Me in Salon
Josh Eidelson interviews me about the shutdown, default, the Tea Party, and the rot of the American ruling class: “Tea Party’s shutdown lunacy: Avenging the surrender of the South”
Josh and I had nothing to do with the headline.
Me in Sydney, October 16-20
I’m going to be in Sydney, Australia, to speak at a conference on financial market dysfunctionality (!) at the University of Technology’s business school. Arriving early Oct 16, feeling like crap I’m sure, and leaving the afternoon of the 20th. Conference is on Thursday and Friday – my bit is on Friday.
Any suggestions of things to do, people to meet, etc.?
Fresh audio product
Just added to my radio archives:
September 19, 2013 Daniel Denvir on the crisis in Philadelphia public schools • Jonathan Crary, author of 24/7, on the ill effects of always-on culture
September 12, 2013 Sanjay Reddy on the Indian economy • Jesse Walker, author of The United States of Paranoia, on conspiracism
No new shows for a few weeks while KPFA fundraises. If you like these shows and want to keep them coming, please contribute to KPFA. Be sure to mention Behind the News.
Situating finance
I’ve long been bothered by activists’ habit of focusing on debt both as a political target and analytical center. This came to the fore during the Occupy moment, and continues today in, well, should we call it the post-Occupy era?
Yes, debt is a problem, no doubt about it. Given the age of many Occupy activists, student debt is understandably very much on their minds (as are crappy job prospects, which don’t always get as much attention). Before that, mortgage debt and exotic variations on it were major contributors to the financial crisis of 2008, and the inability to get the debt machinery going again has contributed to the weakness of the post-crisis recovery. And across the Atlantic, debt is obviously a major part of the European crisis, which goes on and on.
But debt is also symptom as well as cause. If education were free, as it should be, student debt wouldn’t be a problem. If we had a humane health care financing system, medical debt wouldn’t be a problem. If housing weren’t so expensive—and if rising prices weren’t taken as a sign of a “healthy” housing market (why is the rising price of one of life’s essentials a good thing?)—then mortgage debt would’t be a problem. If wages hadn’t been under relentless downward pressure for the last 30 years, people wouldn’t have borrowed so heavily against home equity during the bubble, and wouldn’t have put so much on their credit cards.
Along with that, there’s a mistaken theory making the rounds. Here’s a concise statement of it from Andrew Ross (someone I should say I like and admire a great deal, even if I’m disagreeing with him here), in an article (“The Politics of Debt Resistance”) in New Labor Forum:
In recent decades, however, elites in advanced economies are less and less dependent on profits from productive labor. They rely increasingly on unearned income from financial manipulation by circulating paper claims on the future in the form of debt-creation. This form of wealth accumulation has meant that the majority of populations in fully industrialized countries are now caught in a debt trap that fundamentally affects how they make a living.
This is only a partial truth. Trading profits of the sort that Andrew Ross alluded to above (“circulating paper claims”) are essentially a wash—one trader’s gain is another’s loss. But there’s much more to the story. The claims are claims on incomes earned in production.
There’s no denying that the financial sector has grown enormously in size and importance over the last few decades. But that doesn’t mean that production and productive labor have disappeared from view. A few numbers to make this point. In the second quarter of 2013, U.S. GDP—the total value of goods and services produced domestically—was $16.7 trillion. Of that, $8.3 trillion—half the total—was produced by nonfinancial corporations. Just over half of that, $4.7 trillion, went to pay employees. These same nonfinancial corporations “earned” $1.2 trillion in profits, after paying salaries and other expenses. Financial corporations, though huge, contributed only about 15% as much as their nonfinancial counterparts to GDP. (See table 1.14 here—alas, no direct link is possible.)
Of course, finance is very big—I’m not trying to deny that. But where does its money come from? A lot of it from income earned in production. Firms and their employees pay interest and fees to their bankers. (In the second quarter of this year, nonfinancial corporations paid out a net of $304 billion in interest to creditors, and households another $244 billion.) And nonfinancial corporations have been shoveling out huge quantities of cash to their shareholders, some of whom are individuals, but many of whom are financial institutions. Combine traditional dividends with other means like share buybacks and takeovers (both of which involve corporate resources going to buy up outstanding stock), and there’s been a massive transfer of cash from corporate treasuries to shareholders—an average of $867 billion a year since 2011.
The conclusion to draw from that blizzard of numbers is that finance gets most of its money from corporations and workers engaged in the real world of production. Appearances to the contrary, financiers aren’t creating the stuff ex nihilo. The financial and the real are intimately connected to each other. So if you want to talk about debt, you shouldn’t stop there—you need to start talking about debt for what, serviced by income from where.
Matt Yglesias just wants to believe…
…that Census data showing real median household income is slightly below 1989 levels is wrong, so he went searching for another data source to support his hunch. (Real means adjusted for inflation; median means right at the middle of the income distribution, with half of all households above, and half below.)
In his first post on the topic, “Median family income since 1989: Is the stagnation real?,” Yglesias drew on an assortment of feelings to make his Slate-ish contrary case: bigger better cars, bigger better TVs, MP3 players, and, of course, the Internet. Therefore, the Census report is fishy. But the Census figures come from a survey of over 50,000 households (technical details here), which sounds like a more reliable source than Matt’s gut. And they’ve been at it for decades—family data begins in 1947, and household data in 1967.
But, perhaps realizing that anecdata doesn’t really cut the mustard, Yglesias found himself an actual data source, the Consumer Expenditure Survey (CEX) from the Bureau of Labor Statistics (BLS) to support his hunch. (It’s abbreviated CEX so as not to confuse it with the Current Employment Statistics [CES], the source of the monthly payroll data.) So he rolled out his discovery in a piece posted on Friday, “BLS incomes have risen since 1989.” Anyone familiar with U.S. income stats knows that this is ill-advised. But you need not have read deeply in the income literature—all you need do is read the BLS’s FAQ, which advises against relying on CEX income data:
If you want to relate the expenditures of consumers to their income and characteristics, the Consumer Expenditure Survey is the primary source of data. However, for users interested only in income information, data published by the Census Bureau of the U.S. Department of Commerce may be a better source of information. Data from the Current Population Survey are based on a much larger sample size. For income information, visit the Web site www.census.gov/hhes/www/income.html….
So the BLS itself recommends using the very Census data that Yglesias wants to dismiss.
More on income and poverty figures in the next issue of Left Business Observer, now in preparation.
On Panitch & Gindin and American decline
These are comments I delivered at a panel on The Making of Global Capitalism, by Leo Panitch and Sam Gindin, at the Rethinking Marxism conference, held at the University of Massachusetts–Amherst, on September 20, 2013. I interviewed them about the book here.
I want to start by saying that I greatly admire this book, and pretty much everything these two guys have done over the years. Unusually for the genre, I meant every word of the blurb I supplied for it. A while back, I was on a panel with Radikha Desai, on which she argued that the U.S. empire was not really much of a success compared to its British predecessor, which made me wonder what planet she’d been living on. (Given the stars of this panel, it can’t be her residence in Canada that led to this strange conclusion.) The thing has been incredibly successful on its own terms, and Leo and Sam are excellent at pointing out some of the mechanisms of its success, like the skillful incorporation of the second tier powers like Western Europe and Japan (I could say Canada as well, but it’s something of a special case). They have a high standard of living, and can even ride a moral high horse now and then while the U.S. military does the dirty work of imperial policing. Of course, life in the third and fourth tiers of the empire is another story—one of debt and profit extraction and the occasional CIA-sponsored coup.
And the ability of the U.S. planning elite to transcend immediate national interests to promote the health of the global system has been extremely impressive. Just to pick one example of something I found profoundly clarifying, I never really understood U.S. strategy around Middle Eastern oil. Noam Chomsky likes to quote a 1940s planning document on what a strategic prize control of that oil is, but once the producing countries nationalized that oil in the 1970s, it didn’t seem like the U.S. derived any great economic or strategic advantage from its influence and power in the region. After all, we produce far more hydrocarbons domestically than most of the second tier countries, and our immediate neighbors produce plenty as well. Leo and Sam offer a much more satisfying explanation: the U.S. interest is in the free flow of oil for the health of the global system.
And then there was support for the rebuilding of Japan and Europe after World War II—and in more recent decades, the encouragement of European unification. Narrow self-interest would have viewed these actions as the nurturing of potential competitors to U.S. business—and it’s turned out that way, they are. But again, the health of the global system demanded it, and the planners rose to the occasion.
Of course, I had to come to the “but” part of this little commentary, and here it is. You may have noticed that at the beginning I said the U.S. empire “has been” very successful on its own terms. And I said the planners “rose” to the occasion. The choice of verb tenses gives a clue to where I’m going: are the best days of the American empire behind us? I’m phrasing this as a question because I’m not fully sure of the answer. The claim was made without a question mark in the 1970s and 1980s, and ended up looking foolish in the 1990s. More recently, a lot of analysts used the financial crisis of 2008—it’s a little hard to believe that Lehman Bros. collapsed five years ago, and, as Martin Wolf pointed out in the Financial Times the other day, we still live in Lehman’s shadow, making it at once old news and a current event—to pronounce the death of neoliberalism, but the thing soldiers on. Enormous state resources were successfully mobilized to keep the banks not merely afloat, but dominant. Neoliberalism lives, at least for now. One should be on guard against publishing premature obituaries, both for empires and regimes of accumulation.
But I do want to list some reasons why I think the empire has entered a decadent phase. A couple of years ago, word reached Leo that I’d given a talk in Ottawa that sounded declininst, and he was alarmed. Until then, we’d seen pretty much eye to eye on the incorrectness of the declinist line, and he was concerned that I was embracing unsound doctrine. Sorry, Leo, I’m going to be unsound for a bit.
Several things strike me as signs of rather profound rot. Let’s start with the narrowly economic—specifically investment.
(If I had time I could talk about the rise in U.S. foreign debt, a trend that survived the Great Recession. Some argue that the continue ability of the U.S. to sell its debt is a sign of strength—which it is, until someday, foreigners decide not to buy any more, and then it isn’t anymore. Remember that Alan Greenspan said during the housing bubble that there was no reason to worry because things were going well so far. But back to investment.)
U.S. corporations are highly profitable and flush with cash. At last count (Z,1 Release) , U.S. nonfinancial corporations had nearly $16 trillion in financial assets on their balance sheets, almost as much as they have in tangible assets. The gap between internal funds available for investment and actual capital expenditures—what’s called free cash flow—is very wide at around 2% of GDP. That’s down from the high of 3% set a couple of years ago, but still higher than at any point before 2005. Instead of investing—and remember, profitability is quite high—corporations are shoveling cash out to their shareholders. Through takeovers, buybacks, and traditional dividends, nonfinancial corporations are transferring an amount equal to 5% of GDP to their shareholders these days—again, down some from recent highs, but very high by historical standards. This reflects the victory of the shareholder revolution, a crucial component of the neoliberal era of the last three decades, which established the fact that making shareholders happy is the principal reason for a public corporation’s existence. And that happiness is measured over the very short term: more money, now. The future, well, we can worry about that some other time. Alfred Marshall famously defined interest as the reward for waiting, but American capital has lost all patience (not that interest rates these days offer much of a reward).
The lack of interest in investing for the long term is visible in the national income accounts as well as corporate accounts. What matters for the accumulation of real capital is net investment—the gross amount invested every year less the depreciation of the existing capital stock. We’ve just gotten numbers for 2012, and they’re remarkably low. (See tables 5.2.5 and 5.2.6 here.) Private sector net nonresidential fixed investment (as a percent of net domestic product, or NDP) fell below 1% in 2009. It’s recovered some, to just over 2% last year, but that’s half the 1950–2000 average, and lower than any year between 1945 and 2009. We won’t have 2013 numbers until August of next year, but it’s looking like they’ll stay in this depressed neighborhood. Two things are responsible for this: low levels of gross investment to start with, and a skew of investment towards short-lived, quick return goods.
Public investment is even weaker. Net investment by all levels of government was just under 1% of NDP in 2012, the lowest since 1949 (following the postwar demobilization). Federal net investment was very close to 0% of NDP. Though state and local net investment was positive, but at the lowest level it’s been since the late 1940s.
When measured in real dollars, the trajectory of net investment has to be described as a collapse from which we’ve barely recovered. Net domestic fixed investment of all kinds in 2012 was 54% below its 2005 peak. Public investment was down 43% from its 2004 peak. Residential investment was down 89% from its 2005 peak. Private nonresidential fixed investment was 32% below its 2008 peak. In most cases, real net investment is at late 1970s/early 1980s levels—that, even though real GDP has more than doubled over the last three decades.
I suppose we could talk for hours about the differences and commonalities between an owning class and a ruling class, but what this net investment story tells me is that we have an elite interested in nothing other than short-term enrichment. At that, it’s been very successful. As we learned the other day, 95% of the growth in income between the end of the recession in 2009 and last year went to the richest 1% of the population. But it looks like it’s taking the money and running. It doesn’t seem to have much faith in the future.
Which takes me to the political, and then the psychological, sphere. It is amazing to watch the U.S. Congress seriously flirt with defaulting on Treasury debt. It makes you have to rethink everything you thought about capitalist power and the state. I doubt they’ll actually default—there will be some last second deal to raise the debt ceiling, temporarily, but we’ll probably be back here again soon. It’s something of a mystery to me whom the current Republican party represents—surely it’s not classical Wall Street interests, because they wouldn’t be playing chicken with the status of Treasury bonds. But those Wall Street interests, and their friends in the Fortune 500, don’t seem to be sitting the back-benchers down for a lecture on their class duty. (Or if they are, the back-benchers aren’t listening.) The contrast with the planning elite that came out of World War II that Leo and Sam write about is stark.
And now onto the psychological realm. I’ve been thinking lately about what we might call the neoliberal self. Gone seems to be the classically bourgeois executive ego, a relatively stable, if sometimes anal-retentive structure to guide the subject through life. In its place is a much more fragmented thing, adaptable to a world of unstable employment and volatile financial markets—but unable to think seriously about long-term things like social cohesion or, god save us, climate change.
The material basis of this transformation looks to be the replacement of the relationship by the transaction, to steal the language of corporate governance. Workers are told to run their lives like little entrepreneurs, moving from one ill-paying short-term job to another, or maybe holding two or three at a time. And at the top of the society, we see the erosion of the planning function, and any rationality beyond the most crudely instrumental. It’s been a long time since I read Polanyi, but this seems to me a perspective on the social rot produced by market-regulated societies, from the macro level of investment down to the socially shaped psychology of how we think and feel. I don’t see how the imperium can long survive this sort of pervasive rot.
Fresh audio content
Just posted to my radio archives:
Sepember 5, 2013 Greg Shupak, author of this article, on the bad effects of NATO’s Libyan adventure • Monica Potts on the declining life expectancy of poor white women • Gayatri Chakravorty Spivak on Gramsci (excerpts from an August 24 talk at the Gramsci Monument)
August 29, 2013 Mariana Mazzucato, author of The Entrepreneurial State, on the vastly unacknowledged role of the state in supporting technological breakthroughs • Anna Allanbrook, principal of the Brooklyn New School, on education, progressive and otherwise
Fast food: bad mistakes, deleted
I really screwed up my numbers on the fast food post (now deleted). Like Rogoff and Reinhart, I made a basic Excel mistake, and produced exaggerated nonsense. A doubling of wages would require a 20% price increase, not 67%. (Thanks to Seth Ackerman for pointing this out.) I still have lots of political doubts about this stuff, but I’ll keep quiet for now and do nothing but apologize.
Fresh audio product
Just added to my radio archives:
August 22, 2013 Darius Charney of the Center for Constitutional Rights on the NYPD’s odious stop & frisk strategy • Philip Mirowski, author of Never Let A Serious Crisis Go To Waste, on the durable ideology of neoliberalism
Socialize housing finance! [by Michael Pollak]
This lbo-news guest post is written by Michael Pollak, a writer living in New York.
Some kinds of socialism make simple financial sense. We start with something we all need, like housing, or health care, or old age pensions. Then we all pool our money and pay for it. We all know how this works for single-payer health insurance. How would it work for housing?
The original Fannie Mae (full name: Federal National Mortgage Association), as set up under FDR in 1938, was a pretty good equivalent of a single-payer housing system. It was a government agency which bought all home mortgages which certain other agencies (the Federal Housing, Veterans and Farm Agencies) had insured. They inspected you and the property, ensured sure both were good risks, and insured your payments in exchange for a continual small percentage fee. Fannie Mae then gave the local bank money or a security and took the mortgage in return.
In single payer health care, you go to the doctor, the government pays, and we pay the government in the form of taxes. Here, the government buys the mortgage from the bank who sells it to you, and this keep your mortgage payments down. The initial affordability gain was enormous, thanks to the FHA having recently introduced the 30-year self-amortizing (i.e., fixed payment) mortgage—before Fannie and the FHA, most payment plans were impossible for most people, with 50% down payments and balloon payments at the end. And the system was safe as houses. For the next 30 years the insurance agencies and Fannie were not only self-financing, they consistently made more than they spent, which provided a substantial buffer to protect them in down markets, even while their monopoly kept mortgage prices low.
Fannie was “privatized” in 1968 for the most trivial, short-termist and ultimately futile of reasons: to make the Johnson administration look good for the 1968 election. Back then, running a budget deficit was a serious campaign liability, like sexting is today. Johnson felt he had to close it. But he didn’t want to raise taxes, curtail the war, or curtail the war on poverty, all of which would have been liabilities as well. So he cut a hundred million here and two hundred there through a fistful of budgeting gimmicks like deferring highway expenditures for six months. And one of these gimmicks was to “sell” Fannie to a “private” company the government created (“5 Dumb Fannie Mae Bailout Assertions That Are Actually Secretly Smart!”). It was intended to change nothing in its functioning. The sale of its huge assets for one-time income of $160 million was all to help that year’s budget. (You will often read that Johnson privatized Fannie to “get it off the books,” which implies it was a huge debt liability. That’s exactly wrong. Johnson’s whole motivation was based on the fact that Fannie was making money. It wouldn’t have made sense otherwise.)
In succeeding years, a series of things happened (“History of the Government Sponsored Enterprises”) which really made Fannie and its much younger sibling Freddie Mac (founded in 1970 and from the first a private corporation, though federally sponsored) more and more like normal companies. (Normal companies that financial markets always believed had an unspoken federal guarantee.) And finally, 40 years of transformation later, they ended up doing an entirely normal company thing: they leapt in late in a bubble screaming “Me too!” and died a semi-normal death.
They were put in into “conservatorship” in July 2008, which means the feds now effectively own both Fannie and Freddie.
So what is to be done? When you take this long view, the obvious thing would seem to be go back to 1967, when things worked perfectly, because they could work even better now. In the age of technology, conforming mortgages are so simple that all you need is a well-oiled bureaucracy. (Conforming mortgages, as defined by Fannie Mae, have standard debt-to-income ratio limits, documentation requirements, and a maximum loan amount.) A competent clerk can figure out in minutes whether the odds of you paying your mortgage back are greater than the interest rate using their laptop. In fact, Fannie Mae has been doing this since the late 1990s using their own program called “Desktop Underwriter.” The data has to be confirmed, but that was originally chiefly the job of the agencies who insured the mortgages. There’s no reason it couldn’t be again.
Basically you don’t need mortgage banks for conforming mortgages, which are now commodities. But to make a new, reunified Fannie conceivable even in our dreams, let’s stick to the single-payer model instead of going on to Britain’s NHS. We’ll keep the mortgage banks and let them originate conforming mortgages. We’ll closely regulate their practices via the Consumer Protection Agency that Elizabeth Warren created. (It’s part of their brief already. And while we’re dreaming, we’ll make it an independent agency.) And then we’ll keep mortgage interest down by giving the now reunified and socialized Fannie a monopoly on buying these mortgages from banks. By these mortgages, I mean homes people live in (not second properties) that aren’t mansions—about 60% of the market. Landlords, speculators and rich people don’t need our collective aid.
There’s only thing we’d have to change from the pre-1968 period. Back then, Fannie bought the mortgages and held them to maturity, living off the steady payments. It was a great and simple business model. They only accepted rock solid mortgages, their portfolio was gigantic, and it was diversified to the greatest extent conceivable. So default and prepayment risks could be calculated to a hair and incorporated in the rates and buffer.
But one key thing has changed since then. The end of Bretton Woods brought us the world of gyrating interest rates, and with it, interest rate risk. In fact, the real pressure that transformed Fannie into a normal looking-and-acting company was that these gyrating interest rates killed its old business model of buy-and-hold during the 1970s.
The solution to that problem is securitization. Essentially New Unified Fannie says to investors: “We’ll keep the default and prepayment risk we’re comfortable with—we’ll guarantee them—and you take the interest rate risk off our hands.” If we keep that one change, but otherwise return to the original model of a unified, monopoly, government agency, we’ve essentially recreated the original FDR model, souped up only slightly for the post-Bretton Woods world.
Of course, mortgage-backed securitization has a terrible name now, but that’s because there were shit mortgages at the bottom of it. If all you securitize are widely diversified conforming mortgages, the resulting securities are just as solid as they are. And will be eagerly sought by bond buyers who live to trade interest rate risk.
So that’s the obvious solution to Fannie’s woes. We should declare that the privatization of normal, owner-occupied mortgages is a 40-year-old experiment that has spectacularly failed. And we should go back mutatis mutandis to the previous New Deal model that worked. We should siphon off the interest rate risk through securitization, and then the new Super Fannie can go back to sitting like a brood hen on the nation’s nest eggs.
So what have Obama and the ruling class decided? Exactly the opposite: to wind down Fanny and her brother so as to leave everything to the private markets—even more than before. The Corker–Warner Bill (S. 1217), introduced on June 25, and publicly endorsed by Obama on August 6, proposes to wind both down “no later than five years after passage.” Obama makes clear that the primary reason for this unwinding is “to protect the American taxpayer.” But how on earth is the taxpayer protected by returning to—nay intensifying—the free market dynamics that crashed so spectacularly?
Primarily this is the result of instinct and inertia. Obama is the anti-FDR. Facing the biggest financial crisis in 2 generations, and hence a momentous chance to really change things, he has done everything he can to restore the status quo ante. But to the extent anyone is really thinking about this, rather than just oiling us, this policy choice represents a complete misreading of every lesson we should have learned from this crisis.
The Lesson We Seem to Have Learned |
The Obvious Opposite Lesson We Should Have Learned |
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Government Entities Increase Risk Because We Have To Bail Them Out |
Every single entity we bailed out including Fannie and Freddie was private. Lesson: making large financial entities private doesn’t protect the government of the future one bit from having to bail them out if they cause a crisis. |
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Bailouts are huge and expensive costs to the taxpayer and we must do everything we can to avoid them |
The government is making money on every single part of the bailout including Fannie and Freddie. Lesson: A well managed bailout doesn’t cost anything. What costs money is the economic slump a financial crisis can cause. That’s the risk we want to minimize. |
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Fannie and Freddie failed because they were private entities living on the public tit, unfairly making extra profits through the implicit promise the government would save them. |
Fannie and Freddie didn’t fail because they harvested unfair rents. They failed because they were tasked with returning profits and dividends to the private market. That’s the part we need to remove. Instead we’re doing exactly the opposite. New Unified Fannie should have two stated goals: to minimize mortgage rates, and to buffer itself (and ourselves) against downturns. The monopoly rent is a feature. It is the source of the buffer funds. |
There is, however, one thing everyone today agrees on about the Corker-Warner-Obama plan: it will make mortgages more expensive. So the ruling class proposal fails the only two goals we say we have, to make mortgages more affordable, and to protect the taxpayers from risk. But hey, that’s capitalism for you. Anything better is called socialism.
Fresh audio product
First there was a vacation, then some fundraising at KPFA, and then some delay on my part—but finally some fresh material posted to my radio archives.
But first, a word to our sponsors. If you like these shows and want to keep them coming, then please support KPFA. I doubt I’d continue doing them if it weren’t for KPFA, and KPFA does a lot of great broadcasting for the other 167 hours of the week: Support KPFA… Online!
Ok, now the shows:
August 15, 2013 Thomas Sugrue, author of The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit, on the long history behind that city’s bankruptcy filing • Alfred Blumstein on crime and punishment stats
August 8, 2013 Penny Lewis, author of Hardhats, Hippies, and Hakws: The Vietnam Antiwar Movement as Myth and Memory,on how elites didn’t oppose that war and the working class didn’t support it, and what that means today
The decline & fall of WBAI
My piece on the decline and fall of WBAI (“The Excruciating Demise of WBAI”) is up at the New York Observer. I wouldn’t choose the word “demise” myself, since it’s not over yet.
Rasmus: my last word
The previous post is Jack Rasmus’ return of fire. Here’s my last word.
Rasmus: “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.”
R&D is part of the new category, “IP Product.” Is it really too much to expect a self-identified “professor of political economy” (though I hear he’s actually nothing of the sort) to read the news release with the definitions? Here it is, straight from the horse’s mouth (News Release: Gross Domestic Product):
In the NIPA fixed investment tables, a new category of investment, “intellectual property products,” consists of research and development; entertainment, literary, and artistic originals; and software.
Carry on, Jack. I don’t know why anyone published your original piece in the first place, but taste is at least as difficult to account for as national income.
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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Response to Rasmus
Here’s my response to Jack Rasmus’ complaint about my fact-checking him (“GDP revisions: not a conspiracy, Jack”). 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%.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
There are a lot of criticisms that can be made of conventional economic and social statistics, but you should actually know what you’re talking about before undertaking the project.
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