It is a fashion among economists of the left to decry GDP. The GDP, they say, does not cover happiness, quality of life, degradation of the environment and so on--as if these things would be possible to measure without political presumptions. President Obama himself sees GDP as an incomplete barometer of economic health. During the 2008 presidential campaign Obama told ABC's Charlie Gibson that he would sacrifice a dollop of growth for a dollop of fairness. He being we, of course.
Obama never said precisely how much growth he would trade for how much fairness. Let's assume he meant just a bit of growth for a little more fairness. Obama fancies himself a reasonable man and a compromiser, so that's probably what he was thinking.
OK, what is a "little growth?" Would knocking down GDP growth from 3% to 2%--just 1%!--fit that definition? As a price for a more equitable society, many policymakers, Obama apparently included, would pay the 1% penalty (on behalf of us) as a swap for a more equitable society.
There are three problems with this thinking. The first is that U.S. growth has averaged something like 3% (net of inflation) per year since 1980. Forgive me the sin of using round numbers, but 3% is close enough for the sake of my argument. Going from 3% to 2% is actually reducing the rate of growth by 33.3%, not 1%. That reduction is palpable in the real economy. It effects hiring, investment plans and animal spirits. It makes businesses 33.3% more defensive. Remember this about business: It operates and thinks at the margin.
The second problem of sacrificing "just 1% growth" for more equity is that the tax receipts collected at the higher tax rates (designed to engineer greater fairness) won't be any higher, and could well be less, than if growth had occurred at 3%, rather than 2%.
The third problem is what happens to a country when it sacrifices 1% growth annually for a generation or two. Germany, Japan and the U.S. had nearly identical incomes per capita (as measured by purchasing power parity) in the 1980s. Today the U.S. is 30% higher. That's a big difference. It is the result of 3% vs. 2% growth compounded over a generation.
At this point you may complain that the GDP is a flawed figure and not for the reasons typically touted by the left. The libertarian right's chief complaint is that GDP underweights inflation. For example, does the GDP deflator number capture inflation of the stealthy kind? When fewer potato chips show up in a bag yet the bag's price is unchanged, is that inflation? Common sense says yes. But the Commerce Department's GDP deflator might miss it.
No measure can be perfect. Still, GDP is an extremely useful barometer of economic vitality. Any politician that takes growth for granted, or thinks he can sacrifice "just a little" of it for greater fairness, is robbing our future.
What are your thoughts on GDP growth? Can we sacrifice growth for fairness without robbing our future? Post your comments below.
Now you’re talking about robbing our future! You’ve promoted a ’supply side’ THEORY for the past 30 years, Rich, that has a 100% correlation with increased government spending and future debt (across all political stripes).
Well, better late than never I suppose.
I’m glad President Obama is a moderate. A nation cannot maintain stability with a continuously declining economy. *Nor* can it with a constant wealth gap, as we’ve had for the past generation.
I’ll take a bit of the GDP trade off, thanks, if that gets us a bit more fairness.
In a free society, markets decide who gets what – not the gubmint who can’t even keep party crashers out of the white house.
The tax code is doing a fine job of limiting our growth – we don’t need liberal politicians redistributing wealth any further.
Obama is a moderate?!? what part of the gubmint dole are you on anyway?
I’m with Jackncoke. No need for further intervention, in fact I’d be more than happy to reduce that intervention. But getting back to the premise “sacrifice growth for fairness” … what on earth is fairness anyway? Right, you can’t define it but you know it when you see it? (Apologies to Justice John Paul Stevens)
You can fairly guess I’m counting the days until M. Obama leaves office and takes his obsequious acolytes with him.
R.
Why do we have to sacrifice GDP growth for fairness? I didn’t realize they are mutually exclusive.
GDP is BS.
From wikipedia -
GDP = private consumption + gross investment + government spending + (exports â?' imports)
To increase or decrease the GDP by 1% (Rich’s big number), the government simply spends $140B more or less in a fiscal year. Talk about cooking the books!
The deficit for FY 2010 is projected to be $1.4T = 10% of GDP. So if the federal budget was magically balanced by reducing spending with no tax increases, a 3% growth in GDP would turn into a 7% contraction. Does that make any sense? Not to me. My conclusion – GDP is BS.
Robust Nations supply more opportunities for the good things in life. Call it GDP or something else, but if our economy doesn’t grow and grow fast, we’re headed for another mortgage meltdown/ banking bust. Forty percent of mortgages are under water now and our national debt is out of control, why people are still buying bonds is beyond me.
Sometimes I think a depression wouldn’t be so bad though, at least the liberals would have to get a real job instead of stealing from business people.
The left’s definition of ‘fairness’ is inhumane and unfair at best.
For example, why do public sector employees now make more than private sector employees, for doing less work?
Why are US divorce laws such that if SHE wants to leave, HE still has to pay HER? That is in total violation of the US constitution.
Genocidal leftists like Brianshall would happily repeat the actions of Mao and murder millions in the quest for ‘fairness’.
Lots of words to create a straw man – that we are sacrificing 1% growth for an equitable society. The trouble is that for the next few years we will not have growth unless government offsets the deleveraging private sector. Rich does not get the current situation and he refuses to try to either. That’s the trouble with celebrating anti-intellectualism as a virtue.
Rich,
You said “U.S. growth has averaged something like 3% (net of inflation) per year since 1980.”
True. Actually 3.1% from 1983-2008 (Post-Keynesian Supply Side) insofar as we were still in Stagflation until 1982. Stagflation GDP was 2.3% from 1970-1982. Prior to 1970, however we did 4.5% from 1950-1969 (Keynesian).
We did 3.6% from 1983-2000 so maybe we were a full point off our Keynesian numbers for those two decades with Supply Side. But we only did 2.1% from 2001-2008 and that was worse than during Stagflation yet masked by an historically low unemployment rate of 5.1%. In fact during our best post-war years from 1952-1965 unemployment was 5.4%. So we were beating that. This past decade really did feel terrific up until recently, but our GDP numbers were already starting to fall off the cliff as Supply Side matured into stasis.
Obama knows very well that we will not recover this economy back to anything much better than a sustainable 1% GDP rate of growth. Just like Japan has been enduring since 1992. Therefore, he is trying to finesse that reality with statements about social fairness, because he has no better economic solution in hand. But his sense of fairness means socialized entitlements regarding essential services the government long since took responsibility for. And people like Fareed Zakaria are trying to talk us into “it’s OK to be socialists” because smart as he is he also assumes that we simply have no choice.
Even Rich tells us that 1% is all there is going to be after we recover…because he’s dialed in with the same people who are advising the President. Nevertheless, the government’s numbers assume we will get back to 2.3% GDP or even the grim deficit projections they have made must fall apart.
Therefore, this thing cannot work and it will not be sustainable. We need to stop right now, figure out how to get into the competitive game out there ourselves with the bottom-up, demand pull, global market capitalism that is driving the developing world and still hold onto our top-down, Supply Side strengths. We can have both. We can enjoy the power of a super-structure of consolidated multinational industries, massive global banks and a strong central government (with all its military hegemony) if we are able to foster a rapidly expanding practice of small business capitalism under that umbrella so that we start manufacturing more of our own goods and delivering more of our own services better, faster and cheaper than our foreign competitors can. If our own smaller entities need to outsource into low cost markets then let them export this new capitalism into places without strong central governments…where our Supply Side methods cannot work.
Our large corporations are fine in China because they have a strong central government and a ruthless rule of law over there if you are big enough to be respected. But General Motors would have a terrible time in Afghanistan because they would need to deal with the central government and the power of government defaults to the provinces. General Motors would be buying off the wrong people. Just like Uncle Sam has been.
Remember that The Surge in Iraq only started to work when we began to bribe the local politicians and warlords.
Similarly, our American entrepreneurial capitalists must stop being dominated by Supply Side multinationals, abused by our banks and ignored by the government. We need to downsize our economic, social and political entities to be large enough to be effective and competitive yet small enough to be honest and efficient. Those entities should deliver a sustainable 6% expansion in their part of the economy…especially as they cherry pick global opportunities too small for the large players to bother with.
We must do this and on a massive scale to pull up our total GDP performance. If we don’t then there is no mechanism to take our economy up to the performance numbers we need. In that case, President Obama and his new best friend Fareed Zakaria are correct. We are already socialists, resistance is futile and we need to stop fighting it.
There is just no way that the President would sacrifice one little bit of measurable GDP growth for anything as soft and fuzzy as fairness. If he is urging that on us then it can only be that he has no idea how to make this economy operate any better, however, he cannot admit to that. Instead he might want us to believe that he is fully in control and that he actually decided to reduce GDP expansion purposefully with certain superior objectives in mind.
Of course, if that was actually the case then the President would be choosing social programs and entitlements over the mechanisms of free market capitalism. And that’s Communism American style. The Soviets proved without any doubt that such an approach to government must fail. Therefore, Obama is either deceitful or incompetent whether you believe what he's telling us or not.
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