Does "GDP growth" mean anything?

[Misty]

Lately, Republicans have been claiming that, because the economy grew 3.3% in the second quarter of this year, the economy is actually much better than people think. While granting that "what people think" is affected by a doom-and-gloom media that is blowing things out of proportion, "what people think" also tends to have more of an effect on voting outcomes than reality. So I want to discuss this whole "economic growth" issue by discussing some helpful data.

(Numbers come from the Bureau of Economic Analysis.)

GDP Growth (Not inflation adjusted. I've checked inflation-adjusted; I can argue from those numbers too):

1970: 5.474%
1971: 8.53%
1972: 9.87%
1973: 11.66%
1974: 8.48%
1975: 9.22%
1976: 11.41%
1977: 11.26%
1978: 12.99%
1979: 11.705%

1992: 5.70%
1993: 5.04%
1994: 6.23%
1995: 4.60%
1996: 5.67%
1997: 6.24%
1998: 5.33%
1999: 5.96%


Notice that economic growth in the 1990s, which were considered a time of incredible prosperity, pales in comparison to the growth in the 1970s, which was a time of malaise and unhappiness. The difference? Obviously, stagflation was the difference. If we use the "misery index", the sum of inflation and unemployment, to quantify these years, we see a different picture:

1970: 10.82%
1971: 10.25%
1972: 8.87%
1973: 11.02%
1974: 16.67%
1975: 17.68%
1976: 13.45%
1977: 13.55%
1978: 13.69%
1979: 17.07%

1992: 10.52
1993: 9.87
1994: 8.71
1995: 8.40
1996: 8.34
1997: 7.28
1998: 6.05
1999: 6.41

See the big difference? The misery index in the 1990s was much smaller than in the 1970s. This jives well with the impression of the 1990s as prosperous and the 1970s as uncertain.


I think what this means is that GDP is meaningless - what matters more to voters are issues "closer to home", specifically unemployment, inflation, and, yes, oil prices. This may be one reason McCain does better than he should on the economy: his "drill, baby, drill" mantra goes well with voters who care more about gas prices than rising inequality and exports. On the other hand, the misery index is still a rather high 11.47%, a level not seen since the early 90s recession. If it continues to rise (and I think it might, because the Fed's plan could definitely stoke inflation), we could see a misery index not seen since the early 80s recession, when Reagan endured a crushing recession to squeeze out all the inflation.

 

[Darth Meanie]

You obviously put some though to this, and I personally find these recessions unavoidable, but manageable, since our monetary policy changes have allowed us to turn an old boom and bust cycle of the Great Depression into a growth and stagnant cycle that is much more manageable.

Which is also why I think these government bail-outs are a bad idea. Its putting American tax dollars to save failing corporations, some of which cooked the books. When Enron collapsed there wasn't a huge downfall; of course, AIG is different than Enron, but I think that the best way to economic prosperity is through tax cuts and privatization.

 

[Peanut-Lover]

If you don't mind, may I see four things for the past 9 years - GDP, GDP adjusted inflation, misery index, inflation?

I think that what needs to be looked at is the GDP adjusted inflation and the misery index. I never liked GDP, because if you look at the growth, and growth isn't keeping up wih inflation, then we are fucked when it comes to the economy.

 

[Misty]

sure!

GDP:
1999: 5.96%
2000: 5.92%
2001: 3.17%
2002: 3.37%
2003: 4.69%
2004: 6.62%
2005: 6.30%
2006: 6.09%
2007: 4.77%

GDP(adjusted):

1999: 4.50%
2000: 3.66%
2001: 0.75%
2002: 1.60%
2003: 2.51%
2004: 3.64%
2005: 2.94%
2006: 2.78%
2007: 2.03%

Misery Index:

1999: 6.41
2000: 7.35
2001: 7.59
2002: 7.37
2003: 8.26
2004: 8.21
2005: 8.48
2006: 7.87
2007: 7.46
Currently: 11.47

Inflation:

1999: 2.19
2000: 3.38
2001: 2.83
2002: 1.59
2003: 2.27
2004: 2.68
2005: 3.39
2006: 3.24
2007: 2.85
Currently: 5.37%

 

[Peanut-Lover]

sure!

GDP: GDP (Adjusted)
1999: 5.96% vs 4.50%
2000: 5.92% vs 3.66%
2001: 3.17% vs 0.75%
2002: 3.37% vs 1.60%
2003: 4.69% vs 2.51%
2004: 6.62% vs 3.64%
2005: 6.30% vs 2.94%
2006: 6.09% vs 2.78%
2007: 4.77% vs 2.03%

People: Notice the difference. Rosy picture on right (6.62% to 3.17% at the worst in terms of economic growth) compared to less than a single percent in 2001 with a max back under Clinton. A slowdown is expected after closing in at the top, but the lower numbers are inexcusable. 2001 was tough, but come on - we're the US, we should bounce back like before.

 

[JoeOE18]

That's an interisting analysis, as it often is when you look closely what politicians say.

What worries me about all the nationalisation of big financial industries is the level of control of gives the US government over the financial sector. I don't know the details of the money these companies have been give, but as far as I'm away AIG, at least, now report to the government.

 

[McGrrr]

Heh, I only just noticed this thread (congregation is so inactive now that I don't even pay attention).

Recession is defined as significant decline in economic activities, of which GDP growth is but one indicator. The economy can still be weak yet boast positive GDP growth and the narrow idea that a recession is "two consecutive quarters of negative real growth" was a somewhat misleading layman's definition spread by the media.

Real GDP might be healthy, but take a look at:

1. Real incomes - hit by rising inflation and a weak dollar)
2. Unemployment - up to 6.1% in August
3. Industrial production - downward trend since last Summer
4. Retail sales figures - only Walmart has not suffered a decline; significant in itself, people are buying cheaper options

So... what do you think?

 

[Misty]

That was the case I was making - that inflation and unemployment and such tend to hit a lot closer to home than "GDP growth" and are a better indication of the public mood.

 

[Hipmonlee]

Well inflation actually affects people in their homes, whereas gdp growth doesnt actually have any direct impact in the lives of the average person.

Unemployment also, to a lesser degree.

So if you are looking for what hits closer to home, then inflation is a better indicator by definition.

Have a nice day.

 

[Peanut-Lover]

Ahh, I should have added in "per capita" - if you have the same amount of wealth spread over more people (or if growth of people > growth of economy), you find out the real main-street changes.


WalMart is not the only thing that has seen an increase - need-based companies like Proctor and Gamble (VO5, Crest, etc) have been doing quite well, but for complex reasons...

People stock up (cost-push inflation with a self-fulfilling prophecy)
People are buying cheap - they now prefer lower money to "preffered" brand names (ie, Crest vs Colgate - Crest is cheaper, they'll go with that).

Getting back to Walmart , look at CostCo to see real constant growth (5 year trend)

People are now looking to see "how can I save a buck" as opposed to "what is convenient". THE WAY IT SHOULD BE. I am in Brooklyn, NY, and I have about 5 grocery stores to choose from, and I shop around - the KeyFood down the block has cheap but good quality fruits and vegetables, a little MeatsSupreme corner-store like thing has cheap milk. So, if I don't need more than a few things, I either do without, or I buy what I need at the best prices. When I need alot, I go to FoodBasics and buy things cheap. I don't go there often, though, because of gas, and the fact that its like 5-10 miles away. Moral of the story: Plan ahead and shop around.

 

[Psycho]

To directly answer the question on GDP; GDP growth means something for sure, what it means can be looked at a few different ways. GDP growth usually leads to a higher standard of living just because when a country is making more product, theoretically, more citizens of the country are working and therefore have more income etc etc. However, GDP growth can be skewed and not necessarily a measure of standard of living or anything along those lines.

Specifically, GDP measures production in a country. That is all. We can make the correlation between GDP and standard of living/income etc through common sense. However, as far as standard of living goes with high GDP, a country could export 100% of its product made in the country, giving it a very high GDP and assuming low imports, a very low standard of living.

 

[obi]

GDP growth is misleading because it doesn't take into account population growth. GDP per capita growth is misleading because it doesn't take into account unequal distribution of wealth.

Imagine you have 100 people. 99 of them make 100 dollars, and 1 of them makes 100,000. That guy at the top has his net worth double (to 200,000), while everyone else loses 50 (pretend like there is no inflation to make the math easy). The GDP of this example would increase from 109,900 to 204,950, an increase of over 86%! It would appear as though this is a prosperous community, when in fact, the rich has gotten richer, while everyone else has gotten poorer.