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Article Artículo

It Ain't a Boom: Taking Matt O'Brien to the Woodshed

Matt O'Brien usually has interesting stuff on the economy is his Wonkblog pieces, but his post on the "economic boom" is not up to the usual standards. First, and most importantly, the idea of grading on a curve -- because things are better here than elsewhere we have a boom -- is rather dubious. Some countries were hit less hard by the depression than others. Would we want to say that they were experiencing a "boom?" 

Even if we accept grading on a curve it's not clear we have much of a story. The widely touted "recession" in Japan is seriously misleading. The Japanese proponents of austerity wanted to show that they could do as much damage as their counterparts in the U.K., euro zone, and U.S.. They insisted on a 5 percentage point increase in the sales tax in April. This led to a sharp drop in output in the second quarter. Output also fell in the third quarter, but this was entirely due to inventory fluctuations, final demand grew.

It is a safe bet that GDP will grow in the fourth quarter and will continue growing at a moderate pace in 2015. In terms of how life is on the ground, unemployment fell from 3.5 percent to 3.4 percent in December, with 1.15 jobs for every applicant, the highest ratio since 1992. It's true that Japan is likely to experience slower growth than the U.S., but this is largely due to it having a slowly shrinking population rather than a population growing at a rate of 0.7 percent. There is likely to be little difference in the rate of per capita GDP growth, which is economists' standard measure of income.

Much is often made of slower or negative population growth. There is no reason that anyone except the "it's hard to find good help" crowd should be concerned about such things. If an economy is experiencing healthy rates of per capita GDP growth, then the slower population growth simply means less strain on infrastructure and the environment.

Dean Baker / February 03, 2015

Article Artículo

Context on the Obama Budget

Give the NYT credit, it is trying to write about the budget in a way that doesn't just bury people in really big numbers. Its main article on President Obama's budget included several references that indicated how large various items were relative to the size of the economy and used other comparisons to place them in a context that could make them understandable to readers. This is a good start, but it could be better.

One item that readers would miss in this piece is any sort of historical comparison. This is important because the piece notes Obama's proposed increases in spending, but readers may not realize this is against a baseline of large cuts. The key area for increases is discretionary spending, both domestic and military. Obama proposes to increase spending in each area by less than 0.3 percentage points of GDP. This implies that spending in both areas will fall to close to 2.5 percent of GDP by the end of the 10-year horizon.

By comparison, spending in both areas had always been far higher as a share of GDP. Military spending had averaged well over 5.0 percent of GDP in the 1970s and 1980s during the cold war years, but declined to 3.0 percent by 2000 before again being ramped up as a result of the wars in Afghanistan and Iraq. Domestic discretionary spending averaged 3.9 percent of GDP in the 1980s and 3.4 percent in the 1990s and well over 4.0 percent in the 1970s. Before the downturn the Congressional Budget Office (CBO) was projecting that domestic discretionary spending would be close to 2.8 percent of GDP by the end of this decade. This means that even with the increases proposed by President Obama he would still be spending less than the baseline path that CBO envisioned when President Bush was in the White House.

Dean Baker / February 03, 2015

Article Artículo

4th Quarter GDP: Happy Days Are Here Again (not)

The Commerce Department reported that GDP grew at a 2.6 percent annual rate in the fourth quarter, roughly a half point below most forecasts. This brought growth for the year (fourth quarter to fourth quarter) to 2.5 percent, a modest slowing from the 3.1 percent rate in 2013. Since GDP is the broadest measure of overall economic activity, the weak quarter and weak year-round performance might seem to fly in the face of all the upbeat news we've been hearing on the economy recently. But, most news coverage seemed determined not to let the data spoil the story.

For example, the Post told readers:

"For all of 2014, the U.S. economy grew at a 2.4 percent pace — a relatively dreary number much in line with the previous years of a long recovery. But that number is somewhat misleading: A brutal winter in the northeast led to a sharp contraction in the first quarter. Since then, the nation has seen its best nine-month stretch of growth since 2003 and 2004."

Actually, instead of the 2.4 percent (I get 2.5 percent) pace being misleading, the comment about the next 9 months is misleading. The economy shrank a 2.1 percent annual rate in the first quarter, a drop that was clearly in large part due to the weather. However the strong growth reported for the next two quarters was in large part due to the first quarter shrinkage.

To see this point, assume that the actual rate of growth in the economy is 2.8 percent annually, or 0.7 percentage points a quarter. Now suppose that the economy goes into reverse in a quarter due to weather so that we show that it shrank 0.5 percentage points (2.0 percent annual rate). If the economy returns to its trend path in the following quarter, then it will grow by 1.9 percentage points (0.7 percentage points for the quarter's trend growth, 0.7 percentage points for the first quarter, and 0.5 percentage points to make up for the drop). This 1.9 percentage point quarterly growth translates into roughly a 7.6 percent annual rate. 

This exercise is overly simplistic, but that is basically the story of the rapid growth in the second and third quarters. This growth cannot be understood without reference to the decline in GDP in the first quarter.

The NYT seemed to largely ignore the data altogether, with a lead paragraph telling readers:

"Powered by healthy spending from increasingly optimistic consumers, the American economy is emerging as an island of relative strength in the face of renewed torpor and turmoil elsewhere in much of the world."

Wow, 2.5 annual growth! That should embarrass China with its 7.4 percent growth. Those interested in comparisons with our own past recoveries should know that growth averaged 5.2 percent over the three years 1976-1978 and 5.4 percent over the years 1983-1985. Still feel like celebrating?

Dean Baker / January 31, 2015