I’m still trying to figure out how this:
The U.S. economy contracted during the first three months of the year at one of the fastest rates in 27 years and surprised analysts by nearly matching the historic decline that had been registered in the final quarter of 2008, when it was battered by the financial meltdown.
Gross domestic product, a measure of the goods and services produced across the nation, shrank at an annualized rate of 6.1 percent, according to a preliminary estimate released this morning by the Commerce Department, after contracting by 6.3 percent between September and January.
translates into a depression. As I read it they’re reporting that the U. S. economy has shrunk by something like 3.5%. During the first year of the Great Depression of the 1930’s the economy shrunk 9% and contracted by something like 25% over its entire duration. We’re just not seeing that.
But I think there’s a more important reason to think about what’s going on differently. I believe that we’re just now recognizing that for some time we’ve had water on the books—we’ve overestimated the economy’s growth and its prospects for future growth. I see the current contraction more as a realignment to the true state of the economy.
We’ve had the real, underlying economy and the financial economy, Main Street and Wall Street. Wall Street has “grown” enormously while Main Street has grown very, very slowly. Now the Wall Street gains are being shown to have been illusory and some part of the gains in the real economy, the parts buoyed by those illusory Wall Street gains, are falling away, too.
We’re seeing that wages in the top 1% and .1% are contracting, too. Most of those were dependent on the Wall Street gains and, just as those gains are evaporating, those wage gains should, too.
IIRC the Q4 numbers were believed to be bloated at the time because of the value of unwanted inventories. I.e., the inventories certainly had value but were economic liabilities in a struggling the economy. The article does seem to suggest that Q1 is reaping the cost of Q4 inventories.
Ah, sweet perspective. The “catastrophe” hyperbole was always suspect. And no doubt politically motivated. Let’s leave the morality of talking down the economy for political gain, and the effect on employment for another time. This economy right now is experiencing a good solid recession. Nothing more, nothing less.
There is a bit of measurment noise in the historical data, depending upon source, but your depression figures are directionally correct. In addition, the 1958, 1975 and 1981 recessions had approximately 3% contractions. The latter two lasted 15 – 21 months, depending on what you want to do with 1981’s “double dip.” So this recession, if we have further contraction might finally qualify as “the worst since the Great Depression.” But it ain’t no depression.
I think the more important aspect of this downturn is one largely not covered in the media world, but discussed here previously and I believe you are alluding to: weak recovery.
We now know that to the degree the 90’s and 2000’s economy was driven by a wealth effect from from inflated real estate and stock markets, it was an illusion. (Sorry, Billy C.) I know from past posts that readers here have seen the Case index. They may not have seen a fabulous index put up by Mankiw showing that normalized equity values really ought to be back at mid-nineties levels. That would be a DOW in the 6000-8000 range. (It was posted by Mankiw with the title: Why Buffet is Buying Stocks)
You eliminate those two asset effects and consider a baby boom generation that literally crossed peak spending age in 2008 and you have the makings of an extended period of sluggish growth. In fact, you have 1990s Japan.
Add bone headed tax increase policies from Obama and a 60 vote Senate and who knows what you’ll get.
Drew, in my view what I suspect we’ll get and what I’m concerned we’ll get is nostalgia. An attempt to return to the “good old days” which we won’t see again, at least not in my lifetime.
As they say, for nostalgia and $1.79 you get a tall black coffee at Starbucks.
I think the seeds for a policy blunder are being sewn. Team Obama and his supporters have set the stage by arguing for Keynsian policy: fiscal stimulus, declaring it necessary and that it “works.” Now of course they favored the spending side of fiscal stimulus. It fit the political goal.
But you wait. The moment they think they can get away with it they will be going for tax increases. At that point, to a man they will amazingly not have the slightest idea who Keynes was, declaring that fiscal policy in the form of tax increases will have no “anti-stimulus” effect. The convenient logic boggles the mind, but it fits the political goal.
The Jonathon Alters and Keith Olbermans of the world, along with the tax apologists over at OTB will argue it though. I guaroneteeeee…….
My understanding is that the actual empirical evidence for the efficacy of spending as fiscal stimulus is very scant, indeed. What I’ve read suggests a multiplier of .8 rather than the 1.5 that Obama’s economists are predicting. A .8 would mean that for every $1 of spending you’d get 80 cents worth of stimulus rather than the buck and a half.
Fans of the spending theory (like Paul Krugman) criticize the methodology of the studies without coming up with any studies of their own. As I’ve said before, economics is a descriptive science, not a predictive one.
Have you seen the charts showing how slow the federal government is spending the stimulus? I’ll try to find a link, but I think we’ve spent about 2%, mostly in payments to states for medical care. I think it was on the Atlantic Business channel.
PD –
I recall reading Milton Friedman many, many years ago who observed that government had an almost perfect track record of applying policy just as the the “crisis” of the day was subsiding. Subsequent casual observation would suggest this is largely true.
Dave –
I have seen many estimates of tax and spend multipliers. I don’t think anyone really knows. But the figure you cite is consistent with Kevin Murphy and his fellow Chicago economafia. As a loyal U of C grad and former Murphy student you can imagine where my biases are.
I believe Mankiw is in this range. Menzie Chinn at econbrowser is an unabashed advocate that it is larger. Krugman apparently never saw a stimulus dollar he didn’t like. As long as its spent by a Democrat. Oddly, I seem to recall one of Obama’s own senior advisors had to revise her estimate UP recently to get with the program.
oy
Actually, .8 might be a tad high for Murphy……
FYI, here’s the link to the piece on how quickly the stimulus is not being spent:
http://business.theatlantic.com/2009/04/the_stimulus_spending_isnt_fast_enough.php
On multipliers, my last work on them was in a high school research paper, but my sense is that a high multiplier could be attributed to spending that is transformitive; it has the prospect of long-term economic changes that encourage economic players to make investments, whether it be to open a restaurant or build a house. I know Illinois is trying to get stimulas money to pay for things it was going to do anyway, like road resurfacing for which I think the multiplier has to be minimal.