A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Monday, December 5, 2005

The economy is doing great. Right. Look out the window.

Dubya trotted out into the Rose Garden the other day so he could get one number on the nightly newscasts: 4.6% GDP growth in the previous six month period (annual rate). He bubbled a little bit, muttered something about keeping taxes down, and retired (don’t we wish) to the spin room.

Look out the window. It's still raining. And Dubya’s poll numbers on the economy show America isn’t listening anymore.

Before I show you my secret chart on GDP, let it be known that it’s jobs that matter. Check out the Economic Policy Institute’s work on this. Jobs Picture shows a pathetic 2.6% more jobs four years into the current “recovery,” jobs which cost us $860 billion in tax cuts. The next lowest performance over a similar period is 7.6% in the 1990s, after taxes were raised. EPI’s The Boom that Wasn’t will depress you even further.

[At this point I begin a long digression on why jobs matter more than GDP and how we used to do better. For the sake of flow, I’ve saved it for a sunny day.]

GDP can be spun in a lot of ways. It can be bought by trucking Chinese goods halfway across the country, past closed factories and abandoned storefronts into the WalMart at the edge of town. Jobs can’t.

GDP can be generated by borrowing against our future, shifting spending to us today from us tomorrow. You can do the same thing with a credit card. Borrowing is not earning. Are you feeling good when you borrow five percent of your income so you can buy three percent more stuff?

So, now, the following chart needs some explanation.

First, it should be titled “Average Annual Real GDP Growth,” instead of just “Average Real GDP Growth.” It shows average growth per year.

Second, the concept is to produce GDP net of borrowing, that is, taking our spending (GDP) and deducting federal deficits, what we put on the credit card. Surely if we’re priming the pump we can’t count the water we put in as part of the product.

Lastly, the deficits used as the minus are not the deficits of the unified budget that you most often see. I have used the deficits of the operating budget. This leaves social security out of the financing of general government.

Explanation of this last point: Social Security is a retirement benefits program that is operated very well and is financed by payroll taxes. Tax revenue goes into a trust fund for future use. The trust fund buys only special federal bonds. If social security were a private or independent program obeying the same rules, the government could not count the receipts from the bonds it against its operating shortfalls. For some reason, in the “unified” budget, this is allowed. The reason, of course, is so the numbers won't look as bad as they are. I don’t allow the theft in the chart below. This is simply growth minus federal debt.

These data go through 2004. They would be roughly the same today, however, since the pace of borrowing has only picked up.

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