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Proof that we never came out of the recession

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With today’s economy, you can argue both sides of a lot of issues. For example:

employment:

  • Democrats “Unemployment rate is down below 6%”
  • Republicans “Worker participation rate is at 30 year lows”

GDP:

  • Democrats “GDP growth has been positive every year of Obama’s Presidency”
  • Republicans “GDP growth following the GWB recession is the worst since the              Great Depression”

However, there is one statistic that is not up for interpretation, and it proves that the Obama economy has been a disaster.

First, a little history. Humans have always had a boom and bust economic cycle. This is nowadays mostly referred to as the business cycle. Then along came the Keynesian’s, who argued that the volatility caused human misery. Their solution was to use various economic levers controlled by government to encourage economic activity during downturns (“prime the pump”), while lessening it during booms (keep the economy from getting “red hot”).

The basic idea is that you borrow growth from the booms and move it to the busts.

The primary method used today in the US is the interest rate the Fed charges banks. When the economy slows down, interest rates are lowered to encourage economic activity. When it comes back out of recession, they are raised again. There are multiple reasons for the increase, but one of the most important is this then gives the government back their strongest tool to combat a future recession – if the rate is already low, there is nowhere to lower it to.

During the 2007-8 recession, this rate was reduced from 5.25% to .15%. It stayed at this level until just a couple of months ago, and is now still only at .34%.

The Fed rate has never been raised back up, proof that we have never emerged from the recession.

Even the poor “growth” we have seen under the Obama economy is, to a large extent, simply a function of the Fed interest rates. Take that artificial boost away, and GDP levels for the last 7 years would have been basically flat, give or take a few percentage points.

Written by Jim T

February 3, 2016 at 12:48 am

Posted in Uncategorized

GDP Problem #2 – Measuring the wrong thing

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What is GDP?  Basically, it is what is spent (by people, businesses, and government) on a country’s goods and services over the course of a year.  There are various ways to calculate GDP, but theoretically they should all come up with essentially the same number.  But what is the reason for such an esoteric number being so ubiquitous in economic discussions?  It is being used as a proxy for the value a given economy has created over a certain period of time.

In a “perfect” economy, with rational people making rational decisions, no corruption, waste, etc., this would be fine – what is spent would be a good (the best?) approximation of the value created.  However, how much ‘value’ is created when the government pays people to not plant crops?  How much value would the “Bridge to Nowhere” have created, and at what cost?  Of how much value is an unsafe, unfinished, unusable 3.9 million sq. ft. building upon which was spent an estimated ~$750 million?

This problem with GDP is also well known by experts and many others.  For example, this is from an article in the New York Times last year, by Harvard economist Gregory Mankiw:

“WILL THE EXTRA SPENDING BE ON THINGS WE NEED? If you hire your
neighbor for $100 to dig a hole in your backyard and then fill it up, and he
hires you to do the same in his yard, the government statisticians report that
things are improving. The economy has created two jobs, and the G.D.P. rises
by $200. But it is unlikely that, having wasted all that time digging and filling,
either of you is better off.”

The problem with using some measure other than GDP is that any replacement number would likely be much more complicated to arrive at, and also be much more subjective.

Written by Jim T

January 30, 2010 at 7:49 pm

Posted in Uncategorized

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GDP Problem #1 – False reporting

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You would think after what happened with the USSR, this would be blindingly obvious.  Communist countries lie about everything – especially their economies.  The Soviets in the 80’s couldn’t keep their grocery shelves stocked with much of anything, and it was not unusual for huge lines to form for basics like bread and and even toilet paper.  Their grocery shelves often had more bare space than products.  Yet you had famous Harvard economist John K. Galbraith saying in 1984:

“That the Soviet system has made great material progress in recent years is evident both from the statistics and from the general urban scene. . . . One sees it in the appearance of solid well-being of the people on the streets . . . and the general aspect of restaurants, theaters, and shops. . . . Partly, the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower.”

A Nobel prize winner in Economics from MIT,  Paul Samuelson in 1985:

“What counts is results, and there can be no doubt that the Soviet planning system has been a powerful engine for economic growth. . . . The Soviet model has surely demonstrated that a command economy is capable of mobilizing resources for rapid growth.”

They were far from alone.  So after such a colossal disconnect between the reported figures and the reality, people would learn their lesson, right?  So why is the economic information that China puts out today, by and large, treated as though it were reliable?!?

Insane.

Written by Jim T

January 27, 2010 at 11:12 pm

Posted in Uncategorized