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Posted by: Doug Henwood | August 3, 2013

Rasmus returns fire

This just in from Jack Rasmus, responding to my response to his critique. This is about to get too meta for me, so after this, and a very brief response, I’m declaring hostilities over. Here it is, without a lick of editing.

 

In our continuing debate on the significance of the recent revisions to US GDP, Doug Henwood has published on his blog his second reply to my counter to his critique of my original piece.  The following is my second reply to his more rational (less personalized and polemical tone) second critique. My responses are in ALL CAPS to his preceding paragraphs.(Hopefully he’ll allow this to be shared by his readers as well).

 

“Here’s my response to Jack Rasmus’ complaint. His words are in purple italics; mine, in normal type.

 

GDP for 2012, as I pointed out in my prior article, ‘Economic Recovery by Statistical Manipulation’, was raised by almost 33% as a result of the BEA revisions–from the 2.1% annual growth to 2.8%.

 

OK, DOUG. YOU GOT ME. I DIDN’T ADD THE WORD, ‘RATE’, TO THE WORD GROWTH. I ASSUMED READERS ARE ASTUTE ENOUGH TO RECOGNIZE THAT NUMBERS LIKE 2.1% AND 2.8% REPRESENT RATE. I DIDN’T SAY $16 TRILLION TO $25 TRILLION, WHICH WOULD HAVE BEEN A REFERENCE TO A 33% GDP LEVEL AND NOT A RATE.  BUT IF YOU THINK THAT IS A MISREPRESENTATION, GO FOR IT.

 

GDP wasn’t revised up by almost 33%—it was more like a tenth that. Rasmus means that the growth rate was revised up by 33% (no almost about it). It’s a minor error, but telling, and one he repeats several times.

 

WHERE WE DIFFER IS YOU THINK A $559 BILLION 2012 UPWARD REVISION OF GDP IS NOT SIGNIFICANT, WHEREAS I DO. THAT’S A 3.6% GDP 2012 INCREASE. AND THE FACT THAT 2.5% OF THAT 3.6% REFLECTS ‘EXPENSING’ OF R&D, NOW COUNTED AS INVESTMENT, IS ALL THE MORE SIGNIFICANT.  REAL INVESTMENT IN GOODS AND SERVICES HAS BEEN DECLINING IN THE US, AS US CORPORATIONS SHIFT MORE OF THEIR INVESTMENT OFFSHORE. THE IMPACT ON JOBS IS SIGNIFICANT.  BY ALLOWING ‘EXPENSING’ OF R&D, AND OTHER ‘INTANGIBLES’ COUNT AS INVESTMENT, IT MAKES IT APPEAR THE ECONOMY IS GROWING WHILE THE RATIO OF JOBS TO INVESTMENT IS FALLING. YOU SEE NOTHING WRONG WITH THAT; I DO.

 

Moreover, the consensus forecasts by economists for the recent 2nd quarter 2013, which averaged 0.9% according to the Reuters survey, came in at nearly twice that, at 1.7%, due to the revisions. This is not a normal upward revision, most of which made in previous years by the BEA had very little effect on GDP numbers.

 

Economic stats frequently depart from consensus projections. In fact, trying to beat consensus estimates and bet you’re right and the market is wrong is a major pastime on Wall Street. Also, there were no “revisions” involved. This was the first estimate for the second quarter, so there’s nothing to revise. Rasmus may mean that the changes to the definition of GDP were responsible for the above-consensus result, but if you strip out the gain in the new IP product sector, the major conceptual change, the growth rate would have been roughly 1.6%, all of 0.1 point below the actual number.

 

YOU REFERENCE ‘IP PRODUCT’ (COPYRIGHTS, MOVIES, ETC.) AS “THE MAJOR CONCEPTUAL CHANGE” IN THE REVISIONS, PROVIDING ONLY MINOR BOOSTS TO GDP.  BUT THAT’S NOT CORRECT.  IP PRODUCT RELATED CHANGES ONLY ADDED 0.5% OF THE 3.6% IN 2012 UPWARD REVISIONS.  AGAIN, THE BIGGEST FACTOR WAS ‘R&D EXPENSING’, NOT IP PRODUCT INCLUSION. AND THAT’S A SLIPPERY SLOPE, POINTING TOWARD ADDING MORE BUSINESS ‘EXPENSES’ AS INVESTMENT IN THE FUTURE TO ARTIFICIALLY BOOST (NON-JOB CREATING) INVESTMENT AND GDP. HOW FAR SHOULD THE INCLUSION OF ‘INTANGIBLES’ GO TO BOOST INVESTMENT? SHOULD THEY INCLUDE THE VALUE OF COMPANY ‘BRANDS’ AND ‘GOOD WILL’ AS CATEGORIES OF INVESTMENT—TO COVER UP THE FACT REAL, JOB CREATING INVESTMENT IS BEING INCREASINGLY SHUFFLED OFFSHORE, OR TO ALLOW CORPORATIONS TO LAY TAX DEDUCTION CLAIMS TO INVESTMENT TAX CREDITS?

 

In other words, the massive upward revision to GDP in the 2nd quarter, as reported by the BEA, appears largely attributable to its revisions to how investment is defined. If how we define investment can have that big an impact on GDP, the changes should not be accepted without challenge.

He liked this argument so much he had to repeat it, but there were  no “revisions” in any direction to 2nd quarter GDP, since this is the first we’ve heard of it. The first estimate will be revised next month, and we’ll see if it’s up or down.

 

AGAIN, THE RECALCULATIONS OF GDP HAD TO HAVE HAD A MAJOR IMPACT ON 2ND QUARTER GDP RESULTS.  EXACTLY HOW MUCH IS STILL UNCLEAR. BUT IT MUST HAVE BEEN SIGNIFICANT. MOST OF THE 1.7% GDP INCREASE APPEARS DERIVED FROM INVESTMENT—AFTER INVESTMENT (OLD DEFINITION) HAD BEEN SLOWING NOTICEABLY THE PREVIOUS SIX MONTHS (INVENTORIES, COMMERCIAL AND GOVT CONSTRUCTION, SOME EQUIPMENT).

 

YES, THERE WILL BE SUBSEQUENT ‘REVISIONS’ TO THE PRELIMINARY DATA FOR 2ND QUARTER GDP, BUT THAT’S NOT THE ‘REVISIONS’ IN THE REDEFINITIONS OF INVESTMENT RELEASED BY THE BEA. THE TWO ARE DIFFERENT.

 

My article has raised some hackles in some quarters, including among some segments of the ‘liberal left’ that continues to be apologetic for the Obama administration despite its abysmal record economically, in terms of civil rights, wars, concessions to corporations, and so forth for the past five years.

 

Is Rasmus calling me an Obama apologist? That’s funny.

 

NO IT’S NOT FUNNY. I WON’T MENTION THE MAGAZINES WITH WHICH YOU’RE ASSOCIATED THAT REPEATEDLY APOLOGIZE FOR THE OBAMA ADMINISTRATION.

 

Some among them claim I am arguing there is a ‘conspiracy’ to falsely boost GDP by the Obama administration.

 

Saying they “manipulate” and “rewrit[e] the numbers to make failure go away” sounds pretty  close to a conspiracy (from the thesaurus: “plot, scheme, plan, machination, ploy,trick, ruse, subterfuge”) to me.

 

ALL STATISTICS ARE BE DEFINITION A MANIPULATION OF RAW DATA. ALL REVISIONS ARE REWRITES OF PAST DATA.  IT’S IN THAT SENSE THAT I’VE USED THE TERMS.  AND THE BOOSTS TO GDP FROM THE REVISIONS CERTAINLY MAKE IT LOOK LIKE THE DISMAL ECONOMIC RECOVERY OF RECENT YEARS WASN’T ALL THAT BAD.

 

Much of the increase in investment by the BEA’s redefinition is associated with research and development expenditures by business. The BEA previously considered R&D an ‘expense’. Now it’s an investment. Where does the slippery slope of redefining expenses as investment stop? Obama has proposed in his 2014 budget to significantly increase tax credits to businesses for R&D expenses. That will significantly boost R&D investment. That spending in turn will boost GDP still further in months to come. Does anyone naively think the two developments are completely unrelated? It’s not paranoid to raise the point.

 

Actually they probably are completely unrelated. Also, what Obama proposes often has a hard time getting through Congress, and while R&D tax credits probably aren’t massively effective, they probably do raise research spending some (see “Do Tax Credits Stimulate R&D Spending?”). And that spending includes buying equipment and hiring scientists, which is economically stimulative—and if the research has any payoff, might lead to some actual innovations, which could be additionally stimulative. But elections and the prestige of American capitalism won’t turn on the results. Most people will hardly notice.

 

DO YOU REALLY THINK TEAPUBLICANS IN THE US HOUSE WILL REJECT HIS OFFER TO SIGNIFICANTLY BOOST R&D TAX CREDITS HE (OBAMA) HAS ALREADY OFFERED UP IN HIS 2014 BUDGET PROPOSALS? OR HIS OFFER TO CUT THE CORPORATE TAX RATE FROM 35% TO 28%. OR HIS VARIOUS OTHER BUSINESS TAX CUT PROPOSALS HE UNILATERALLY OFFERED IN HIS MARCH 2014 BUDGET? TO ARGUE THAT BUSINESS TAX CUTS CREATE JOBS IS A REPUBLICAN-CORPORATE CLAIM THAT HAS LITTLE SUBSTANCE IN RECENT DECADES. THE US HAS PASSED TRILLIONS OF DOLLARS IN CORPORATE AND INVESTOR TAX CUTS, AND WE’VE LOST 7 MILLION JOBS IN MANUFACTURING AND MILLIONS MORE IN CONSTRUCTION. AT LEAST THE CORRELATION BETWEEN THE TWO DOES NOT SUPPORT A VIEW THAT ‘BUSINESS TAX CUTS CREATE JOBS’.

 

INVESTMENT TAX CUTS (LIKE R&D) MORE OFTEN RESULT IN JOB LOSSES, NOT GAINS.  THEY MAY RESULT IN BUSINESSES HIRING A FEW RESEARCHERS, TO DEVELOP NEW PROCESSES OF PRODUCTION THAT SUBSTITUTE CAPITAL FOR LABOR—A RECOGNIZED MAJOR SOURCE OF JOB LOSS IN THE US THE PAST TWO DECADES MATCHED ONLY BY FREE TRADE RELATED JOB LOSS.

 

DO YOU REALLY THINK ‘MOST PEOPLE WILL HARDLY NOTICE’ THIS?  YOU SEEM TO STRONGLY SUGGEST IT WILL ALL RESULT IN MORE ‘ADDITIONAL STIMULUS’. I DON’T AGREE.

 

Nevertheless, my critics—some New York left liberal types in particular—insist on defending the BEA and the administration.

 

Busted. We plotted this response out yesterday afternoon over cronuts and pour-over coffee at an undisclosed location in Brooklyn.

 

WHETHER YOU HAD COFFEE OR NOT I DON’T KNOW..BUT YOU ARE ON RECORD REPEATEDLY DEFENDING THE BUREAUCRACY AS A-POLITICAL CIVIL SERVANTS. THE DAY TO DAY WORKERS THERE, I AGREE ARE NO DOUBT HONEST AND HARD WORKING. BUT THEY DON’T CALL THE SHOTS.  THERE’S BIG CORPORATE TAX CUT LARGESSE IN THESE GDP CHANGES. MORE R&D EXPENSING MEANS MORE R&D TAX CUTS MEANS LARGER DEPRECIATION BUSINESS SLUSH FUNDS.

 

These critics think that adding more than $500 billion to 2012 GDP is normal. They point out that the BEA revisions had little effect on long run GDP since the 1960s. That’s true. But the changes have had a big impact on GDP since the so-called end of the Great Recession in 2009, and especially in the latest 18 months. They are ‘frontloaded’, in other words, having their greatest effect on GDP during the ‘recovery’ period since 2009, during which time it has become clear neither fiscal or monetary policies have done much to generate a sustained economic recovery. So that the 33%-50% boost to GDP in the last 18 months does result in making the failure at recovery appear significantly less so. To point that out is to engage in ‘agitprop’, I’m told.

 

The revisions do nothing to change the picture of the 2009–2010 recession as the worst in modern history, nor does it change the current recovery’s status as the weakest.

 

SEEMS LIKE YOUR REPLY DUCKED MY POINT HERE. MAYBE I MISSED SOMETHING.

 

Critics also pooh pooh my point that gross domestic income, GDI, is rising faster than GDP, even though the likes of Bernanke, chair of the Federal Reserve, does not think the trend is unimportant—as I quoted him in my original article. Something of import is going on here, between gross domestic income (GDI) and gross domestic product (GDP). The historical ratios between the two are changing in the last decade. But why so, we should ask? In reply to my critics, of course incomes from capital gains, dividends, etc. are not directly included in GDP calculations.

“Of course”? Your original piece didn’t read as if you knew this. And the “directly” is superfluous.

 

NO, ‘DIRECTION’ IS NOT SUPERFLUOUS. CLEARLY, THE GDP REVISIONS HAVE RESULTED IN AT LEAST A $250 BILLION BOOST TO DEPRECIATION NUMBERS IN 2012, AND DEPRECIATION IS JUST A FUND FOR PROFITS EARMARKED FOR FUTURE INVESTMENT. SO THE REVISIONS DO RAISE GDI. BUT I’M MORE CURIOUS ABOUT HOW GDI MAY BE GROWING DUE TO NON-PRODUCTION ACTIVITY.

 

The differences between GDI and GDP are a favorite topic of data connoisseurs. Fed economist Jeremy Nalewaik has written several papers arguing, among other things, that GDI may be more accurate, especially at business cycle turning points, than GDP. (Here’s a ‎paper [PDF] and here’s an interview.)

 

But the BEA revisions, by increasing investment, do raise corporate profits (as Dean Baker has correctly pointed out, by more than $250 billion in 2012 alone). Corporate profits then get distributed to shareholders in the form of dividends and other capital gains. Raising investment by redefinition raises profits, which raises the distribution of those profits in the form of dividends, capital gains, etc. Ok, that direction of causation is clear.

 

Raising investment raises profits? Really? Not all investments are profitable, and sometimes profits can be raised, at least in the short term, by stinting on investment. There’s quite a bit of that going on right now, in fact. And Rasmus is slipping capital gains back into the national income accountants’ definition of income, which is wrong.

 

DEPRECIATION IS A FORM OF PROFITS (I ASSUME YOU’RE STRONGLY DISAGREE), THAT FINANCES FUTURE INVESTMENT THAT OFTEN (NOT ALWAYS) BOOSTS SUBSEQUENT PROFITS.  AND WE SHOULD LOOK MORE CLOSELY AT HOW MULTINATIONAL CORPORATIONS MANIPULATE THEIR PRICING AND DATA TO TAKE ADVANTAGE OF REVENUE SHIFTING TO REDUCE TAXES. (MY GOSH, DO MNCs REALLY MANIPULATE PRICING AND REVENUE TO EXPLOIT TAX LOOPHOLES!). YOU HAVEN’T ADDRESSED MY PRIOR SUGGESTION THAT NON-GDI INCOME MAY BE SHIFTING INTO GDI, CAUSING GDI TO RUN AHEAD OF GDP.

 

So there could be a motive for counting profits from financial speculation as part of GDI, which might explain why BEA corporate profits (and GDI) are running ahead of GDP in recent years. It’s a legitimate question to raise, and doing so is not to suggest ‘conspiracy’ or reflect ‘paranoia’.

Sometimes GDP runs ahead of GDI, and sometimes GDI runs ahead of GDP. GDI grew more quickly than GDP in 2006, but GDI lagged GDP in 2007—which is often what happens before a recession, and Nalewaik has shown. GDP ran ahead of GDI for much of 2012, as well, a portent of the recent slowdown.

 

GDI LAGGED GDP IN 2007 PERHAPS BECAUSE FINANCIAL PROFITS COLLAPSED FASTER THAN REAL GDP.

 

There are serious problems with GDP reporting if GDI is somehow rising faster than the value of those goods and services themselves. But critics of my view believe that to raise such questions is to ‘insult their friends at the BEA who are all skilled and honest servants’, as one of my ‘left liberal’ critics puts it in a recent reply to my article.

 

They are skilled and honest public servants. I’m guessing Rasmus never actually spoke with one.

 

FOR THE RECORD, OF COURSE. BUT SO WHAT, THOSE THAT TALK TO THE PUBLIC DON’T MAKE OR CHANGE THE RULES. THE POLITICO APPOINTEES DO THAT RUN THE AGENCIES.

 

To say now, as the BEA is saying with its recent GDP revisions, that ‘expenses’ constitute investment is a major shift of definition of GDP. It has resulted in a record upward revision of the numbers, and a slippery slope to further false upward revisions that will follow no doubt.

 

This “record upward revision” has done almost nothing to change the growth numbers over the long term, and the changes to recent figures are relatively minor.

 

AS I AGREED, THE IMPACT GOING BACK TO 1929 OR 1960 IS VERY MINIMAL. BUT $559 BILLION IN 2012 IS NOT MINIMAL.

 

Perhaps the ‘expenses’ incurred in derivatives investing by multinational corporations will soon be considered ‘investment’ in the next round of BEA revisions.

 

Financial transactions of this sort are excluded from the national income and product accounts by definition; they cover only production and incomes earned in production. Stock trading, derivatives slinging, and foreign exchange transactions have nothing to do with GDP.

 

ACCORDING TO THE BEA’S FORMAL DEFINITIONS AND METHODOLOGY, UP TO NOW.  BUT ONCE THEY START COUNTING ‘INTANGIBLES’ AND ‘EXPENSES’ AS INVESTMENT, THAT’S A GAME CHANGER.  AND HOW DO WE KNOW, AT THE CORPORATE PRICING LEVEL, WHETHER FINANCIAL TRANSACTIONS ARE NOT  BEING REPORTED AS NON-FINANCIAL PROFITS IN ORDER TO EXPLOIT TAX LOOPHOLES?

 

Also, if the Obama administration was looking for a political payoff with this redefinition, wouldn’t it have been better to do it a year ago, before the 2012 election, rather than after?

 

NO. THAT WOULD HAVE BEEN TOO OBVIOUS, TO TRY TO BOOST GDP BEFORE THE ELECTION. BETTER TO WAIT UNTIL THE SECOND TERM.

 

IN CONCLUSION, DOUG, I APPRECIATE THE LESS PERSONALIZED AND LESS POLEMICAL RESPONSE IN YOUR LATEST REPLIES.  THAT’S HOW DEBATES AND DISCUSSION ON SUCH MATTERS SHOULD BE CONDUCTED. AFTER ALL, WE’RE NOT OPPONENTS OR ENEMIES, THOUGH WE MAY DIFFER IN OUR LEVEL OF SUSPICION OF THOSE WHO ARE.

 

JACK RASMUS, AUGUST 2, 2013

 

 

 

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