Don’t Play into GDP Politics
These days, pretty much everything is hyper-political, including death rates from disease, wearing masks, opening schools, whether some demonstrations are “mostly peaceful” or “violent,” and now GDP.
Late last week, plenty of headlines blared that real GDP declined 32.9% in the second quarter, suggesting that our country’s output of goods and services was roughly 1/3 lower than in the first quarter of the year. The problem is that this superficial summary of the data is a gross exaggeration.
Real GDP was not 32.9% lower in Q2 than it was in Q1; it was 9.5% lower. And if it continued to decline at that same 9.5% rate for three additional quarters (so, four quarters in all), it would be 32.9% lower than it was in Q1. In other words, the drop wasn’t 32.9% for one quarter, it fell at a 32.9% annualized rate for one quarter.
We know this may seem like we’re trying to make the economy look better than it is, but that’s not our goal. Whichever method you use, the drop in real GDP in Q2 was the steepest for any quarter since the Great Depression, far surpassing the 10.0% annual rate of decline in Q1 of 1958, when the US was ravaged by the Asian Flu.
Furthermore, our argument will cut the exact opposite way in the third quarter when we anticipate real GDP will grow at roughly a 15.0% annualized rate. That means the economy will be about 3.6% larger in Q3 than it was in Q2, not up 15.0% in one quarter.
But all of these numbers are suspect, anyway. Much of the measured economic activity that did happen was supported by government intervention, which ultimately just shifts the timing of economic activity from the future into the present. It is impossible to accurately estimate the impact of total government spending (and Federal Reserve money printing) on GDP because, while some of it is direct spending (say on ventilators), most government spending went to consumers through unemployment benefits or IRS checks. In other words, the Federal Government borrowed from future generations to fuel spending today. This created a weird phenomenon where GDP fell, but personal income actually increased by 32.6% at an annual rate in the second quarter.
So, while private-sector wages and salaries fell at a 27.4% annual rate in Q2 and small business income fell at a 43.1% annual rate, overall personal income rose due to government borrowing and redistribution. This is unsustainable, and will likely slow the recovery, especially if the government continues to extend unemployment benefits.
The good news is that the recession is already over; the economy likely bottomed in late April or early May, but the wounds from the shutdown will take a very long time to heal. Our estimate for when the economy will reach a new peak for real GDP is mid-2022, but a better measure for full healing is when the unemployment rate gets back below 4.0%. That, we don’t expect until at least late 2023.
Here’s the original Prophecy I wrote in regards to this leading supply-side economist…
Brian Wesbury Weighs in on Coronavirus Panic
Hey a new idea in my inbox: Stop paying the pols!
Brian Wesbury is perhaps the leading supply side economist. So, let’s quote him on the coronavirus panic:
“To focus the minds of our politicians who are shutting down the economy, we should stop paying them as long as the shutdown lasts. Government employees keep getting paid, while millions of Americans will lose their jobs. They “solve” the problems they helped create, by spending other people’s money. Businesses – free markets — are chastised, destroyed, casualties left in the wake. But they are the only ones that, if they can weather the shutdown, will be able turn the economic tide.
Our politicians and bureaucrats need to get creative. Let experimental drugs move ahead rapidly. Allow restaurants to open at 50% capacity, increasing the distance between tables. Allow people to create safer working environments on their own, letting only a few shoppers in at a time, wiping down counters, etc. The government needs to focus on building up hospital capacity, protecting those who are at high risk – the elderly and those with underlying conditions – but we need to let others get back to work.
Remember, unless we stop all personal interaction, we are essentially deciding certain risks are necessary. Shutting down “non-essential” business slows the spread of the virus but does not stop it. The same calculus needs to be done for the risk coming from economic damage. Unfortunately, unless we can share the economic damage with our politicians, they won’t be willing to make that calculation.”
What’s the matter with these governors who blithely shut down their states when they are already deep in debt and unfunded liabilities?
How about some intelligent strategies, folks. If the South Koreans and Taiwanese can do it without shutting down their economies, perhaps the US – as the leading capitalist power – should be able to understand that capitalism works if you let it.
Yet I find more concern with spurious monopoly and privacy fears, than enthusiasm for the opportunities opened by US capabilities such as social networking, e-commerce, drones, pharmaceuticals, and mobile networks.
Even the Chinese seem to be doing better than us if you can believe the Communist data. (My rule, by the way, is to believe people until it is evident they are misleading you.)
They say there are no new cases in Wuhan these days. And the Chinese seem to have done it without shutting down their economy while opening new horizons for artificial intelligence, 5G networking, e-commerce, and other advances.
Capitalism can do better because it’s antifragile. Under crisis, it grows stronger.
“We have to start trusting individuals, as we do in so many other areas of life. We have all learned that our most effective measures to prevent the spread of disease are to wash our hands, not touch our faces, and stay away from others if you (or they) are sick. What individuals can’t do is fight a massive recession. You can reduce the odds that your family is affected by a virus, but when you lose your job because the government shuts down the economy, your problems are far more likely to multiply. The government does not create wealth – it never has – and cannot possibly offset every dollar of damage.
We know that recession and unemployment hurt the health of citizens – emotionally and physically. At the same time, the shutdown of the economy will reduce the wealth of the US over time, grow the government, and lead to fewer resources in the long run to deal with future economic problems. This is one of the issues facing Italy and other countries, which have been growing slower than the US for decades, and which, as a result, have underinvested in healthcare.
The sooner we open America up for business, the less the economic damage, and the better off we will be in the long run. Viruses kill people every day. If not this one, then another. Giving up our freedom due to fear is a price we will pay for generations. The secondary economic effects, too, could be significant. We are holding back the supply of goods, while the government sends money out to stimulate demand. This will likely lead to price increases, then government price controls to fix “price gouging,” which in cases like Venezuela have been shown to increase “hoarding” and further reduce supply.”
Let’s increase the supply of knowledge and learning and money as time. That’s the information theory of economics and it applies today more than ever.
Currently we are wasting time and human minds, our scarce resources, in order to save face for politicians.
We are destroying the village in order to save it. We need surgical strikes and strategies more than surgical masks and business bans.
That’s what the politicians are being paid for. Let’s stop paying them until they get it right.
Editor, Gilder’s Daily Prophecy