I. Definition of GDP
First some background. The GDP, or gross domestic product, is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.
http://www.investorwords.com/2153/GDP.html
http://en.wikipedia.org/wiki/Gross_domestic_product
Knowing what makes up GDP is really important if you want to understand how to get it growing again, so take a minute to really understand the component parts.
1. Consumer spending (sometimes called consumption)- you buy it and use it-- food, a tv, sneakers, whatever.
2. Investment: Education. Housing. Railways. Ports. Something that is not consumed, but is instead used for future production of goods and services. Obviously there can be gray area. A computer is both.
Importantly, both non-residential investment (such as factories) and residential investment (new houses) combine to make up Investment. Residential housing is a key part of investment. This has dropped off the cliff, as you might imagine. Off the cliff.
3. Government spending. As I understand it, if the government buys it it comes under this category, period.
4. Exports - Imports. The value goods exported, minus the value of imports. I will not discuss trade at all in this post, because it is very difficult to control and predict.
II. Consumer Spending is in the Tank, and Likely to Remain There For a While
Now let's see where these categories of spending are these days. Consumer spending has plummeted. You may not be able to see that quite now as you finish up your Christmas shopping, but it has. Retailers are going bust, the car companies are obviously in a world of hurt, and US domestic sales of automobiles have dropped further than at any time since World War II. Big discounts are available on electronics, clothes, etc. Basically, consumers are afraid for their jobs/homes, or have lost them. When you're really concerned about losing your job, the Plasma screen TV or new dress can wait.
This is most most unlikely to reverse itself anytime soon. American consumers are famous shoppers. After 9-11 retail sales REALLY plummeted, as people were both riveted to the tvs and nervous. But a few weeks later it rebounded sharply. Bush literally urged us to go shopping. Small, small man.
Anyway, there are two excellent reasons to think that consumer spending won't rebound sharply anytime soon, which I boldly predict it will not.
First, Americans understand that the economy is truly awful. Most of the readers of this blog are highly educated people born and raised in the northeast. I am very confident that people like us badly underestimate the shock that people not like us feel when a Lehman Bros. goes under, or a Citigroup needs dozens of billions in cash and hundreds of billions in loan guarantees to stay afloat, and, especially, when GM is driven to the wall, and needs money by the end of the year to avoid bankruptcy. These things, by themselves, could be enough to badly depress or shut down economic growth. Couple that with the fact that the local Target closed, local businesses are cutting back and your boss tells you that the company needs to save money, and presto, you have a recession mindset. Multiply that by the entire nation, and you have probably the worst recession since 1945. The absolutely frantic government response has in some ways exacerbated this problem. The frequent statements by Bernanke and Paulson earlier this year that the crisis was contained proved most ill-founded. To their credit, they're not saying that anymore. But people that watch the news remember. It seeps in. Of course, the response is still necessary, as I've said in posts before.
Second and more important, is where are people going to get the $$ to spend? From 2002-2007, a key source of money that people used to shop was from appreciating home values (and stock portfolio values). As people were wealthier on paper they spent more and, importantly, borrowed more and saved much less. Home equity loans and credit card receivables went up sharply, and people spent like drunken sailors (as did the government).
Well, the stock market has crashed and the housing market has tanked, so these temporary boosts to wealth will be out of action for a while. Incomes aren't rising fast (obviously). So ladies and gentlemen, its really simple. With incomes down, and insecurity and debt up, those with jobs are saving more and spending less. Those without jobs or having lost their house are spending way less. Presto-- consumer spending is down.
And even though it may not go down radically from here, it is really hard to see a sharp rebound. The stock market could go up quickly, who knows, but the housing market really can't. There's just too many houses on foreclosure and unsold inventory for housing to rebound much until at a bare minimum mid to late 2009, and probably not until at least Spring 2010 at a guess.
Having said all this, I refer back to my post on Friday, December 05, where I pointed out that there is already a lot of "stimulus" in the pipeline, including lower oil prices, lower interest rates which are causing a lot of refinancing, and all of the money that the fed and the treasury has been throwing around. So there's more uncertainty than usual right about now, because there are such extreme headwinds and tailwinds at the same time.
Referring back to the beginning of this post then, GDP is consumer spending + investment + government spending (I'm leaving exports - exports out of this post, because it is very difficult for the government or anyone else to control exports). If consumer spending is unlikely to rebound strongly (to say the least) anytime soon, and investment is as well (residential housing is a big part of investment) you simply have to have government spending grow, or there is no way the economy will in the near future. Government spending (deficit spending) is the only game in town.III. The Attempt to Stimulate Consumer Spending in 2008 Largely Failed, and its Failure was Both Predictable and Predicted
Earlier in 2008, the rebate checks were mailed out. This is an attempt to increase consumer spending by increasing the deficit and simply putting more money in people's pockets. It worked to an extent, but only so much, both because it was much too small to have a serious impact and, more importantly, because scared consumers tended to save the money and not spend it. All of this was predicted by many mainstream economists.
Savings is good too, for a myriad of reasons, but these reasons are mostly long term. In the short term, spending is far, far better than saving.
IV. The Federal Government Can, Should, and Will Increase Government Spending to Stimulate the Economy
Don't let anyone tell you, as some conservatives are, that government cannot stimulate the economy by running larger deficits and spending the money on bridges, roads, ports, health care, etc. It most certainly can. This is Keynesian economics 101, and is not controversial among serious economists. Now the government can't increase the size of the economy this way over the long term but in the short term it absolutely can, should and will. Team Obama has leaked this week that the economy is in much worse shape than they thought, and have not acted to quash speculation that the upcoming stimulus package will be bigger than anyone thought a few weeks ago, north of $700 billion over two years, with a trillion dollars over the 2 years being considered not out of the question. This is such a good idea that I am at a loss for words. It could be the difference between unemployment topping out at say 8.5-9%, or at 11-13%. It could mean the difference between a decent job and homelessness for millions of Americans. Its a hugely good idea as I've said in several posts before and will in several posts in the future.
V. Where will the Economy Go From Here?
Now its prediction time. Where will the economy go from here. Or, put another way, where will growth come from when the economy does recover?
Now that I think of it, this belonged in my last post, when I predicted that the recovery will begin on June 19, 2009. LOL.
At the very end of the day, the only way the standard of living of a nation grows is through productivity. That is, you can grow GDP by putting more people to work (for example, granting women and minorities the right to compete on equal terms for jobs, which is good economics as well as morally right), running a budget deficit, or doing myriad other things, but these things by and large do not, in the long run, increase per capita GDP. The only thing that does that is productivity. Basically, allowing Labor to work more efficiently, or allowing the interaction of labor and capital to work more efficiently.
How to increase productivity in the long run has been the subject of entire books and is beyond what I can contribute. To increase GDP, which I'll happily settle for, you need increases in (exports - imports), consumer spending (which is 2/3 of the economy, and I've discussed at length), investment or government spending. Increasing government spending is an excellent short term solution, and a poor long term solution, as taxes need to be raised to pay for this spending, and that will short circuit consumer spending. The key, in my opinion, is investment. We've had about enough residential housing for now, and that's a huge part of investment. So increased investment isn't easy!
So one wonders where growth will come from in the medium run. It would appear that after 2010 more growth than usual will have to come from investment than usual, and less from government spending (which will have skyrocketed from an already high base). People and businesses need money to invest, and that money, by definition, is either borrowed or comes from savings.
It is a central tenant in economics that government borrowing plus private investment = private savings plus foreign investment. So private investment and private savings are closely related. If you're going to build a railroad, or bridge, or new factory, or the like, the money for the investment must come from somewhere. That somewhere is generally either savings or borrowed, either from the government (to build a school) or abroad (A new Toyota factory funded by the parent company perhaps). So to increase investment you (as a practical matter) need to increase savings. Which can often decrease consumer spending-- private citizens savings = their income minus their consumption, minus THEIR investment. Anyway, raising savings (which in the US have been abysmal for years) has been a big issue in the US for years and the savings rate has only declined. So raising investment is going to be tricky.
It may well be that government spending will have to be elevated longer than I had thought. If I'm right, and consumer spending is slow to recover, the only things left are trade, government spending and investment. Can't raise investment without (a) raising savings; or (b) going into more debt. And one thing I'm certain the United States has about now is too much debt. Too much credit card debt, too much mortgage debt, too much government debt (at the moment). So I'm not for a strategy that relies upon increasing debt.
I am arguing for a government investment program that is real, and sustained, even after the stimulus package I have long advocated has run its course. By investment program I mean spending which can benefit economic growth later on, like schools, mass transit and other infrastructure, and possibly alternative sources of energy. Health care is also an excellent place to begin this investment. It is sorely needed (50 million or so people are uninsured, and that number is sure to rise in the steep recession we are in), government can do it (Medicare works), and it can be continued long after the recession is over. Whether it raises long term economic growth, however, is trickier. It might, but not as clearly as a much needed rail link.
Other areas for long term increases in government spending that are useful for the economy need to be considered. And taxes will need to be increased to pay for this spending (obviously diminishing any stimulative effect!) But as of now, and my mind isn't fixed on this, I don't see any other way forward. For the last 25 years, growth in the economy has been fueled primarily by increases in debt. The national debt has absolutely skyrocketed, mortgage debt has soared, consumer debt has soared, business debt has increased somewhat. A strategy for growth that allows for growth alongside a decrease in debt is now needed. And that will likely require more investment, by both the private sector and state and local governments.
1 comment:
good analysis
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