if we are not producing anything, then how is the market expanding and why is everyone saying things are heating up? by Neal Goldberg
(libertarian)
Sunday, April 11, 2010
I'd like to think I am a very thorough guy. When I read an article, I tend to ask questions; and all of a sudden, these questions get me started on a search for some truth that just isn't there. Lately, I have been hearing that the economy is heating up, yet, no one I talk to is aware of the economy heating up. So, I started looking for the source of what I was starting to feel like propaganda. And through my searching, It doesn't feel like I can find anything but propaganda. So, I went out to find out where this propaganda was coming from. This quote is fairly typical;
"Overall, the economy came out of the recession in the middle of last year (2009) as the country saw Gross Domestic Product growth in the third quarter, and posted a 6 percent increase in the fourth quarter, he said. But real "core" GDP, or private domestic sales, is expected to recover more slowly."You can find this quote here.
If private domestic sales are way down, that means that nothing is really moving. If this article is to be believed, nothing has been moving for the very least, a year. And if they are basing this GDP report upon production, then either we are a really foolish nation, or there is something wrong in the Land of Oz. If you can believe in a 6 percent rise in GDP without private domestic sales, then I have a bridge to sell you. (GDP stands for Gross domestic product after all.) Most people have a belief that GDP stands for what a nation produces and tells about the health of a nation. And that seems to be the general definition;
"An estimated value of the total worth of a country's production and services, calculated over the course on one year"
I don't like to be accused of making things up, so I will show you where I got that information.
Production and Services. Wouldn't you tend to believe that means commerce? I believed it meant private commerce, you know, goods and services? Yes, it made me question the whole idea also.
So, I went straight to the horse's mouth. I went to the Bureau of Economic Analysis who makes these incredulous findings of fact. What I found out was actually amazing, and I know I am not done yet, but my head is spinning. In reading through the Bureau of Economic Analysis, they have included financial flow which includes investments in fixed capital assets like commercial , retail and housing assets. That seems to be not a significant portion of the GDP report, but I am not sure that most people know that or not.
"The perpetual inventory method is used to derive estimates of fixed capital stock, which are used to estimate consumption of fixed capital. This method is based on investment flows and a geometric depreciation formula"
But here is where it gets interesting and yet, concerning. Even Government is counted. So if the government employs more and spends more, as we have with our stimulus packages, our GDP goes up as far as the reports are concerned. Meanwhile, we have no private domestic sales. In other words, we as a nation have not really produced a thing, so this whole report means nothing in reality. If you want to say the stock market is up and Government employment is up and Government expenditure is up, that's fine with me because well, that is truth. But let's put in a little perspective here. The GDP/GNP report is a major report every quarter and the stock market reacts to this report. So, if the Government adds to the GNP through stimulus money, the market shoots up on reports GDP is up! In reality, we actually have a false reaction to a false report. The Government spends money, and employs more people, which adds to the GDP, which in turn puts more confidence in the stock market and the market goes up. Even if the Government is dealing in deficit spending! (don't know about you, but shouldn't that be negative GDP?) Good luck telling this good news to the 10% of the nation that is unemployed, plus the 3 million people who have been chronically unemployed. It gets rather interesting when you understand the Government can control the economic upturn and downturn of the nation by the amount of money it spends.
Here is the conclusion if you can stand it. When the nation falls into a depression, have the government spend money any way it can, such as stimulus programs even if it creates debt because the GDP will go up. The market will go up because the GDP is up and Whamo! we have a new fledgling economy! Hail to the big spender! I imagine this is the very reason our economy is based upon confidence. We can actually create confidence so the economy feels confident and no one can actually argue with the facts. Now if that sounds like doublespeak, don't blame me; I am not the one exuding confidence..
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The GDP goes up when the government spends simply because it results in production, whether paid for by government or private money does not change that fact.
The stock market goes up when those who invest in the stock market believe the government money being spent is being directed towards those firms that they believe should receive the welfare.
Other than the percentage of control the government has over the economy, nothing much has changed since Lincoln and the railroads began government control over the economy. Economic socialism is nothing new.
Neal, as Gene states, any stimulus - regardless of source will lead to changes in the economy. However, if government stimulus is directed to increasing productive capacity- ..then- even if in deficit, this is good spending- its investment to increase factors of production. If the spending results in "primary consumption" then yes- its not wise spending, its a short term fix and adding to the deficit.
There are many measurements of GNP, so whether domestic spending is included by one or another is NOT the benchmark of measuring an economy. There are complex and varied measurements- why- because our economy- and economics is complex and varied. So, we use different measurements to gauge different factors in the economy. If media "misuses" and "cherry-picks" different economic indicators put out by the government, then that's the media's ignorance of a complex economy. To merely look at a handful of indicators- to judge or comment on an economy as complex as ours is insufficient. GNP/GDP formulations are a quick easy way for laymen to "try" to understand our economy- yet this formulation is woefully outdated yet still used by mainstream media. I think, if one wishes to analyze the economy with breadth and depth of meaning- one should go to the Federal Reserve web pages and take a few weeks studying the myriad of reports and analysis to "begin" to understand the state of the economy. Â
