How Much Economic Growth Is “Artificial”?
<Click on table for larger image>
• Congressional Budget Office (CBO) – Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2010 Through March 2010
The American Recovery and Reinvestment Act of 2009 (ARRA) contains a variety of provisions intended to boost economic activity and employment in the United States. Section 1512(e) of the law requires the Congressional Budget Office (CBO) to comment on the reports filed by certain recipients of funding under ARRA that detail how many jobs were created or retained through funded activities. This CBO report fulfills that requirement. It also provides CBO’s estimates of ARRA’s overall impact on employment and economic output in the first quarter of calendar year 2010. Those estimates—which CBO considers more comprehensive than the recipients’ reports—are based on evidence from similar policies enacted in the past and on the results of various economic models.
Comment
The table below shows actual GDP statistics over the last six years. Combining it with the table above, some interesting facts are revealed:
• Q3 2009 Final GDP real growth was 2.2%. The CBO estimates that 1.3% to 2.7% was due to government stimulus. So excluding stimulus it is possible Q3 2009 was still negative.
• Q4 2009 Final GDP real growth was 5.6%. The CBO estimates that 1.1% to 3.6% was due to government stimulus. So excluding stimulus it is possible Q4 2009 was as low as 2.0%.
• Q1 2010 Preliminary GDP real growth was 3.0%. The CBO estimates that 1.7% to 4.2% was due to government stimulus. So excluding stimulus it is possible Q1 2010 was still negative.
Add it up and only one quarter of the last seven (Q4 2009) has been able to show real growth in excess of government stimulus.
Let’s be clear … real growth means standards of living are advancing. Real growth means that economies are being more productive and real useful jobs are being created. Government stimulus is an attempt to manipulate growth statistics via inefficient and wasteful government spending. Stimulus does not advance standards of living.
While we agree that the “Great Recession” probably ended in the summer of 2009, the fact that the recovery is so dependent on government stimulus is not an encouraging sign.
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The Economist – The economy: A sticky gas-pedal
America contemplates yet more fiscal stimulus and leaves the pain for later
Mr Obama’s fiscal policy has been described as “gas now, brake later”: wider deficits in the near term to keep the economy out of depression (which would risk even bigger deficits), followed by a switch to deficit reduction to cap the rise in the national debt. The switch, however, remains a future abstraction. The latest initiatives would bring the total amount of stimulus since Mr Obama took office to well over $1 trillion (see table). Does the economy need all this? Despite turbulent markets, forecasts for American growth this year and next are being revised up, not down. On May 26th, the OECD predicted growth of 3.2% for 2010, up from 2.5% last November. But, it added, “it is unclear if output growth is yet self-sustaining and how the economy will respond as the effect of the stimulus ebbs.”
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June 2nd, 2010 at 8:49 am
“Let’s be clear … real growth means standards of living are advancing. Real growth means that economies are being more productive and real useful jobs are being created. Government stimulus is an attempt to manipulate growth statistics via inefficient and wasteful government spending. Stimulus does not advance standards of living.”
Where is the evidence that the government spending does not advance the standard of living. Much of the spending is for infrastructure — where would the standard of living be without good freeways and sewage systems.
One could argue the spending is a pull-ahead of future upgrades/repairs, but many of the projects had already been identified and not done for lack of funding. This would suggest catching up on needed repairs.
But the premise that all government spending is wasteful seems suspect.
June 2nd, 2010 at 9:16 am
Sal, just the fact that we borrow the money makes it impossible to overcome your suggestion of advancement. If we were doing it through savings and taxes it would be an advancement in the standard of living.
June 2nd, 2010 at 9:45 am
We now have the debt in place and the money mostly spent. Where is the growth in tax revenues that allow us to pay the debt off? Seems to me the IDEA of a stimulus program investing in infrastructure and investing in our future was what we were sold but in reality we didn’t get it. What percentage of it went to investment purposes versus current spending programs to keep federal, states and local government programs afloat a few more months?
Taking on debt makes you FEEL more wealthy while you are spending the money. It doesn’t equal more wealth.
June 2nd, 2010 at 10:00 am
“Taking on debt makes you FEEL more wealthy while you are spending the money. It doesn’t equal more wealth.”
It does when there is a large output gap. In the absence of stimulus, many people would be sitting on the couch collecting unemployment benefits. That’s fewer highways repaired, fewer homes weatherized, and so on, with higher unemployment and more spending on unemployment benefits. When there is an output gap, then there is idle labor, making stimulus policies the elusive “free lunch.” There is the valid concern is that debt is higher, but when borrowing is virtually free (and will be for the foreseeable future), the only rational response is to borrow more. Not doing so would be to ignore the price signals that the market is trying to send.
Justin argues that the value of an expenditure depends on how the money arrived at the point of transaction (“just the fact that we borrow the money makes it impossible to overcome [the] suggestion of advancement”). But that is just plain illogical. An analogy: does going to college still get you can education when you pay for it with a student loan, rather than in cash?
June 2nd, 2010 at 10:12 am
Government stimulus is to the economy what a “doughnut” spare tire is to a car. Sure, a regular tire is better, but when you have a flat, you are damn glad to have that “doughnut”! You put it on and get the car to a tire store to get the original tire either repaired or replaced.
What the anti-stimulus/”born-again” debt hawks would rather have us do is drive the car slowly on the rim to the tire store, “saving” them (us) the cost of the “doughnut”. But what damage to the wheel? And how long will it take?
Tying in the previous post “Understating the Benefits of Avoiding Low-Probability Disastrous Consequences” it becomes obvious that government spending is one of the ways a society can recover from too many “high risk puts” that it did not regulate because it would “slow down” growth.
To carry the analogy one more step…since we didn’t want to pay the taxes to keep the roads well repaired and policed, we should now not want to have or use the spare tire after a blow-out from hitting a pot-hole while speeding?
June 2nd, 2010 at 10:25 am
Gatlin,
“”Justin argues that the value of an expenditure depends on how the money arrived at the point of transaction (“just the fact that we borrow the money makes it impossible to overcome [the] suggestion of advancement”). But that is just plain illogical. An analogy: does going to college still get you can education when you pay for it with a student loan, rather than in cash?”"
No, not illogical at all.
Borrowing the money means taking on even more debt which must be repaid. Advocating that taking on more debt is an advancement in standard of living is illogical. Especially when the debt load is the core issue with the loss of the standard of living we used to enjoy.
Also, going into debt to get through college when there is little to no hope of finding a job that will pay off that debt in the near term is illogical. So your own analogy is flawed.
June 2nd, 2010 at 10:44 am
Reading most pundits you’d think that Obama takes the trillion dollars and goes and spends it in Macao.
I think from now on I will skip over any person working in finance who decries government spending during a recession as a misallocation of capital. The economics is wrong and the hypocrisy is wronger.
The saying that we get the government we deserve clearly isn’t true. We deserve the Republican party and all the deflation and depression it would bring….but at least the fiscal deficit would be lower!!!
June 2nd, 2010 at 11:09 am
Sal Writes …
Where is the evidence that the government spending does not advance the standard of living. Much of the spending is for infrastructure — where would the standard of living be without good freeways and sewage systems.
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If I randomly spend $100,000 on improves to your house, did I raise it value by $100,000? The answer is probably not. You cannot be sure I spent that money on “value enhancing” items. Maybe I repaved your driveway, which might have been cracked but serviceable. Maybe I did NOT remodel the kitchen which was old and inefficient. This is how government stimulus money is spent … randomly.
Everyone likes a new road (like a new driveway) but if the new road does not increase revenues (lower travel times and/or increasing tolls) relative to its cost, it is a waste of money. Economists would say that a project needs to have a multiplier affect of more than 1. This means that for every dollar spent on a project, it produces over a dollar in value. Rarely do government projects have a value over 1. Government money is either spent on items of little value or too much is spent on worthwhile items (like highway construction)
See Flint Michigan … it is considered the “newest” city in America. All its roads have been repaved, they have the newest fleet of garbage trucks and police cars in America and on and on. So why aren’t you selling your house to move to Flint. Because despite the new roads and garbage trucks it is still Flint, it has little economic opportunity, little natural beauty and high crime. New roads and sewers did not raise their standard of living (relative to what was spent).
June 2nd, 2010 at 8:36 pm
Jim writes:
“This is how government stimulus money is spent … randomly.”
Given the number of people involved and all the controls in place (yes, there are government auditors), randomness would be a challenging outcome. The presumption that government acts at best randomly or at worst maliciously to destroy the standard of living is one I cannot hope to dissuade anyone of. I can only look for the evidence of rampant fraud or waste and do my part to make it known or vote the bum out of office.
June 3rd, 2010 at 5:10 am
I have a guestion, what will happen is there\s too much growth? Thanks in advance!