Relevant and even prescient commentary on news, politics and the economy.

Clap Louder? (WaPo and GDP growth)

This one’s for Brad. The Washington Post’s Neil Irwin should have his license to write about economic news revoked. His lede:

The U.S. economy grew at a healthy pace in the second quarter, the government said today, despite being buffeted by a financial crisis, a deep housing slump, high fuel prices and a weak job market.

Gross domestic product rose at a 1.9 percent inflation-adjusted annual rate in the April through June period, far above what forecasters would have expected just a few months ago.

Compare Bloomberg:

The U.S. economy shrank at the end of 2007 and grew less than forecast in this year’s second quarter, signaling that the country is in worse shape than many investors and analysts had thought…

The economy may weaken further as the temporary boost from tax rebates, which aided a pick-up in gross domestic product last quarter from the previous three months, fades.

U.S. population growth is around 0.9% p.a. So real GDP growth of -0.2%, 0.9%, and 1.9% for the last three quarters implies growth per capita of roughly -1.1%, 0%, and 1%, respectively, with hopes for Q3 not exactly running high. How on earth can a reporter with half a brain call that a “healthy pace,” and an editor let the claim into print?

Added: Here’s an optimistic but informed take from Prof. Hamilton; my concern is that lots of mischief can be made with “apart from the things that were bad, things were pretty good!” arguments.

Update: The current version of the story (12:39 P.M.) replaces “healthy” with “solid,” and adds a “but” paragraph before the “above what forecasters would have expected” bit.

At Least They’re Consistent

Just the other day, I wrote:

So, I don’t go to bed worrying about inflation, or that we’ve been in an especially protracted recession for years and apparently don’t know it (an implication of claims you can find out there that CPI and like measures understate “true” inflation by very large amounts).

Now, Barry Ritholtz pulls the alternative GDP series from Shadow Government Statistics, a/k/a CPI-understates-inflation HQ, and sure enough, it says that we had essentially zero GDP growth through the Clinton years, and a lot less than that since.

My short response: Bullshit.

Pardon my language.

Added: In an addendum to his post, Barry says that he thinks the most recent economic cycle wasn’t all it was cracked up to be. I strongly agree. However, I think it’s important to be clear as to what the real problems are. Barry mentions a big one, which is the sustainability of economic activity that’s driven by easy money. Another issue is the increasing income and wealth inequality that creates disconnections between aggregate economic growth and experiences (wage growth, wealth, debt) at or near (or even not so near) the median. The latter, in particular, has implications that even the center-left a la the Democratic presidential contenders is loath to take on non-rhetorically.

US Legislators Profiting from War? Say it ain’t so, Joe

Seems it’s not just the executive branch and their friends that have “invested” in this war. From IPS comes a news article about the money invested by our legislators.

Members of Congress invested nearly 196 million dollars of their own money in companies that receive hundreds of millions of dollars a day from Pentagon contracts to provide goods and services to U.S. armed forces, say nonpartisan watchdog groups.

The article is based on a report by the Center for Responsive Politics, via their site: Opensecretes.org

Before we get to the meat of this, consider that I found this via Common Dreams.org’ copying the news article. The article is not a US based media article. Oh nooooooooo! It is a nonprofit, global news organization out of Rome publishing an article on a report by a US based watch dog group. THANK GOD FOR THE INTERNET!
Ok, I feel better. Don’t you?

The original article, Strategic Assets has a wonderful chart. Of the top 10 legislators invested in our military industrial complex, can you guess who has the most tied up? A hint: Of the top 10, 3 are democrats and they don’t include Nancy or Diane.

According to the most recent reports of their personal finances, 151 current members of Congress had between $78.7 million and $195.5 million invested in companies that received defense contracts of at least $5 million in 2006. In all, these companies received more than $275.6 billion from the government in 2006, or $755 million per day, according to FedSpending.org, a website of the budget watchdog group OMB Watch.

In 2004, the first full year after the Iraq war began, Republican and Democratic lawmakers—both hawks and doves—had between $74.9 million and $161.3 million invested in companies under contract with the Department of Defense.

Our esteemed colleagues have seem to have no concern about the image such investing may present:

The minimum value of Congress members’ personal investments in these contractors increased 5 percent from 2004 to 2006,…

Granted, some of the companies counted may seem unlikely candidates for being considered defense until you read:

As the military operations in Iraq and Afghanistan have expanded and transformed, so, too, has the need for goods and services that extend beyond helicopters, armored vehicles and guns. Giant corporations outside of the defense sector, such as Pepsico, IBM, Microsoft and Johnson & Johnson, have received defense contracts and are all popular investments for both members of Congress and the general public. So common are these companies, both as personal investments and as defense contractors, it would appear difficult to build a diverse blue-chip stock portfolio without at least some of them.

So, what’s a person to do with their 401K money if they want to be in the good, secure companies but does not want to promote war profiteering? As noted in the article, even without war, the solder needs tooth paste. But we are exercising our military currently and we’re using it up, which means replacement costs are accelerated. Though maybe tooth paste is used at no greater rate. Though we did call in all those reserves. Which might explain Pepsico getting $187 million in 2006 but it does not explain:

In the case of Sen. Jay Rockefeller (D-W.Va.), chair of the Senate Select Intelligence Committee, his stock in Pepsico, which is worth at least $1 million, is actually held by his wife, who is on the food and beverage corporation’s board of directors.

Nor does it explain this:

Petraeus will speak on April 8 and 9 to the Senate Foreign Relations and Armed Services committees. In 2006, members of these two committees had between $32 million and $44 million invested in companies with DOD contracts. Foreign Relations member Kerry’s investments accounted for most of it—between $28.9 million and $38.2 million. Members of the two committees held between $3 million and $5.1 million in defense-only companies.

What is there to say? Military spending of war does increase GDP for the good? Privatization of the military goes far beyond mercenaries? The USA is an economy of war making? It’s just business? I’m a fool for not riding the money wave?

The army and the empire may be falling apart
The money has gotten scarce.

One mans word held the country together
But the truth is getting fierce.

END

Growth, more than freedom of capital

We have been discussing a lot of economics through the political viewer lately. And I certainly have laid my point of view out there, but I also like the theory discussion. I like to think and know how stuff works or how someone interprets what they see. I believe discussing theories leads to better political discussion. With that, I hope this might inspire some tangent topics into the political here at AB.

This is a paper out of France by Robert U Ayres & Benjamin Warr titled: Accounting for Growth: The role of physical work

They suggest the increasing extraction of work from energy do to the increasing development of energy use is the missing factor that explains our growth.

“However the major result of the paper is that it is not `raw’ energy (exergy) as an input, but exergy converted to useful (physical) work that – along with capital and(human)labor – really explains output and drives long-term economic growth.” “However, if we replace raw energy as an input by `useful work’ (the sum total of all types of physical work by animals, prime movers and heat transfer systems) as a factor of production, the historical growth path of the US is reproduced with high accuracy from 1900 until the mid 1970s, without any residual except during brief periods of economic dislocation, and with fairly high accuracy since then.”

There key concept is the definition of exergy.

“The formal definition of exergy is the maximum work that could theoretically be done by a system as it approaches thermodynamic equilibrium with its surroundings, reversibly. Thus exergy is effectively equivalent to potential work. There is an important distinction between potential work and actual work done by animals or machines. The conversion efficiency between exergy (potential work), as an input, and actual work done, as an output, is also an important concept in thermodynamics. The notion of thermodynamic efficiency plays a key role in this paper.
To summarize: the technical definition of exergy is the maximum work that a subsystem can do as it approaches thermodynamic equilibrium (reversibly) with its surroundings.”

This summarizes their theories development:

The supposed link between factor payments and factor productivities gives the national accounts a direct and fundamental (but spurious) role in production theory. In reality, however, (as noted in the introduction) the economy produces final products from a chain of intermediates, not directly from raw materials or, still less, from labor and capital without material inputs. In the simple single sector model used to `prove’ the relationship between factor productivity and factor payments, this crucial fact is neglected. Allowing for the omission of intermediates (by introducing even a two-sector or three-sector production process) the picture changes completely. In effect, downstream value-added stages act as productivity multipliers. This enables a factor receiving a very small share of the national income directly, to contribute a much larger effective share of the value of aggregate production, i.e. to be much more productive than its share of overall labor and capital would seem to imply if the simple theory of income allocation were applicable [Ayres 2001a].

If this is true, then we have a bigger problem concerning how to keep this boat floating than subprime lending and fed rates. We have a policy problem. And that speaks to all the work Cactus has done about presidents.

Related to Cactus’ work, this chart from the this paper is interesting. It is the unexplained portion of growth by their theory.

Note that this phenomenon begins right about where we see the lowest point of the top 1% share of income, just after we see the split of productivity from wages and the beginnings of the supplyside policies and a change to a net debtor nation. The authors suggest some of this is do to conservation.

“We conjecture that a kind of phase-change or structural shift took place at that time, triggered perhaps by the so-called energy crisis, precipitated by the OPEC blockade. Higher energy prices induced significant investments in energy conservation and systems optimization.”

They further refine the explanation with:

“The marginal productivity of capital has started to increase whereas the marginal productivity of physical work – resulting from increases in the efficiency of energy conversion – has declined slightly.”

Could this marginal capital productivity increase be a result of our policy focus on capital as the driver of growth? Money from money? Are we seeing in their explanation that part of our growth that is borrowed from our future, thus artificially created?
As I read this paper it made me think about the European economies who have been focusing on alternative energy development, wind in Denmark, solar in Germany, (Japan), wave generation in England and northern parts, geothermal in Iceland/Greenland. This paper to me suggests that this coming election has at the core of all our topical issues (health care, war, inflation) energy. As the authors conclude keeping in mind peak production issues and the declining output of Saudi’s fields:

“From a long-term sustainability viewpoint, this conclusion carries a powerful implication. If economic growth is to continue without proportional increases in fossil fuel consumption, it is vitally important to exploit new ways of generating value added without doing more work. But it is also essential to develop ways of reducing fossil fuel exergy inputs per unit of physical work output (i.e. increasing conversion efficiency). In other words, energy (exergy) conservation is probably the main key to long term environmental sustainability.”

Is China in trouble? There is a start of a discussion about peak oil and it’s potential effect here.