Saturday, January 30, 2010

The Meaningless GDP Growth Numbers

The latest GDP numbers were released Friday and, no, despite what the Associated Press tells us, the economy in the last three months of 2009 did not boom. Yes, 5.7% is a gaudy number, but even Paul Krugman says that it is a "blip." (Yes, when I agree with Krugman, I put that one on, too. Broken clocks can be correct twice a day.)

The current situation, as Krugman explains, is based upon what is called an "inventory bounce." He writes:
Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.
It is interesting that Krugman brings up "long-term investment," because at the current time, we don't see businesses investing for the long haul, especially in this country. This is not due to myopia on part of business owners, but rather because we have a situation of what Robert Higgs in this excellent paper calls "regime uncertainty."

During the 1930s, the Roosevelt administration was openly hostile to business owners, forcing up taxes to confiscatory levels (FDR even tried to have a 100 % tax on all income above $25,000 a year), and making open threats to seize companies or force them to shut down. Now, this made him popular with lots of voters, as "populism" does seize upon the resentments of people.

If you notice, Obama is doing the same thing. Now that many of his initiatives are being beaten into the ground with the loss of the 60th Democrat in the U.S. Senate, he is resorting to Huey Long-style threats against private enterprise. No doubt, this will please the Paul Krugmans of the world, but it also means the end of long-term investment here.

And the end of long-term investment here means that businesses will try to keep current operations going but also are going to have an exit strategy, just as they had during the 1930s. However, during that decade, they did not have the option of investing in places like China, which has shown itself to be much more friendly to capital investment than the United States.

To a Keynesian like Krugman, I might as well be speaking gibberish. Keynesians believe that all that is necessary is for the government to print lots of money, make sure that people receive it, and then watch them spend. The more people spend, the more the economy magically grows, since in the Keynesian mind, all assets are homogeneous and spending is the yeast that makes the economic bread rise.

Remember, Krugman holds that investment is useful only because it is another mechanism for spending. The concept that capital investment means more production in the future, and creates the means for people to obtain a higher standard of living simply does not exist in the Keynesian thinking. It is always spending all the time.


Anonymous said...

As we know, Keynesianism does not have theory of capital structure (among other things it's missing). Mention to a Keynesian that money dilution causes an invariable distortion to the structure of investment and production and their eyes glaze over. It's like trying to explain to a punk rocker what a diminished chord is.

William L. Anderson said...

Great point! (I love the "punk rocker" analogy.)

Jesse said...
This comment has been removed by the author.
William L. Anderson said...

Jesse, FDR tried to do it in 1942 via executive order. He ordered all income above $25K to be taxed at 100 percent. However, the U.S. Supreme Court quickly struck down the order because all tax rates must be set by Congress.

My source was Benjamin Anderson's book, Economic and the Public Welfare, published in 1948. The book is in my office, so I cannot give you the page number.

By the way, while he did not campaign on it, George McGovern in 1972 said that his preference would be a 100 percent tax on all income above $30K. Obviously, that never happened, but don't forget that for a long time, the USA had 90+ top rates and the rate in 1981 before the Reagan tax cuts was 70 percent.

I once asked Krugman (at the 2004 meetings of the Southern Economic Association in New Orleans) about the 70 percent rates, and his reply was: "Those rates were insane." His exact words, and Joe Salerno can back me up, as he was sitting next to me.

Jesse said...
This comment has been removed by the author.
Jonathan Finegold Catalán said...


In "New Deal or Raw Deal", Burton Folsom retells how Roosevelt's cabinet was dumbfounded when he first suggested 100% tax rates.

Andy Katherman said...

William, great blog. I watch Robert Reich quite a bit on the Kudlow Report. Every night he's on, it's the same keynesian propaganda over and over. Can someone with an ounce of economic literacy put these people in their place intellectually? They are like a flesh eating virus that will not go away. If you were to recommend a good book to refute Keynes (obviously there are many), what would you recommend?

Paul said...

I recently found this site and I absolutely love it. Although some of the information is over my head, I'm learning new ideas every day and find your writings helpful when discussing economics with others.

But most importantly, nothing is better than having someone knock that pompous a.. Krugman down a few pegs. Keep up the good work!

Unknown said...

"To a Keynesian like Krugman, I might as well be speaking gibberish."

Well said, Prof. Anderson. What's worse is the business news, though, which is just regurgitated keynesian nonsense from ivy academic economists who fail to predict much of anything, government technocrat economists who are fairly accurate at predicting precisely the opposite of what will happen, and CEOs and Chief Economists who might as well be reading out of a plain Jane keynesian-dominated Intermediate Macro textbook.