"Economy bounces back: GDP grows 2.3% in second quarter (USAToday)"
"First reading on Q2 US GDP at 2.3% vs 2.6% expected (CNBC)"
this is all true. Reading further in those articles sometimes we may read commentary on the impact of those revisions, such as the latest one which resulted in a lowering of GDP for both 2012 and 2013.
Although, as the bottom graph on the chart to the right shows, some quarters were revised upwards and others downwards, the net impact has been to reduce growth over the last few years. While previously average annual growth was pegged at 2.3% between 2011 and 2014, currently the estimate is for only 2.0%. These dismal figures reinforce the weak growth that the U.S. economy has had since the end of the recession, a full six years ago.
Annual growth since the second quarter of 2009, when the recession was officially declared over, has averaged only 2.1%. This is close to European standards, the example that Krugman and other economists wish the U.S. should follow; that is, adopt policies like the European countries have favored for the last 30 years or so, and that have brought them continuous stagnation, high unemployment, and unbearable debt loads.
Failed Government Policies
But the sad truth is that all the "GDP boosting" policies of both the Federal government and the Federal Reserve Bank have failed. The Federal government debt has nearly doubled since the third quarter 2007, at the onset of the recession. At that time, debt amounted to $10.2 trillion, and it has jumped to $18.2 trillion today for a total increase of $8.1 trillion- this is an 81% increase in just seven years. To put it in a dramatic perspective, in seven years we've acquired debt equal to that incurred in the 226 years between the time the U.S. became a country, in 1789, and 2005- a remarkable feat.
At the same time, the Federal Reserve Bank has increased what is misleadingly called its balance sheet, by well over $3.8 trillion. Just out of thin air, the Fed has purchased $3.75 trillion worth of U.S. securities since August 2008. That is, in the earlier period it held securities worth $479.6 billion, and today it is the proud owner of $4,231 billion of U.S. securities. It is interesting to note that nearly half of the U.S. government debt issued since the recession has been acquired by the Fed; that is, it has been monetized.
But all of this spending and money pumping has not produced anything other than creating a stock market bubble. The impact on the economy has been minimal, at best. Actual GDP has risen by only 9% in total since the recession onset. Real GDP in the fourth quarter of 2007 was running at an annual rate of just under $15.0 trillion; it has risen to only $16.3 trillion since then. This translates into a 1.1% annual rate over the 30 quarters in this time. This is very poor performance indeed; both by itself and compared to our experience in prior recoveries. The bottom graph on the chart to the right shows the U.S. performance in all recoveries since the end of the Second World War, beginning with the 1949 recession. Since it's been 24 months since the end of the Great Recession (that should be called the "Lingering Recession" perhaps), we calculate average GDP growth, at annual rates, for the same period after each recession ends. The lowest average growth for all post-recessions is the latest one, at only 2.1% - clearly this is the worst by far of all other periods.
How Accurate are the Data?
One issue that is usually ignored in all the discussions on GDP growth is the accuracy of the statistics. Aside from the fact that they try to measure perhaps the wrong things, the revisions suggest that the data can not be reliably used as a guide for business. Take the first quarter of this year. The initial data release suggested that the economy had actually slowed significantly, in fact it had gone backwards since GDP shrank two-tenths of a percent (-0.2%) (what many economists state nonsensically as "negative growth," an oxymoronic word if I ever heard one.) But contrary to the initial release that the economy had shrunk in the first quarter, the revised figure tells us that in fact the economy grew modestly by slightly over half a percent. And these revisions are a common occurrence. I am not suggesting that I would want them not to revise the data, but that we should look at these figures with some degree of skepticism.
A few years ago, well actually many years ago, the economist Oskar Morgestern (see the brief biographical note below) wrote a book aptly titled On the Accuracy of Economic Observations. There he deplored the practice of government agencies issuing data that typically give the impression of being very accurate and precise, while they have a high degree of uncertainty. In all fairness, I should admit that the agencies usually footnote the sampling errors in the data, but they are not strongly highlighted. Analysis of the revisions to historical GDP data and their revisions, reveals that the growth rate for a specific period may be revised in the future by an average of 1.6 percentage points. For example, this means that a 2.5% GDP growth rate could end up being either as high as 4.1% or as low as 0.9%- which is a wide variation in fact.
EconLives
My plan for this blog was to provide brief biographies of economists from time to time. Let me start with Oskar Morgerstern.
He was an economist born in Germany in 1902, grew up in Austria and studied at the University of Vienna, where he obtained a PhD in Political Science in 1925. After this he attained a scholarship from Rockefeller Foundation to study in the U.S., where he stayed until 1929. Subsequently he moved back to Vienna and taught at the University of Vienna for a few years until an invitation to visit Princeton University came in 1938. He was in the U.S. just about the time that Hitler took over Austria in the infamous Anschcluss, so Oskar decided it was wiser to remain here. He was a faculty member in Economics at Princeton until his retirement in 1970, when he took a position in New York University until his death in 1977 (like many people today he continued to work past retirement age!)
Besides the book on economic measurement mentioned above, he wrote jointly with the mathematician John Von Neumann the first book on game theory, titled Theory of Games and Economic Behavior, the book for which he is best known. Morgenstern was one of the economists in the "Austrian Schoool" of economics- a group known for voicing an economic theory radically different and opposed to the Keynesian paradigm. He worked with Ludwig von Mises, Friedrich von Hayek and others while in Vienna, although his work on economic theory tended to be more technocratic, and emphasized a mathematical approach that is anathema to the Austrian school. But at heart he was a strong believer in free markets and free association.
Game theory has been famously brought to prominence recently by Yanis Varoufakis, who was touted and feared as an expert in game theory when he was appointed as Finance Minister in the Greek government. Underlying all the media statements and opinions when Varoufakis was appointed, was the implication that the Greeks had now the upper hand in all discussions with the European Union, and the Euro group primarily, regarding the huge Greek debt load. Yanos had in game theory the silver bullet that would solve the problem. We all know now how it all ended up. The Euro group, dominated and led by the Germans, particularly by the influence of Wolfgang Schauble the German Finance Minister, crushed the Greek government's claims and forced them to surrender their position. Game theory met its match, German might.
A few years ago, well actually many years ago, the economist Oskar Morgestern (see the brief biographical note below) wrote a book aptly titled On the Accuracy of Economic Observations. There he deplored the practice of government agencies issuing data that typically give the impression of being very accurate and precise, while they have a high degree of uncertainty. In all fairness, I should admit that the agencies usually footnote the sampling errors in the data, but they are not strongly highlighted. Analysis of the revisions to historical GDP data and their revisions, reveals that the growth rate for a specific period may be revised in the future by an average of 1.6 percentage points. For example, this means that a 2.5% GDP growth rate could end up being either as high as 4.1% or as low as 0.9%- which is a wide variation in fact.
EconLives
My plan for this blog was to provide brief biographies of economists from time to time. Let me start with Oskar Morgerstern.
He was an economist born in Germany in 1902, grew up in Austria and studied at the University of Vienna, where he obtained a PhD in Political Science in 1925. After this he attained a scholarship from Rockefeller Foundation to study in the U.S., where he stayed until 1929. Subsequently he moved back to Vienna and taught at the University of Vienna for a few years until an invitation to visit Princeton University came in 1938. He was in the U.S. just about the time that Hitler took over Austria in the infamous Anschcluss, so Oskar decided it was wiser to remain here. He was a faculty member in Economics at Princeton until his retirement in 1970, when he took a position in New York University until his death in 1977 (like many people today he continued to work past retirement age!)Besides the book on economic measurement mentioned above, he wrote jointly with the mathematician John Von Neumann the first book on game theory, titled Theory of Games and Economic Behavior, the book for which he is best known. Morgenstern was one of the economists in the "Austrian Schoool" of economics- a group known for voicing an economic theory radically different and opposed to the Keynesian paradigm. He worked with Ludwig von Mises, Friedrich von Hayek and others while in Vienna, although his work on economic theory tended to be more technocratic, and emphasized a mathematical approach that is anathema to the Austrian school. But at heart he was a strong believer in free markets and free association.
Game theory has been famously brought to prominence recently by Yanis Varoufakis, who was touted and feared as an expert in game theory when he was appointed as Finance Minister in the Greek government. Underlying all the media statements and opinions when Varoufakis was appointed, was the implication that the Greeks had now the upper hand in all discussions with the European Union, and the Euro group primarily, regarding the huge Greek debt load. Yanos had in game theory the silver bullet that would solve the problem. We all know now how it all ended up. The Euro group, dominated and led by the Germans, particularly by the influence of Wolfgang Schauble the German Finance Minister, crushed the Greek government's claims and forced them to surrender their position. Game theory met its match, German might.
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