Tag Archives: GDP

Imaginary Numbers for Imaginary Growth

I’m sorry but it’s time to type out, yet once more, how we calculate the annual growth rate for the real GDP, and no, there’s no imaginary quarterly or annualized growth rate for the real GDP.  Now that we’ve reviewed, the financial inanity of the current administration is highlighted by policies which are in direct variance with the stated goal of increased economic growth of 3%.

There are two numbers we absolutely need in order to have economic growth: Labor force increases; and, Labor Productivity increases.  The labor force is obvious, how many people of working age are in the workforce. Productivity pertains to how much can be produced by those workers.  For more information see this article from the St. Louis FED.  Suffice it to say that if the labor force growth is 0.5% and the productivity growth rate is o.5% then the economic growth rate will be 1%.

There are a couple of bits of Reality we need to introduce at this point in time: (1) The baby boom is over. (2) We are poised to severely limit our immigration.

As of 2015, the number of baby boomers ranges from 74.9 million to 82.3 million, depending on whether the generation begins with the birth year 1943 or 1946.” [CNN] No matter which year one assumes for the beginning, it was over by 1964-65.  Growth in the labor force has not, and may rationally not, increase at levels seen when the Boomers hit the job market. And, now they are exiting.  Those born in 1965 are now 52, with about 13 years left before retirement; those born during or before 1952 are presumably retired already. So, what is happening now?

“The US fertility rate has been in a steady decline since the post-World War II baby boom. Back at its height in 1957, the fertility rate was 122.9 births per 1,000 women. The latest quarterly CDC data also indicate the larger pattern of women having babies later in life. As birth rates increased among women in their 30s and 40s, the rate among teenagers and women in their 20s dropped.” [CNN]
The current rate is 59.8. There are factors associated with lower birth rates; for example, in developed nations urbanization is a factor — children aren’t a major need for their work in agricultural pursuits.  Another factor is the cost of raising the children, it’s more expensive to raise children in a developed country where those children don’t enter the labor force until they are in their late teens or twenties.  Further, the urbanization trend continues apace in the US. [Census] [Slate] More urbanization, more education, and we can’t reasonable expect a repetition of the Boom in the foreseeable future.
So, if we aren’t increasing our labor force via the old birth-rate route, then the other way is immigration, and this warning from the Los Angeles Times:

“Trump in his first weeks in office has launched the most dramatic effort in decades to reduce the country’s foreign-born population and set in motion what could become a generational shift in the ethnic makeup of the U.S. Trump and top aides have become increasingly public about their underlying pursuit, pointing to Europe as an example of what they believe is a dangerous path that Western nations have taken. Trump believes European governments have foolishly allowed Muslims with extreme views to settle in their countries, sowing seeds for unrest and recruitment by terrorist groups.”

This seems a polite way to say that the Trump administration would like very much to limit immigration to white Western Europeans. If we don’t allow immigration from Mexico and Central American nations, and we severely limit immigration from predominantly Muslim nations, then what’s left?

And, in terms of increasing the labor force, here’s where the policy and the reality clash. If we want an increase in the birth rate in order to increase our labor force, then the women having those babies are more likely to be foreign born immigrants to the US. [Pew]  We don’t get to have it both ways — limiting immigration both limits the number of people available for immediate employment, and the number of little people who will grow up to be a portion of our labor force. Once more with feeling, if we limit immigration we necessarily limit our economic growth.

One of the amazing things about conservative/trumpism ideology is the notion that elements diametrically opposed to one another may somehow be massaged by empty rhetoric into actuality.  Somehow, we are supposed to believe that we can have 3% economic growth while limiting our immigration unrealistically, and while continuing the urbanization of the country. Only in the fever swamp of right wing ethnocentric white supremacist thinking is this going to “happen.” And, the happen part is in quotation marks because this is Neverland.

So, no — we don’t get the deficit reduced by cutting taxes on corporations, millionaires, and billionaires. No, we don’t get a balanced budget by cutting non-defense discretionary spending, and NO we don’t get 3% economic growth by unrealistically impeding immigration.  2 + 2 does not equal 7.

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Okun’s Law and Sequestration

GDP formula

This isn’t rocket science.  For anyone wondering why Austerity doesn’t produce Prosperity, the answer lies in this simple formula.  We measure our economic growth in terms of the gross domestic product, the GDP.

Investopedia explains:

“GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy – transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation’s productivity, which is unrelated.”

In short, we can critique the use of the GDP as a measure of our economic well being for not including bartered transactions, or private sales in which sales taxes aren’t applied, or we can note that the notions of productivity and economic health aren’t necessarily related.  However,  what we can’t do is dismiss the utility of the formula, nor can we argue it isn’t one of the most commonly used (and understood) metrics applied as an economic description.

So, why is this formula plastered on this blog for the umpteenth time?  Because when Uncle Fester brashly opines that “We’ve got to cut government spending and get the economy back on track,” he’s offering up a classic demonstration of his ignorance about how we measure our economic situation.

Consumers buy things.  That’s the C in the formula. Companies and corporations buy things.  That’s the I in the formula.  Governments buy things. That’s the G in the formula.  We sell things to other countries, and we buy things from other countries. Those are the X and the M in the formula.  The greater the DEMAND for goods and services (aggregate demand in some explanations) the more wealth is generated.

Now let’s bring this down to Uncle Fester’s level by considering the life of the lowly paper clip.  Consumers buy paper clips, which are mostly used to hold sheets of paper together, or may find themselves altered to perform other tasks like being poked in the little hole in the electronic gadget to “reset” the thing, or to hang Christmas ornaments, or whatever a person might think to do with a piece of bent wire.  Businesses buy paper clips.  And, yes, various levels of government purchase paper clips.  In fact, there are about 11 billion paper clips sold in the U.S. every year.  [WSJ]

Now, imagine the impact of taking one part of the formula out of the whole.  What if government cut backs caused agencies to scale back on the purchase of office supplies?  This is the point at which the artificial demarcation between enterprise and government breaks down.  If the government manufactured it’s own paper clips there would be no need to put the G in the formula, but it doesn’t.  The federal government, like the consumers and the companies, gets its paper clips from one of two domestic producers of bent wire clips. [WSJ]

Here comes the obvious.  When the government scales back purchase orders for office supplies (like our lowly paper clip) that represents a decline in demand.  And, guess what! The formula for Aggregate Demand is exactly like the formula for the GDP.  [Investopedia]

“The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as “total spending”.  [Investopedia]

To see an example of the classic aggregate demand (AD) curve click here.   The FRED graph for our GDP to date looks like this:

GDP Chart to 2012

The gray area shown on the chart is the recent Recession.  The blue line graphs the trajectory of our GDP to date, and the thinner red line is more technical. It’s the “Nominal potential gross domestic product,” [CBO 2001 pdf]  which assumes that the line would show what happens if everyone who wanted a job had one, and all resources were being used efficiently.  [See also: KCFED, pdf] Frankly, this one is a bit technical for Uncle Fester, so let’s keep it simple.

If the demand for paper clips is reduced, when consumers, businesses, and governments stop purchasing, the micro-graph for the subcategory of office supplies and the sub-classification of paper clips,  would mirror the overall aggregate demand.  And, the bottom line?  That which reduces the aggregate demand also reduces the GDP.

This simple, but basic, proposition from classical economics is precisely why austerity measures never produce prosperity — which we measure by using the gross domestic product.

If we can hold Uncle Fester’s attention this long, perhaps we can introduce Okun’s Law.   Okun’s Law observes that for every 1% decline in unemployment there’s a 3% increase in the GDP.  There are some issues with the “law” the first of which is that it’s not really a law, but an observable component of the United States’ economy; and, it’s a bit funky when we add in some other variables like productivity.   That said, for all its imperfections, when we reduce unemployment in the United States the GDP moves up.   This isn’t just common sense — it’s an observable and quantifiable fact.

Now we get to the meaty part.  If Uncle Fester is adamant about reducing federal spending because it’s a drag on the U.S. economy, then we can respond by saying if we lose 700,000 jobs as a result of the sequestration austerity measures, then according to Okun’s Law we will see a reduction in the U.S. gross national product.

A reduction in federal purchasing means a reduction in demand for goods and services.  Each decrease in demand means layoffs or reduction in production or offering of services and in turn means a reduction in the gross national product.   This is probably the point at which Uncle Fester will want to change the subject to something like “wasteful government spending.”

This recitation doesn’t assume that all government spending is productive.  The Pentagon has already said it doesn’t want some items Congress is enthusiastic about procuring.

“In February, the Pentagon released a budget that began the process to cut at least $487 billion in defense spending over the next 10 years. This included terminating the Global Hawk, which the military estimated would save $2.5 billion over five years; the C-27J, at a savings of $400 million; M1 Abrams updates, saving hundreds of millions of dollars; and cutting roughly 5,000 positions from the Air National Guard and reducing that agency’s budget about $300 million.”  [Military.com]

Since the cutbacks in these examples would come from Ohio, it’s predictable that Ohio representatives in Congress would revert to Okun’s Law and decry the loss of jobs in their districts.

“The budget is expected to be finalized after the November election, though the struggle over continued funding could extend long beyond that. Grant Neeley, professor of political science at University of Dayton, called this a “collective action problem.”

“(Legislators) need to cut the budget but (won’t) take those jobs in our state. Especially in an election year in a battleground state,” he said. “They’re going to provide rationale, but at the end of the day, it’s about protecting jobs in their district. If they have the choice between making a cut in their district and making a cut somewhere else, which one do you think they’re going to choose?” [Military.com]

What we can’t do is proclaim austerity begets prosperity calling for wider and deeper cuts in government spending — which turns the aggregate demand, the GDP measurements, and Okun’s Law upside down — while at the same time demanding that jobs not be cut from corporations and businesses within Congressional districts because of what will happen to aggregate demand and the local GDP and assuming Okun’s Law is still applicable.

Let’s guess that this is the point at which Uncle Fester pontificates that 25% of our federal budget goes to foreign aid.  In the fact based universe this isn’t the case: “Since the 1970s, aid spending has hovered around 1 percent of the federal budget. International assistance programs were close to 5 percent of the budget under Lyndon B. Johnson during the war in Vietnam, but have dropped since.”  [WaPo] OK, it’s not foreign aid, then it has to be “welfare.”

The total spending for Temporary Assistance to Needy Families program uses up a grand total of o.7% of our entire federal budget. [Klein]  “But, but, but,” squeals Uncle Fester, “There are more Takers than Makers…” whatever that means.  What it doesn’t mean is that there is an upward trend in the number of people participating in the TANF program.

tanf participitation

Nor does it mean there’s an upward trend in Food Stamp program participation and costs.  (SNAP)

SNAP

In our factually based universe, all federal programs for those in poverty comprise about 7% of the total federal budget. [MJ]  Yes, this is where Uncle Fester breaks in with the anecdote that he saw someone at the Food Bank who was driving a newer pickup than his.

However, all the mis-information, mis-conceptions, and anecdotal observations don’t repeal the basic rules of capitalism, and its basic understanding of Supply and Demand.  Nor, do they discredit the veracity of Okun’s Law.

We do need to reduce unnecessary spending, and we do need to increase revenue by closing loopholes which only serve to place more of the taxation burden on the middle class for the benefit of the top 0.1%.  What we do not need to do is torture the rules of American capitalism into a contortion which renders them risible and unrecognizable.  Okun’s Law is still functional, and as we see from the unfortunate examples in the Eurozone, austerity doth not begat prosperity.

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