“GDP, in common parlance, stands for gross domestic product, or the aggregate value of all the goods and services produced on these blessed shores. Or, at least, that's what it used to mean in those long-gone days of yore, when life was simpler and government statistics credible. These days, alas, those initials more typically signify "gross deceptive pap."
The insidious change has not gone unremarked, both in this magazine and by more than one skeptical scanner of the turgid flow of numbers flowing out of Washington. Yet purportedly professional seers, who draw handsome paychecks for sifting through the unending streams of digits and making sense of them for hoi polloi like us, deferentially pass along the official numbers unsullied by even a modicum of analysis, as if they were holy writ, especially when they're upbeat.
A case very much in point was last Thursday's revised report on second-quarter GDP, which helped spark a nice, if something less than enduring, leap forward by the stock market. The initial version released in July posited that the venerable economic barometer had risen by 1.9% -- up from the first quarter's meager 0.9% gain, but obviously no great shakes.
Comes now the so-called preliminary estimate that claims second-quarter GDP grew by a much more robust 3.3%. That was hailed by the incorrigibly constructive contingent in the Street as evidence of the resiliency (favorite word) of the economy and prompted the thinned-out ranks of investors to put their worries and their plans for an extra-long weekend on hold and pile into stocks. Hooray! Hooray!
But even a cursory look at what they're drooling over reveals pretty thin gruel. Nothing, for sure, that would cause any sentient being to start humming "Happy Days Are Here Again." For the ostensibly better GDP showing is a mirage, conjured up by the usual suspects out of smoke and mirrors.
The key here is the GDP deflator, which purports to adjust GDP for the impact of inflation; it's a curious calculation in that, contrary to its moniker, it seems designed to do the exact opposite of deflating GDP.
Thus, according to this accommodating measure (accommodating, that is, if you're determined to put a good face on a dreary report), inflation grew at an improbably restrained 1.33% in April-June. And maybe it did -- but not in the good old U.S. of A.“
Alan Abelson, “Sizing Up Sarah”, Barron’s (1 September 2008).
http://online.barrons.com/article/SB122004938061284705.html
Alan Abelson (1925-) is a veteran financial journalist, and has long written the influential “Up and Down Wall Street” column in Barron's Magazine. Mr. Abelson is widely viewed as a pioneer of tough coverage of Wall Street and his columns are sometimes controversial.
We hear things every day about the economy that are confusing and cause us to wonder if we are being told the truth about its current state and prospects. Here is another example that is doubly confusing because it has an aura about it that leads one to believe that the person writing knows something about the economy and economics. Perhaps he does but it does not show here.
The complaint is that the latest release on the GDP does not comport with his impressions about the economy. The latest estimate of second-quarter growth in Real Gross Domestic Product was revised upward to an annual rate of increase of 3.3 per cent and the corresponding GDP price deflator implies an annual inflation rate of only 1.3 per cent. Clearly, given all the dreary news about an economy on the verge of recession and suffering from acute inflationary pressures, these numbers, he implies, must be false, with the implication that one cannot trust the economic indicators coming out of Washington.
While they may well be revised a bit in the future, these numbers make perfect sense given what we know about what is happening in the economy. Real GDP, for example, measures the volume of the country’s aggregate production, not people’s income as measured by their purchasing power over all the goods and services the economy produces. As reflected in the numbers on the Real GDP, output and profits have been rising across a wide variety of sectors, with the exception of housing and its related industries and the financial sector. As frequently noted in the media, the economy has not been in a recession.
Despite the fact the country is not in a recession, people are correct in their perception that their incomes are falling. A country’s income is not measured by its Real GDP but by its purchasing power on world markets, that is, its Real Gross National Income, which is its Real GDP adjusted for some income flows and, more importantly, for the changes it is experiencing in its terms of trade. Because of the rise in oil and other commodity prices on international markets, U.S. terms of trade -- the ratio of our export prices to our import prices -- have been falling significantly. Consequently, even though we work harder and produce more, it doesn’t mean we have a higher income and can buy more. People rightly feel the impact of these prices changes on their level of living when they buy gasoline and other imported commodities, and they rightly sense they are worse off than before.
Add to this we have a huge external imbalance and the growth we have seen in our production (that is, the rise in our Real GDP of 3.3 per cent noted above) has been spurred by an increase in the demand for our exports as the dollar has fallen on foreign exchange markets. Exports are goods and services sent abroad and therefore are not available at home to consume and use for domestic capital formation. As our exports rise, simply stated, the domestic supply of goods and services shrinks. The technical term for the volume of goods and services actually available in the country for consumers and investors to buy, after adjusting Real GDP for net exports sent abroad, is Real Gross Domestic Absorption, and it has been falling as our exports have been rising. In this sense, the harder we work and the more we produce and sent abroad as exports, the less we have at home and the poorer we are, at least in the short-term.
When you add together the decline in our terms of trade and the re-orientation of our domestic production to exports these two changes are having a highly adverse impact on the economic life of the average American, even those not directed affected the job losses these changes have brought about.
With regard to the GDP deflator, no doubt domestic prices are rising very slowly precisely because of the intense competitive pressures on domestic producers generated by what have been a flood of cheap imports. Now that international prices are rising we are importing international inflation and this shows up in the CPI, which unlike the GDP deflator includes both domestic and foreign produced goods. There is only so much American producers can do to reduce costs so it would not be surprising that the GDP deflator will rise faster in the future.
Whether they like it or not, Americans are entering a period when the extensive imbalances in the economy that have built up over a period of decades will have to be eliminated. This requires an adjustment to the marked decline in the American terms of trade of the past year and a shift in our domestic production from goods and services for the home market to goods and services for foreign markets. Some idea of the cost of the terms of trade adjustment can be gleaned from the experience of the 1970s. In the 1970s, the terms of trade of the United States fell 25 to 30 per cent when the price of oil and other commodities rose greatly on world markets. This terms of trade loss represented a permanent drop of some 2 to 3 per cent of our GDP at the time and a temporary adjustment loss of about the same magnitude. We are now much more dependent on trade than in the 1970s but the fall in the terms of trade is likely to be less. We may only lose 1 or 2 per cent of our income this time, with some added short- and medium-term adjustment costs.
But the current loss in purchasing power by the U.S. on world markets comes at a time when we have a trade deficit of 5 to 6 per cent of our GDP that must be eliminated. Taken together with the terms of trade loss, this means an adjustment of 6 to 7 per cent of our gross national income, no small matter. To make the problem before us even worse, our population goes up a percentage point a year and we need to increase our GDP by that amount just to maintain our overall standard of living. Entitlement spending is also out of control and is projected, under present policies, to increase its demand of the economy’s output by an additional 10 per cent of the GDP in the next 20 to 25 years. This is of course impossible and will necessitate large cutbacks in government spending.
Simply stated, in order to adjust to our external imbalances and the costs of the financial turmoil now plaguing the economy there will be no rise in average American levels of living for 3 to 5 years, even assuming the Real GDP continues to rise at its past average rate of 3 per cent or so a year. Much more likely is slower growth and a further fall in real incomes as the adjustment process gets underway.
Add to this the fact that the Federal government is actuarially bankrupt. All discussions of tax breaks and increased social spending such as those now discussed in the political debates are nonsense. Whoever is elected President, tax rates will be increased across all income groups and the tax base will be expanded to include lower income households not now subject to the income tax. The details may differ; the result will be the same. Rather than discussing how health care can be expanded to cover more treatments and procedures and more people and families, the focus will be on identifying cuts in Medicare and Medicaid that will do the least harm to those in need.
I apologize for a long Tdj. But articles like the above are unhelpful because they mislead people into thinking that the complexity of the economy can be summarized in one statistic and if this statistic does not conform to our preconceptions of what we think it should show, the government is misleading us. I am hardly one to praise government. But in my view the GDP data are excellent, and before we disparage the efforts of our statisticians, we ought to know what the statistics they produce actually measure and mean.
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