Tuesday, March 18, 2014

National Growth, GDP, and the Geico Gecko

Aside from the articles I have been reading this week about China, it is remarkable how little focus there is about economic growth. Europeans acknowledge substandard growth but do little about it. Brazilians have their hands full dealing with protests relating to the coming World Cup. Governments in Turkey and Venezuela are two examples of demonstrations in the streets that have nothing to do with growth. Of course former Soviet States are now preoccupied with Russian aggression.  In the US we have a myriad of issues that policymakers have apparently placed above economic growth including climate change, immigration, the minimum wage, healthcare, and income redistribution.

One would think that after five years of disappointing employment and output gains, there would be more people in the street demanding stronger economic growth. One could imagine all manner of government committees hammering away at the best ways to restore economic growth. I understand that ideology has made it difficult to find a solution but that doesn’t fully explain why no one is even trying. We get steamed up when Russia exerts its will over defenseless people living on their borders – why is there no constituency comprised of the millions of small businesses and employees who are languishing in the shadows?

I have advanced some reasons for tepid approaches to growth in past posts but in this one I focus on the very meaning of macroeconomics. We take macro for granted since we have used its concepts and theories for at least half a century. GDP and inflation are macro concepts as widely known as spinach and atoms. We oooh when GDP rises and we cry when inflation accelerates. But the truth is that no one can buy a GDP and no one pays inflation. These and other concepts are made up by government statisticians and they are no more real to you and me than the Geico gecko.

GDP, inflation, and other macro concepts were designed for national cheerleaders. That is, we call the area within the boundaries of our nation the USA. Most of us are nationalist cheerleaders – we root for our Olympic teams and we revel in strong national economic growth.  In economic terms, this nation is made up of a lot of parts – bourbon is largely produced in Kentucky; skilled workers reside in California and Washington; a lot of autos are manufactured in the Midwest; Cruise ships depart in huge numbers every day from Miami and Fort Lauderdale; Las Vegas had a huge crisis in residential housing; and so on. Everything is local. The US scorecard is credited but the truth of more Recreational Vehicles produced is that most of the benefits go to Northern Indiana.

To repeat, everything is local yet we cheer for the national team. Why? One reason is that when residents of Elkhart, IN do better, the benefits often spread to a wider geographical area as Hoosiers spend their new found wealth in other places. But a stronger motivation for macro is that our elected federal policymakers in Washington have an obligation to improve the economic well-being of people across the country. Their job is to make GDP sizzle like your favorite steak.

That is what they have done for decades. Whether it is the Fed or Congress, we hear over and over about how their policies address national concerns with national remedies. We argue about the success of these policies but it is undeniable that macro has been a very important motivator and macro policies have been the result.

And this game has worked because of the inter-related and interdependent nature of the US economy. While each region and sector might have obvious and stark differences, these matter less if a national macro policy appears to have broad benefits spanning the country. We all know that some regions or some products or some industries or some workers are impacted more than others – but so long as the benefits and costs appear to be borne across the nation – we consider macro and macro policy a legitimate exercise.

So that gets us to where we are today. People bought this macro story in 2008 when we all felt threatened by a severe global downturn.  Helping the Saving & Loan in Fort Myers was not seen as a bailout for Florida or Real Estate. Rather it was viewed as part of what was necessary to bring the whole nation back to economic health. But that was then. Despite the fact that slow economic growth is very damaging, notice how many non-macro beliefs exist which stand against the advocacy of growth policies right now.

1.     Growth will not be shared among all workers
2.     Growth will not help the long-term unemployed
3.     Growth will not raise the wages of those with low skills
4.     Growth will not protect administrative workers from unfair business practices
5.     Growth will worsen pollution connected to energy production
6.     Growth will not solve problems of healthcare price inflation
7.     Growth will worsen illegal immigration
8.     Growth will not redistribute incomes from the rich to the poor
9.     Growth won’t solve problems associated with crime and poverty
10.                        ……….add your own here.

This is not just ideology and politics – these and other charges shake the very foundation of almost 80 years of macroeconomic analysis and policy. We can argue every one of the above points but the truth is that I cannot remember a time in my career when macro was so dubious. I checked the dictionary and one word used to describe dubious is suspect. Today macro is suspect. 

I point that out because I believe that while macro is a suspect – it is mostly not-guilty. I agree that income distribution has tilted towards the rich. I agree that the last 10 years have witnessed a time when many persons did not share equally in prosperity. But I will say that if there ever was a time when national economic growth could improve the lot of most Americans, it is now. And I will say even louder that if we spend all of our time debating the 10 points listed above, we will surely languish in substandard growth for the foreseeable future.

Let’s put it this way. There should be a time for everything. We don’t have the resources to do everything right now. Some of you would prefer to deal with a myriad of issues because you think they might goose the growth along. While some economists are making up theories that support income distribution before growth – I think there is much more evidence for the reverse. Let’s focus first and foremost on the national economic growth. Once we get a head of steam going, then we can work on the infinitely harder problems of distribution, immigration, climate change, etc.

            

15 comments:

  1. Dear LSD. My inference from what yer say’n orbits ‘round a national context and the role govomit has or has not played with policy/macro. Yeah, I guess it can be argued that govomit should and does play a major role at the national level; so I’ll cede that point. It can also be argued that govomit’s role—at least since 2007-8—has been less than satisfactory ‘cause all the “policy” intended to propel growth has been inefficient from a cost/benefit perspective: The stimmilus money created more debt than yobs. So much for national policy, but more specifically “ . . . so much for Keynesian econ” to the extent one considers Keynesian macro econ . . . not being an economist I guess it does, eh?

    Yer 10+ non-macro beliefs countering growth policy suggest the gravitational pull of special interests, which have been the force-field causing growth’s failure to launch—not from Cape Canaveral but from Washington, D.C. Set aside those special interests, set aside theory that national policy is the necessary and sufficient condition to ignite growth, and let local economies and the private-sector push their own launch buttons. Git govomit out of the way. Let the invisible hand weave its magic wand. Arguing for more national govomit policy and expecting a different (better?) outcome comports exactly with Einstein’s definition of insanity.

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    1. I suspect Charles that if we followed your advice we would be the only country on the planet to not have a strong centralized government. That day might be over.

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    2. Dear LSD. While I don’t have data to reference I’m sure there are many countries without strong central govomits—then, again, it depends on what you mean by “strong.” Seems central govomit strength does not correlate positively with econ growth that benefits all—at least given the U.S. Govomit’s recent performance. And, as history shows—a strong central govomit, at least for economic planning presumably to lift all boats and benefit all—countries who have pursued that approach failed. Recently, one of those failures has made a comeback: China’s central planning has produced phenom growth, but at considerable social, environmental, and human cost. (Not the kind of strong central govomit I think you have in mind.) The commonality of those failures has been Communism at worst and socialism at best, the latter to which the U.S. is heading. If, as you say, “That day might be over,” then maybe the U.S. won’t follow the failures into the history books . . . . unless, of course, “progressive thinkers” are in charge of the books and record history in their own fantasy.

      I'm unaware of any prize, Pulitzer or other, for having a strong central govomit—unless you want to consider the booby prize worthy.

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    3. What I was saying is that there are not many countries today that have the same decentralized governments that you and I wish for. I meant the day is over for countries with small decentralized governments. I doubt we are ever going back there. The cat is out of the bag. So for me -- the choice is about what centralized governments do. I wish they would focus on growth as their main priority now. In future years when growth has been restored then maybe we can focus on other things...But with our current attitudes toward policy I doubt we will ever get there again...macro and growth are doomed.

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    4. Dear LSD. I’m saturated with chat that says we must focus on growth as a main priority. Lacking the specificity that will effect that growth is the solidarity of the vacuum . . . er, problem. Keynesian 2008-14 has proven feckless—unless you are an aficionado of Krugman et al, which I know you are not. As macro-man, what specifics would you suggest that would propel the U.S. economy from the gravitational pull of special interests into orbit where all objects enjoy the same gravity-free (hint: all ships/boats floating equally) economic benefit?

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    5. Charles -- the essence of government is special interests so there is no real cure for that. So long as there is a government there will be people who will want to benefit from the power to divert resources. The best one can hope for is a somewhat enlightened government that tries to not destroy its capacity to create growth while it engages in specific interest satisfactions. As you know as a regular reader here -- as it relates to today the best growth policies would be those that aim at the supply side including reducing regulatory uncertainty. Since supply policies are notorious for unequal initial impacts, they are very hard to enact. As we continue to languish and as demand-side remedies continue to be ineffective, perhaps some will see the light and give supply a try.

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  2. The system is changing faster than the theory can keep up. Good and moderately paying jobs have been eliminated by technology and global competition. There has been no adequate replacement yet. Education is not preparing future workers for the changes as fast as they are coming on line. The is an unbalanced distribution of income going to a few who actually do less to earn it that those who do the heavy lifting to produce what generates the income. This started in the late 80's when CEO's got paid on short term returns. It is not a socialism Vs Capitalism but real changes that differ greatly from the systems we have seen since the dawn of the industrial age...during which period the bulk of the economic theory was developed.

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  3. I suppose it has already been said, here and in other posts, but it needs to be said until somebody hears and listens: the government needs to be an overseer and not a micromanager. Its job is to create an economic environment which is conducive to growth and then allow it to work as designed. The problem is that we continue to elect control freaks...mostly ambulance chasers...who know zilch about economics but want to be the ones to push all of the buttons and pull all the levers. When a man can't build a farm pond on his own land without being sued by a gestapo-like government agency, it gives you a picture of where we're headed.
    So what if economic wealth isn't shared equally. When the national economy is in a boom, everybody shares proportionally. The '80s gave us greed, and everybody was greedy from the top right down to the bottom. The problems arose when the progressives insisted that the bottom deserved as much as the top....funny that they weren't all that willing to give up any of their share from the top.
    Now the system has gotten away from us. Chances are we won't be able to rein it in before it comes apart at the seams. Probably, its that event which will which will bring things back to a semblance of sanity, and it will be painful for quite a while.

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    1. I agree with your assessment Fuzz. But if we are more or less stuck with what we have now then at least I's like to see them prioritize better. Growth has to come first. I am not for Keynesian approaches as you know but I do think we can make better headway with all our problems if we work on growth first.

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  4. So I think your message is to get government out of the way of growth. Lower and more stable tax rates, consistent regulation and stable monetary policy are the clear choices for growth. But we need to deal with income inequality and environmental regulation, especially the climate change zealots. A pro-growth policy does not. Consider just one growth issue--the Keystone pipeline. Everyone who examines it, including now the State Department, says it will not affect the climate and has minimal environmental risk. It will definitely have a positive effect on growth. But the opposition to this one growth choice is furious including a very rich Californian who says he will spend $100 million to defeat politicians who vote yes.

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    1. Mr. Yachts, I agree that inequality and environment have growth tradeoffs as you say. But my blog worries that is we spend too much time debating the growth tradeoff of every one of these policies -- then we will never get growth on the agenda. My point is that growth should be priority #1. We shouldn't even be talking about income inequality or environment until growth is fixed. It is not a tradeoff. Growth is #1. That's it.

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  5. I agree with you, Larry. Growth should be the #1 Focus of Macro and Government policy. I worked for a very Astute and Wise Managing Director who would remind his Sales and Marketing Staff at Budgeting and Forecasting Meetings,.."Sufficient New Orders will take care of a lot of problems. Under his watch we focused more on Sales and Marketing than cost cutting measures that would hinder our ability to Service our customers. In other words,,Growth (Orders) is the Number One Priority,

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    1. Thanks Danny -- nice to see you out in public! :-)

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  6. Larry, there's nothing more I'd like than to see than the buffoons in DC prioritize better. Growth is the only answer, but we won't see it as long as their priorities are self-centered. As an old 4-star boss of mine said before the SASC: "At the Air Staff, we list our priorities as 1. What's best for the country, 2. What's best for national defense, and 3. What's best for the Air Force. Your priorities are: 1. What's best for yourselves, 2. What's best for your constituents to get you re-elected, and 3. What's best for the country." He said that they all chuckled and called him an idealist. That was in 1983, and I can guarantee you that nothing has changed. We will see nothing that spurs growth until we can change attitudes inside of the Beltway. We don't need no stinking career politicians.

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    1. I agree Fuzz. My only hope is that for a fleeting moment at some point in time these yoyos will see that their own selfish political aspirations coincide with stronger economic growth. Perhaps we need a little more time suffering under existing policy for voters and politicians to more clearly see that there is no way to solve their own problems without growth....A guy can dream, right?

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