There is no free in liberty.


Saturday, September 3, 2011

Questioning "a brief recovery"...


Victor Davis Hanson:

Zero jobs last month — a net change of zero job growth? It was just announced that last month’s unemployment is still above 9% — despite the nearly five trillion dollars in Keynesian pump-priming, the near zero interest rates, the expanded unemployment and food stamp support, and the government takeovers and subsidies of businesses.


In the last 30 months, the Obama administration has created a psychological landscape that finally just seemed, whether fairly or not, too hostile to most employers to risk new hiring and buying. Each act, in and of itself, was irrelevant. Together they are proving catastrophic and doing the near impossible of turning a brief recovery into another recession.

The bit in bold bothers me. Where is the evidence of a recovery outside of stimulus? It seems to me a recovery is economic growth beyond that growth that is the direct result of fiscal stimulus.

I understand the argument that over the long term the positive effects of debt spending are counter balanced by the negative effects of paying down that debt; that the two can be ignored when figuring GDP over the long term due to the fact that they cancel one another out over the long term.

But what of the short term? Should the same logic apply when figuring our GDP over the past quarter? I do not think so, yet that is how GDP is measured.
GDP = C + G + I + NX


"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Where is the debit that would represent debt incurred as a result of debt spending (fiscal stimulus for the concern of this post) that has yet to be paid off? It is ignored based on the long term assumption that one cancels the other even though we generally look at quarterly snapshots of our economy.

This application of long term reasoning to short term measurements is akin to an inappropriate mixing of "tense" and results not only in confusion, but an inflated sense of GDP during recessions. To get a more accurate reading of GDP we should include the debit that is debt incurred as well as the credit that is debt cancelled in GDP for the period of time being measured.

If the argument is that we should use fiscal stimulus to "kick start" our economy, it behooves us to measure whether or not stimulus is having a measurable effect on the economy by subtracting stimulus from GDP measurements. Currently government stimulus is included in GDP thus allowing Keynesians and bureaucrats to point to stimulus inflated GDP numbers as though they were a sign of a strengthening economy and a measure of their success.

It is as if during every recession we have a Keynesian behind the wheel of a stalled car and all the effete fellow can muster is to turn the key and point to the jittery needle on the tachometer as a his measure of success. Then when the car battery is drained and the public's tolerance for debt spending is similarly drained our Keynsian turns to the public and blames them for the tachometer needle that again rests on zero. What we need is a tachometer that reads only when the engine is running on its own.

The end result of measuring GDP as we currently do is to give the appearance of success where there is none and give the impression of "a brief recovery" in the past when there is not one.

Green shoots .... sigh.


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