debt levels in advanced economies since 1800, examining 26 different “debt overhang episodes” when public debt levels were above 90 percent for at least five years.
And what do you suppose they found?
The debt episodes included everything from Netherlands’ Napoleonic War debts and the Japan banking crisis of the 1990s to Greece’s current fiscal crisis. On average, the researchers found that growth during these periods of high debt were 1.2 percent lower on average, consistent with Reinhart and Rogoff’s findings in 2010. What they also found, however, was these episodes of high debt and lower growth were quite lengthy, averaging 23 years. And the accompanying long-term drag on GDP was substantial. “By the end of the median episode, the level of output is nearly a quarter below that predicted by the trend in lower-debt periods,” they explain.
Japan’s “lost decade” has lasted much more than a decade, hasn’t it?
And the policies being pursued by this president seem to be offering up an attempt to see if this country can’t move that average beyond 23 years.
Need a picture?
We’re at 101% of debt/GDP so, according to these folks, we’ll actually perform below the red line.
But hey, more spending please. Because, you know, we need more government jobs (the private sector is doing fine).
Forward (into economic oblivion)!
The indispensible e21 goes after what it calls “the government sector of the economy canard”.
A recurring theme of commentary appearing in the New York Times and elsewhere is that the government is shrinking as a share of the economy. According to Floyd Norris, “the government sector of the American economy has shrunk during the first three years of a presidential administration” for the first time since the 1960s. This dangerous decline in government spending is thought by Norris and others to be responsible for the slow growth since the recovery officially began in July 2009.
The most straightforward way to assess the burden of government is by comparing total government outlays to gross domestic product (GDP). By this standard, the federal government is currently larger than at any point in post-War history. Between fiscal years 2009 and 2012, federal outlays averaged 24.4% of GDP, the highest government-to-GDP ratio since 1946 and 22% (4.4 percentage points) larger than the average size of government since the military demobilization following World War II of 20.0%.
The politics of the Norris approach is to make the canard seem to be reality in an attempt to portray the last three years as a conservative approach to our economic problems by the Obama administration:
Rather than measure actual government spending, which is at record levels, Norris instead focuses on the “government sector of the economy,” which is different conceptually from the actual size of government. Each dollar of government spending does not automatically contribute to GDP. The Bureau of Economic Analysis (BEA) only counts direct government purchases of goods and services or investments in capital equipment or infrastructure in the National Income and Product Accounts (NIPA). When the government buys an airplane from Boeing, for example, it counts the same in the GDP as if the aircraft were purchased by United Airlines. The same accounting generally works for employee salaries, as government purchases of services provided by Commerce Department employees, for example, count as government consumption spending in GDP.
The difference between government spending and the government contribution to GDP is largely attributable to transfer payments, entitlements, and subsidies. In recent years, transfer payments have exploded upwards. As of March 2012, transfer payments were running at a $2.3 trillion annualized rate, or 15.2% of GDP. Over the past four years, transfer payments have grown at a compound annualized rate of 9.1%, or about 3.5-times faster than the economy. Since passage of the Obama Administration stimulus, transfer payments have accounted for more than 18% of household income. As the composition of government spending has shifted away from capital investments and towards transfers, the “government sector” of the economy has fallen even as government spending has reached record highs.
e21 then does a further analysis of the Norris claims and says while it would be easy to dismiss the Norris critique out of hand, it does have some resonance.
Norris’ talk of the decline in the “government sector” provides insight into the changing role of government – specifically as provider of infrastructure to one of enabling transfer payments:
As e21 explained previously, the growth in state and local government has come with no corresponding increase in public goods like infrastructure to show for it.
Not all spending cuts are the same:
Spending cuts for sequestration aimed at defense, for example, will reduce GDP on a dollar-for-dollar basis. Spending cuts on transfer payments and subsidies only reduce GDP to the extent that the dollar would have been spent or not otherwise earned. A dollar devoted to unemployment insurance that lengthens the duration of unemployment, for example, may actually reduce GDP.
Finally, given those explanations, why did the stimulus bomb?
President Obama’s stimulus was very poorly constructed. In 2009, Republicans criticized the stimulus as a “spending bill.” The President responded that increased government spending was the “whole point” of a stimulus. But based on the analysis of Norris and other commentators, the spending increase was obviously too oriented towards transfers instead of real purchases of goods and services. An effective stimulus based on government spending would have looked like the plan advocated by Martin Feldstein, which would have increased government purchases of military equipment and hardware. While left-leaning economists often lament the size of the President’s stimulus (i.e. wishing that it was even bigger), the composition or relative share of the type of spending was likely a much bigger problem.
It gives further credence to the assertion than economically, Mr. Obama is out of his element. He and Krugman (and most of the left) talk about the size of the stimulus. In fact, what it is spent on is more important than the size.
Meanwhile we’re headed into sequestration where precisely what would help the GDP on the government size of the ledger is on the chopping block (military equipment spending, etc.).
Couple that with "taxmageddon” and you can imagine the economic carnage possible in January.
It would seem that would be a fairly potent means of campaigning and keeping the issues most important to the forefront. It might take care of this.
Look, one of the reasons we’re going through this “I killed bin Laden” self-congratulatory orgy right now is a day spend doing the bin Laden back pat is a day not spent on having to discuss this awful economy.
It wouldn’t be hard to compile a list of problems a new president would “inherit” from Obama. That was (and still is) an Obama strategy – blame Bush. It may be time for Romney to begin to blame Obama:
-For 8.2% unemployment
-For doubling the debt
-For anemic GDP growth
-For large increases in major regulations
-For green energy boondoggles based in crony capitalism and a nonexistent energy policy
-For increasing dependency on government
-For the first credit downgrade in US history
And, that’s just a short list.
I like the “inherit” scheme. It’s a good way to frame the debate and put the Obama campaign on the defensive. If and when the Romney campaign and certain elements of the GOP can stop shooting themselves in the foot over gay spokespersons that is.
Two good jobs reports back to back has got the Obama campaign trying out some new campaign rhetoric about how what they’ve done has worked and that America is “back”.
Is it? Or is it premature to make that claim? Well, on the one side, most economists will tell you that job growth is usually a lagging indicator and good job growth usually means the other underlying numbers for positive growth are good too.
But are they?
Well, not necessarily. In fact, one of the other leading indicators of a strong economy, GDP growth, isn’t going to be so hot according to many economists. David Leonhardt reports:
But the jobs report isn’t the only measure of economic activity, and another major measure — of gross domestic product — doesn’t look quite so cheerful. The most likely situation is that job growth will slow in coming months, economists say, which will make President Obama’s economic narrative a bit more complicated than it now is.
On Friday, Macroeconomic Advisers, one of the most closely watched forecasting firms, reduced its estimate of economic growth in the current quarter to an annual rate of 1.8 percent, from 2 percent. And 1.8 percent growth does not generally lead to very strong job growth. In the fourth quarter of last year, by comparison, the economy grew 3 percent.
Beyond the current quarter, forecasters expect the economy will grow at an annual rate of 2 to 2.5 percent for the rest of the year, according to Bloomberg.
Based solely on the gross domestic product numbers, the obvious conclusion is that job growth will slow in coming months. Over the last six months, the average monthly gain in nonfarm employment has been 201,000; over the last three months, the average gain has been 245,000.
Sure enough, most forecasters do expect job growth to slow. Barclays Capital expects 200,000 jobs a month for the rest of the year. IHS Global Insight forecasts a slowdown to 180,000 jobs a month. Macroeconomic Advisers says it will slow to 140,000 jobs a month in the final three quarters of this year.
So what’s the drag on the GDP? What is it that is causing this less than optimistic forecast for job growth?
A combination of things:
Why do economists expect growth to slow? The warm winter has probably pulled some spending forward into the last few months and will reduce spending in coming months, says Joshua Shapiro, an economist at MFR Inc. in New York. Rising oil prices also play a role. So does the continuing debt overhang, which makes a sustained recovery difficult.
Spending slowdowns, rising oil prices and the debt overhang all combine to slow growth. Of course there are other things too that will effect it – increased regulation, for instance.
Annie Lowrey reports on other concerns:
First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.
The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.
“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.
Inventories have been restocked and oh yeah, there’s the European sovereign debt crisis to contend with. As well as:
Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.
And finally we have the Chairman of the Federal Reserve:
He acknowledged that rising oil prices were “likely to push up inflation temporarily while reducing consumers’ purchasing power.” But the Fed expects the overall pace of increases in prices and wages to remain “subdued,” Mr. Bernanke said …
Bernanke also mentioned the continued depression of the housing market as a factor and he believes growth this year will be between 2.2 to 2.7 percent. Such growth would indeed put a damper on employment growth.
Whether or not the forecasts will prove true obviously remains to be seen. However the elements that should slow growth seem to be in place. Consequently, the forecasts are less optimistic than Obama’s political campaign would have you believe.
After many “false dawns” (remember “green shoots”?) the possibility of another one looms large. Sure, the economy is making progress. And yes, that’s good. But overhyping that progress and then seeing the numbers go south again could be very damaging to an incumbent president’s reelection hopes. Not that I expect that possibility to slow him down a bit from claiming to have saved the country from the abyss when in fact we’re simply crawling out from the one he helped create.
If you wonder why there is this focus on the left on taxing the ‘rich’, part of it can be found here:
President Barack Obama asked Congress for another $1.2 trillion in government borrowing authority, the third and final request under an August deal with lawmakers that averted a U.S. default.
The president’s notification to congressional leaders yesterday starts a 15-day countdown for lawmakers to consider and vote on a joint resolution disapproving of the increase.
An “August” deal and we’re already on the “third and final request”? August for heaven sake. 5 months. Does that at all demonstrate how absolutely unconcerned this administration is with out-of-control spending? Does it help explain the class-warfare, anti-Wall Street, shift-the-blame campaign in which the President has been engaged?
We’ve already exceeded the national yearly GDP with our debt under Obama and now he’s going for more.
Well, except at DoD. There’s he’s slashing muscle and bone on the one hand while proposing a pay-hike for other federal employees on the other.
The debt ceiling increase is to meet commitments already made by the government. The Treasury Department has been relying on accounting maneuvers, similar to the ones employed during the year’s earlier dispute, to ensure that the previous $15.194 trillion limit wasn’t breached.
Since the budget law was approved, the debt limit has been raised twice, by a total of $900 billion. In the latest request, the limit would rise to $16.394 trillion, which the Treasury Department estimates will fund the government until late 2012.
We are so ill served by our current crop of politicians that it almost defies description. We’re past the generational theft of our grandchildren’s money and are working on that of our great-grandchildren.
This is simply inexcusable, yet like an alcoholic or drug addict it seems our politicians can’t help but do whatever is necessary to obtain their next fix of borrowed money. Meanwhile the credit rating for the country has been downgraded and is at risk for further downgrade. And the economic drag on the economy in general this sort of a debt load carries continues to increase.
You want a national tragedy … here it is. You want a national nightmare … its playing out right in front of you and there doesn’t seem like anyone is able to stop it.
But most rational people understand that at some point it has to stop … it has to come to an end. And when it does, this recession will look like child’s play, all thanks to the selfish short-sightedness of our political class. Oh, and yes, the gutless votes who keep rewarding this sort of behavior because it benefits them.
At the risk of sounding like some sort of extremist fanatic, the end is near. And it isn’t going to be a pretty end either.