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The way to crush the middle class is to grind them between the millstones of taxation and inflation. – Vladimir Lenin

Archive for October 30th, 2009

U.S. Claim of 3.5% Economic Growth is Smoke and Mirrors – UPDATED!

Posted by iusbvision on October 30, 2009

The elite media is euphoric, saying the Obama stimulus package worked and we had 3.5% economic growth this quarter!

Unfortunately when I explain to you how the U.S. Government comes up with that number you are going to realize why the CBO likely never has an accurate forecast and why most economists are worse than weatherman at predicting economic trends. What I am about to explain to you is a tad arcane but Poligazette and my IUSB Vision readers are some very smart people and I have confidence that you will grasp this just fine.

The first thing that must be understood is the difference between a growth in GDP (Gross Domestic Product is the totalBLS 10292009 sum of production within the borders of a country in a given year adjusted for inflation) and a growth in real GDP per capita. It is possible to claim that your economy is in “recovery” even at 1% growth (Joe Biden) but since 2% of production growth in the United States is because of improvements in technology and capital goods; and another 1% is needed for population growth, an economic growth rate of over 3% is required to reliably increase the GDP per capita of the United States. The GDP per capita is the most important measure of the standard of living and wealth of the average citizen.

With a claimed GDP growth rate of 3.5% and a non farm unemployment rising past 10%, how can each citizen be producing more per person while the unemployment rate is skyrocketing with another 530,000 NEW jobless claims just in the last month? This would have to mean that American consumers went on a spending spree to drive that number up or that each worker became way more productive and must be working lots of extra hours and overtime to get that per capita GDP up….

If you are starting to think that something sounds fishy you would be right.

I had a brief chat and open lecture with noted economist Bradley Schiller today. He told me that with the new 3.5% number that per capita GDP must be up and with unemployment also up the overtime worked hours must be way up. As you can see from the graphic, Schiller was wrong.

The graphic is from the Bureau of Labor Statistics from October 29th.  As you can see the hours of persons worked is way down in both categories. The total output is also down so how can this be? Where did the 3.5% growth come from? Could it be that Americans went on that spending spree? Sorry consumer confidence is down 5.7 points this quarter.

How can the output per hour have increased so high on the graphic when hours worked and total output are way down?  Did Americans go into overdrive and suddenly become become super workers? The answer to why that number is artificially inflated is the same reason why the GDP number has been artificially inflated.

So how does the  the US Government measure GDP? They use an old and very flawed Keynesian formula.

GDP= C+I+G+(X-N)

C = consumer consumption of goods and services measured. I = capital investment like building factories, production robots, machine tools etc. (X-N) is exports minus imports and since we have a large trade deficit that is always a negative number. G= government spending and this is where the smoke and mirrors come in.

Since GDP has to equal total production of the workforce, this means that if Mr. Bernanke at the Federal Reserve prints up a bunch of money and Nancy Pelosi spends it,  congratulations, each worker in the United States just became more productive on paper. This is the effect that a $1.7 trillion yearly deficit for 2009 has on an economy. For the sake of comparison the yearly deficit spending for 2007  was a “measly” $211 billion.

This is why the old, flawed Keynesian model is favored by politicians, socialists and other leftist ideologues, because on paper it means that the more you spend the better your economy is and the more productive you appear. What this amounts to is that there is no economic dip, depression, or problem that cannot be fixed by government spending. It gets worse, because of another flawed Keynesian concept called “leakage” they actually believe that government spending is MORE efficient in growing the economy than tax cuts. When Vice-President Biden said that we have to greatly increase deficit spending so we don’t go bankrupt, now you know why.

The reality is that most government spending does not create much if any wealth and much of it simply amounts to a transfer payment. Government is gargantuan and bureaucratic. Government money is spent for political reasons and not for economic reasons or efficiency.Thus the “multiplier effect” government spending has on the economy is much less than creating real wealth like creating things or investors building a factory.

There is even an argument to be made that much of the “G” variable for government spending should be counted as a negative number towards GDP because each dollar government spends eventually is a  dollar taken from you or an investor to spend it. GDP exploded after 1947 when government spending dropped from 188 billion to 58 billion.  It also should be mentioned that the larger government is, it engages in more  arbitrary, regulative and taxing behavior that also drives down consumer and investor confidence. Deficit spending also drives up inflation.

The old Keynesian model is what a majority of economists believe because this is what they are taught in school; they simply never think for a moment to challenge it. This is a big part of the reason why government economists are so bad at cost/revenue forecasts.  The economic collapse and the inability of 80% of  economists to see it coming helped to convince me that most economists are great at applying flawed theory and don’t really understand economics.

It should also be noted that some economists are saying that one percentage point of the alleged 3.5% growth measure was due to the cash for clunkers program which studies have shown mostly was utilized by those who had planned to buy a car anyways this year; so the program just borrowed some spending from the future that will result in dips in auto sales for the next two quarters. In either case, the economy really isn’t improving anywhere near the degree that the elite media and some politicians say it is.

At best the current GDP formula is not a very good measure of an economy. A new formula for GDP needs to be constructed and tested.

UPDATE – The government revised doiwn the growth to 2.8% and shows that almost all of that is just government dumping of money in the economy and not porivate sector growth. the Associated Press reports HERE.

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