Growth Tremors in Europe

Once more, in the news this morning, gloom and doom (as if we didn’t have enough of that already). The reason for this is that, in Europe, German (-0.6%), French (-0.1), and Italian (-0.8) Gross Domestic Product numbers came in negative for the second quarter compared with the first. The change in Europe’s total GDP was a positive 0.2 percent, but in our day and age positive growth at such low levels is viewed with alarm.

In our times nobody asks how much growth is necessary in our economies. In other words: What is the underlying measure? The underlying measure, it seems to me, is population growth. Whenever GDP growth exceeds population growth—and the more it does so the more true this is—we are engaged in unnecessary overconsumption.

Just to check this out, I looked to see where European population growth now stands. “Now” in this context is 2012, the last year for which UN statistics are available. That year the growth stood at roughly 0.18 or 0.19 (I’m taking data from a graph). Therefore the Q2 GDP growth in Europe is just a shade higher than actual population growth. The two, in other words, are in equilibrium. I am showing the population graphic below; I found it here; the data for it come from this UN report (link).

Sooner or later, and all over the world, we will have to adjust to GDP growth rates that match population growth rates pretty closely rather than diverging sharply—as in the graphic that I’m reproducing from a previous post:

Why? Because the Age of Oil is drawing to a close and we shall be obliged to adjust to the “new normal” eventually. This reasonable projection is simply never seriously pondered by our media which are still convinced that nothing is changing at the basic levels of the world economy. But things are changing. Europe may be ahead of its time and Angela Merkel wise rather than foolhardy in insisting on austerity.

GDP Stumble and Defense Expenditures

The 0.1 percent decline in GDP in the last quarter of 2012 has aroused a good deal of comment, including the tracing of it to decline in government expenditures. More tellingly, decline in military expenditures. The Bureau of Economic Analysis provides a series that tracks such expenditures. It is called National Defense Consumption Expenditures & Gross Investment (FDEFX). I am here reproducing a graphic of such expenditures from the Federal Reserve Bank of St. Louis, more specifically its FRED data service:

So what are we to think? The decline from the 3Q 2012 to 4Q 2012 was $46.8 billion. I wouldn’t mind getting, say, a tenth of that. My financial worries would be over. But in the context of our economy, and in light of the Himalaya-sized increase in military expenditures since the war on terror started, that’s just a little jiggle. Our graphic, up there, barely shows it. Herewith a bit of an enlargement:

If such a relatively small decline in defense consumption can cause the GDP to dip a toe into negative territory, the meaning is that our GDP is barely growing. This dip, at the tail of 2012, is a bit surprising, actually. I would have expected it sooner—say with the end of our withdrawal from Iraq. But no. We’ve been busy elsewhere at expanding rates. Now the mindlessly hawkish right will make the most of this dip. The dip will serve as ammunition for holding defense expenditures steady at minimum—while improving targeting of seniors (SS, Medicare) and the poor (Obamacare), and the young (tuitions).

I thank Monique for alerting me to this development. She sent me a link to a Chart of the Day (link) where its publisher provides a graphic of changes to total expenditure since 2000. The graphic exaggerates the change by this choice of presentation. Let us, by all means, hide the big picture and stir up the emotions. Whom the gods would destroy…

World GDP Performance in 2011

According to a World Bank tabulation (link), of 175 countries for which 2011 results were available, 14 (8%) had negative GDP growth, 33 (18.9%) had anemic growth under 2 percent, and 128 (73.1%) had growth greater than 2 percent and up to a maximum  of 20.7 percent.

So where does the United States fall—and who is the winner? Well, the United States had an annual GDP growth of 1.7 percent in 2011; therefore we fell into the anemic category. The best performer in that category was Belgium (1.92%), the worst was the United Kingdom (0.65%). This category also held such eminent names as Australia, Denmark, France, Hungary, Italy, Luxembourg, Norway, and Spain.

The biggest loser in the negative growth category was Yemen (-10.48%), the best performing was Croatia (-0.04%), and the category included Greece, Ireland, and Japan.

And the winner among the strongly growing categories was—Macau SAR: 20.7 percent. So where and what is that realm? It is a part of China. The SAR stands for Special Administrative Region. Macao is one of two, the other is Hong Kong (growth in 2011 of 5.16%). Macau consists of three parts, a peninsula and two islands, all connected by big bridges; Macau is, in effect, invisible when you look at a map of China. It juts into the South China Sea, a close south-eastern neighbor of Hong Kong.

So who was second in the race? Qatar (18.8%). And third? Mongolia (17.3%). Do you feel “left behind?” And does the great British Empire, of which we once were a part, seem to be sinking as the water table rises with the spread of global, ah, warming? Or did I just pick a bad year?
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Map credit: Wikipeadia (link).

Suddenly NGDP?

Economists who want to kick-start the economy want the Federal Reserve to do it. Why the Fed? Because our government, which controls the fiscal purse-strings, is hopelessly deadlocked. That only leaves monetary policy, the Fed’s area of action.

Pots are all a-boil, a-bubble on economics blogs. People want a relatively new idea implemented. It’s called NGDP targeting. The N here stands for nominal. Nominal Gross Domestic Product. That really means GDP as measured in ordinary, current dollars, dollars valued as we use them right here, right now. The conventional way to measure GDP is in real, meaning constant dollars—dollars with inflation removed. GDP data are collected in nominal dollars (of course), but expressed in constant dollars—so that any two periods may be compared. We want to know what really changed: how much has production of goods and services increased or decreased. Get rid pure price increases. The Consumer Price Index lets us do that.

Now why do the economists want NGDP targeting? Why not RGDP targeting? The answer is very simple. The Fed has absolutely no way of influencing real GDP. But it could influence NGDP. Let’s start with the reasons for that.

When we measure nominal GDP in two successive periods, the change we see is caused by two components hidden, as it were, inside that nominal dollar. Part of the change is actual growth in products and services delivered. The other part is due to increase in prices, inflation. Thus—

NGDP = Growth + Inflation.
RGDP = Growth - Inflation.

Suppose that nominal GDP grew by 5.5 percent, but the inflation was 1.12 percent. Then growth was responsible for 4.38 and inflation for 1.12 percent. Real GDP growth would therefore be 4.38 percent in the period.

Let’s look next at how the Fed comes into this. Their role emerges when we note that Inflation itself has two parts—although CPI only measures both together, indistinguishably mixed. One part is due to increase in prices, the other is due to increase in the money supply. And the Federal Reserve controls this second part. Let’s see that equation again:

NGDP = Growth + (price inflation + increase in money supply)

When we see it this way, we start to understand the NGDP targeting advocacy. The Fed can cause the money supply to grow or to shrink. And when it does this, it can influence the NGDP. The Fed’s long standing policy is to control the aggregate, inflation. It does so by causing the part that it controls to change. The Fed targets inflation as a whole. It tries to keep that measure within bounds—without causing a recession.

The Fed has three ways of influencing the money supply. One of these, and the most important, is (1) the Federal Funds Rate, thus interest charged on banks’ borrowing of federal funds; low rates cause more borrowing—therefore money supply grows. The others are (2) lowering or increasing bank reserve requirements; lowering these increases, raising these decreases money supply; with low reserve requirements, banks have more cash on hand; and (3) buying or selling Treasury bills from banks or securities dealers; buying these puts cash into the economy; selling these draws cash away.

How would NDP targeting work? Instead of targeting the inflation rate, the Fed would announce an NGDP growth rate as its target. To hit that target, it would take (or forgo) monetary actions. With the growth rate target widely known, bankers, investors, indeed the whole economy, would know in advance what the Fed would do. This is known as “expectations,” and the more accurate these are, the more rational is economic behavior (thus our economists).

To use the example above, suppose the Fed had set a goal of a 6 percent NGDP growth but the actual NGDP grew 5.5 percent (as above). With targeting in place, and publicly known, the Fed would now attempt to increase inflation by 0.5 percent, from 1.12 to 1.62 percent by one or a combination of the above-described monetary activities. The real growth (4.38 percent) plus the new inflation rate (1.62 percent), would soon deliver the targeted 6 percent NGDP growth.

Similarly, if inflation suddenly increased, say because oil prices spiked up, the Fed would not immediately take steps to counter this increase—the tendency when inflation is the target. The Fed would know that these high prices will also dampen physical growth. It might therefore leave the inflation take its course—or only mildly counter it.

Advocates of NGDP targeting foresee major benefits from this more sophisticated approach. My feeling is that they want inflation increased now somehow. NGDP targeting is one way to do it. And this because they don’t see the Administration succeeding in passing fiscal stimulus bills.

Why GDP No Longer Measures Welfare

The other day the New York Times wondered, Why is income falling with the recession officially over? I suggested then—and I’m far from alone in this—that the Gross Domestic Product is no longer an accurate way of measuring the general welfare of the American population. In the earlier post (link), I showed growing inequality in income as one of the interesting indicators. It suggests that while GDP is a good measure of the welfare of the top quintile of the population, it does not measure welfare over all.

Today I’ll contrast the GDP-performance with Jobs-Performance in our economy over an extended period of time. I will show the two in raw numbers and in index formats. First the raw numbers:

[Note: Clicking through enlarges image. But changes introduced—by Google? others?—now do not bring you back to the post if you click on the Back Arrow. Instead, when wishing to return, press Esc.]

Total employment is shown here in thousands, GDP in constant 2005 dollars. Both were growing in the 1939-2010 period, but as the annotations show, the growth of employment advanced at a rate of 2.1 percent a year while the growth of GDP was 3.6 percent annually. The two curves, therefore, gradually converge.

Now this pattern of growth suggests that productivity may be responsible for the different rates of growth. True. In 1939 each employed person generated $34,978 in GDP (GDP divided by employment). In 2010, each employees generated $100,818 in GDP. These being constant dollars, productivity, measured in this “gross” manner, increased just a shade under 3-fold. And here the negatives associated with productivity appear. GDP, which we casually associate with the general welfare, requires fewer and fewer people. If productivity had not advanced, thus stood at 1939 levels in 2010, we would have employed three times as many people, 374 million versus 130 million. We don’t have that many workers, to be sure, so productivity has a positive aspect too. But why then is income falling? That is because productivity gains are not shared with the laboring masses. Income growth is always lower than growth of productivity.

The growth rate in employment has also slowed. In the 1990-2010 period, it was 0.9 percent a year—over against GDP growth in that same period of 2.5 percent. The difference between these two rates (1939-2010=1.5%, 1990-2010=1.6%) has been increasing.

The bottom line is that general welfare means employment for all who seek it; GDP growth means fewer and fewer jobs. You draw your own conclusions.

The next chart sharpens the view of GDP and Employment growth. It shows both at 100 in 1939—and then changes based on that index into the future. What you see is the marginalization of employment over time. The GDP rests more and more on goods produced either by machines or labor overseas. China should watch our GDP and rejoice. We, here at LaMarotte, will keep staring at the jobs numbers instead.

Take Five for Budget Sanity

This post for those who suspect that our representatives are losing their marbles in the latest fight over the U.S. debt ceiling. In that context I got to wondering: Just how big is government as measured against the Gross Domestic Product? The answer turns out to be that it was 20.5 percent in 2010, thus in round numbers, a fifth of all economic activity. But how much has it grown? It must have grown fantastically when you listen to our representatives. Must it not? Well, folks, in the last sixty-two years government, as a percent of GDP, has grown a whole, monstrous four-tenth of one percent. In 1951, government was 20.1 percent of GDP. Now lets look at that—and then some detail beneath it.

What this chart shows, courtesy of Table 1.1.5. of the Bureau of Economic Analysis, the keeper of these number, that the small increase in total government expenditures as percent of GDP came from state and local government. It went from 6.8 percent of GDP in 1951 to 12.2 percent in 2010, an increase of 5.4 percent in this period. At the same time, federal government declined from 13.3 to 8.3 percent of GDP, a loss of share of 5 percent. The difference between these sectors, that 0.4 percent, is the only increase. Just to show it, I’ve also charted a sub-component of the federal, the national defense component. It grew within the federal budget by 1 percent in this period. The overall decline in federal expenditures, therefore, has been due to shrinking expenditures on domestic programs.

I remember the 1950s pretty well. What I don’t remember is the hysteria surrounding budgets then. I conclude that the current madness has nothing to do with job creation, efficiency, or the government growing oppressively huge. Based on these numbers, its basically the same size it was in 1951. Money has shifted to the state and local level, away from the federal, except defense.

What is this clash all about? It is a curious upheaval by a portion of the population against anything that represents collective effort. It takes the form of refusing to pay taxes. This disease first attacked the national government. Now it has spread to attack the state and local—so that we are roused from sleep by headlines telling us of bankrupt Minnesotas.

The people are aroused—but they are also a little confused. The fetid airs of failing capitalism are finally reaching the people—and they mistakenly believe that the evil odors they smell arise from those who’re trying to keep the roads paved, children in school, sewage treated, and food and drugs inspected. It’s not like that, Mr. and Mrs. America. Look at the chart. Lots of things are wrong, but it’s not government going for broke. It’s only going—broke, that is—because we refuse to pay the bills while expecting the services to keep on coming. Think again. Think again.