Healthy economy equals quiet bulletin board

[Shapley]

My conspiracy-theorist friends think the government is lying to us about inflation. While the government shows a 'slight increase' in food prices, for example, in January, they're seeing their own grocery bills rise faster. They couple that with the pay reduction brought about by the tax increases (a different issue, of course), and they see their buying power (similar to inflation, but measured entirely differntly) as greatly reduced. They regard this as dishonesty on the part of the government, since the government does not see fit to report it.

Looking at the GDP numbers, the big drop was government spending.

Which is an indication that government spending has been 'artificially' inflating it for some time. Government spending did not drop by a great amount, but it was enough to impact GDP. This is why the fear the sequester, even though it is a relatively minor cut in overall spending. If the sequester kick in for March, we'll probably see another drop in GDP for this quarter, thus meeting the classic definition of a recession. Regardless of the reason for it, reporting that we have entered another recession will erode consumer confidence, which is already shaky.

[Giant Communist Robot]

the government is lying to us about inflation

Just what are they measuring anyway? They use seasonal adjustment, a statistically justifiable method, and hedonics. When looking at a longer term, seasonal adjustment removes repeating events to uncover the underlying trend. Perfectly acceptable if you need to see a longer term trend. Hedonical adjustment lowers the price when value is added without raising the price. Usually, this happens in electronics. Maybe this is dubious. In sum, the CPI measures a trend in the value of the currency. It doesn't represent the prices you see. All items are included in the CPI headline number; I've mentioned many times the core excludes food and energy for justifiable reasons. As an alternative, one may look at the Producer Price Index, but similar problems show up. The Fed themselves use the Personal Consumption Expenditure deflator, available with the Income and Outlays report. This one comes with headline and core numbers, too.

My personal preference is not one based on sampling, but the effects of interest rates.

we'll probably see another drop in GDP for this quarter, thus meeting the classic definition of a recession

I'm sure you've seen the revised numbers.

[Giant Communist Robot]

Which is an indication that government spending has been 'artificially' inflating it for some time

One philosophy is that the government should have a hand in moderating the economy. When the economy overheats, the government should step in to control inflation; when the economy contracts, the government should stimulate. The appeal is that we would all benefit. We should remember that deficit spending during a recession, in accounting terms, adds to net savings; and the money spent cascades through the economy adding to the GDP. In theory, anyway. Historically the government has shown to be more effective at controlling inflation and stimulation (usually through interest rates) doesn't look to work well. Nevertheless, spending does add to the economy and tend to diminish the harmful effects of recession.

[Shapley]

I'm sure you've seen the revised numbers.

Actually, I haven't. I'm just back from a long weekend trip to Denver, CO., and haven't looked at a television, newspaper, or the internet (except to print boarding passes) since Friday...

I've got some catching up to do!

[Giant Communist Robot]

The revision was a positive .1. What's difficult here is finding a definition of recession everyone agrees on. ECRI says we are in one now. The NBER, which is backward looking, may say we are in one because of the length of time we have been in economic doldrums. Their definition is flexible, and I think they make their decision by committee. Nevertheless, I don't know how meaningful a recession call can be if the economy is still growing.

[Shapley]

I think we had a lengthy debate on whether or not we were in a recession back in 2007. I held that we were not in one until two quarters of negative growth had occured (the 'classic' defintion), which meant we had to be in a recession for six months before we could admit it.

There are several economists that have appeared on television and in newprint who have claimed we are in a recession now, though I do not know how they define a recession. Some could say that the economy 'recedes' when it grows at a slower pace than some previous time but, like yourself, I question how one can claim 'recession' when there is growth, even if it is slow growth.

However, as you've noted several times, government spending is accounted in GDP, thus permitting government to spend its way out of recession, on paper, at least, as long as it get away with spending sufficiently to offset the private-sector recessionary data. I think that would be difficult to maintain over time, since I believe government borrowing and spending depress private-sector growth, and thus the long-term effect of government spending on actual growth would be temporary in nature. It also depends on the nature of the spending: spending on construction and other enhancements can have more of a postiive impact than spending on welfare and unemployment payments: both of which provide a negative incentive for private-sector growth by providing alternatives to employment.

[Shapley]

But, yes, I did see that the 1st quarter data had been revised upward. We have one more revision due next month, so we'll see what the 'final' number may be. I seem to recall December being a pretty good month overall, based on reports at the time and my own observation of industry activity in our sector, but we'll have to wait and see what the 'official' tally says. I expect it will not be a big move in either direction.

[Giant Communist Robot]

I do not know how they define a recession

...and those pundits and shills won't tell you, either.

thus permitting government to spend its way out of recession

If I said this I was wrong. Gov spending can only moderate the effects of the recession. I'm not sure my earlier post was clear on this point; historically the government has been ineffective with stimulating growth.

I believe government borrowing and spending depress private-sector growth

An interesting point. It's logical and reasonable that government debt can crowd out the private sector.

[Shapley]

If I said this I was wrong.

No, I didn't mean to imply you said that. You pointed out that government spending is a component of GDP, and I extrapolated from that the idea that a high level of government spending may be enough to change an otherwise negative GDP growth into a positive one.

I doubt it would be possible to push the GDP into positive territory if it would otherwise be more than slightly negative, although it could be argued that China has been successful in that regard.

[Giant Communist Robot]

it could be argued that China has been successful in that regard.

China's export based economy has benefited from our appetite for Chinese goods. They're currently transitioning to a PCE based economy. I'm skeptical of most numbers coming out of China, except for the PMI's.

[Giant Communist Robot]

I see Reinhart and Rogoff, the champions of "debt to GDP", have been embarrassed. http://www.reuters.com/article/2013/04/16/us-global-economy-debt-idUSBRE93F16C20130416

An Excel error? Maybe more than that...

[Giant Communist Robot]

From Mike Konczal's article on Business Insider:

future historians note that one of the core empirical points providing the intellectual foundation for the global move to austerity in the early 2010s was based on someone accidentally not updating a row formula in Excel.

This study is used by Paul Ryan.

[Shapley]

From the article:

"Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries."

Excluding the post-war growth years of those nations which were geographically isolated from the bulk of the war makes some sense, but failing to mention why that was done does not. These British territories experienced high levels of growth, presumably because their intact infrastructure was used to augment the growth of Britain, most of whose infrastructure was in tatters. It could be said they were used as satellites for Britain's industrial regrowth in the post-war years.

There was an article, which I think I linked, a while back which argued that countries such as America, Canada, and Australia enjoyed post-war growth, not because of their grand know-how or any other particular expertise, but rather because most of the infrastructure of the other powerhouse nations were bombed into oblivion. As those nations, with centuries of know-how and experience, regained their infrastructure, they began to supplant the upstart nations in growth, which local economists lamented as the 'decline of America', the 'decline of Australia', etc.

America's post-war rise, like Canada's and Australia's, was a result of geography. Excluding those years as 'anomalies' would be the equivalent of the oft-cited 'hide the decline' of glabal warming lore. It may be justifiable, but it should be up to Reinhart-Rogogg to justify it.

[Shapley]

I believe the EU also has a cap on debt-GDP ratio among their member nations (though they seem to be flexible on enfocement of the cap). I'm not sure if 90% is the target, I'd have to do some Googling to find out.

[Giant Communist Robot]

I believe the EU also has a cap on debt-GDP ratio among their member nations (though they seem to be flexible on enfocement of the cap). I'm not sure if 90% is the target, I'd have to do some Googling to find out.

I think it's 60%

[Shapley]

I think it's 60%

Yes, that appears to be correct. According this Wikipedia:

not many outside of Eastern Europe are meeting the target.

[Giant Communist Robot]

not many... are meeting the target

These unresolved issues are a headwind against growth.

[Giant Communist Robot]

My conspiracy-theorist friends think the government is lying to us about inflation. While the government shows a 'slight increase' in food prices,

I should have posted this earlier, but am just getting around to it now. From the Encyclopedia of Banking and Finance :

..the Consumer Price Index (CPI) prepared by the Bureau of Labor Statistics of the U.S. Department of Labor. It is not, however, an index of consumers' living costs or of consumer prices, as indicated by the following official explanation of its concepts and calculation.
The consumer price indexes are statistical measures of the average changes in the cost of fixed or constant "market baskets" of consumer goods and services purchased by the index population, either all urban consumers or urban wage earners and clerical workers.

I thought the EB&F entry was best as it explicitly states the CPI is not an index of consumer prices. It's an easy mistake to make--look at its' title. Also, one should consider how memory works here: do we selectively remember what we want?

I think it's interesting that "prices" are different for the two populations.

[Shapley]

I think it's interesting that "prices" are different for the two populations.

Indeed it is. Where do the consumer shop that the wage earners don't? Or, perhaps what do wage earners buy that consumers don't?

[BigJon]

RnR's work still shows that high debt to GDP is a drag on that economy's growth.