John B. Taylor and Russ Roberts “Chart Cast”: Potential GDP and the Current Not-So-Great Recovery

Economic Malaise: simultaneously deploying Keynesian deficit spending and QE in an environment of high public and high private debt

An item that receives little attention is that Keynesian deficit spending and quantitative easing [QE] were both economic theories developed during a period of very low public and private debt. Deploying the theories, simultaneously, in an environment of high public and high private debt within an advanced economy was first tried in the early 2000’s in Japan. The result? Economic malaise.


Fast forward to February 2012 in an advanced economy of the US. What results can one find of simultaneously deploying Keynesian deficit spending and QE in an environment of high public and high private debt?

(1) an 8.5% u3 measurement of unemployment with an army of discouraged workers,

(2) falling home prices which continue to fall,

(3) high public debt morphing into hyper-debt,

(4) a trailing annual GDP growth rate of 1.7%. (1) (2) (3) (4)


The missing element is growth. More importantly growth was attempted by simultaneously deploying Keynesian deficit spending and QE in an environment of high public and high private debt. One can quickly conclude that growth does not occur [Japan and the US now as prime examples] by simultaneously deploying Keynesian deficit spending and QE in an environment of high public and high private debt. The result merely being economic malaise with debt morphing into hyper-debt.

Notes:

(1)
http://www.bls.gov/news.release/empsit.nr0.htm

(2) http://www.propertycommunity.com/forum/north-america-real-estate/21772-nationwide-prices-still-falling-us-analysts-predict-further-decline.html

(3)http://www.denverpost.com/breakingnews/ci_19858627?source=rss

(4) http://articles.businessinsider.com/2012-01-27/markets/30669494_1_gdp-report-private-inventory-investment-real-gdp

　

　

　

　

　

　

　

The Austerity Argument: Real GDP Growth vs. False GDP Growth

Of the many problems with the "austerity argument" regarding lower GDP growth are:

(a) the argument regarding "austerity" leading to lower GDP growth relies on the implicit assumption that the previous false GDP growth number, created through endless government deficit spending, was in fact a real growth number, yet in fact the GDP growth number was false,

(b) the false GDP number is then used as a base measurement,

(d) austerity merely returns one to a real GDP growth number and/or a real GDP growth number base,

(e) the movement from false to real is depicted as "lower growth" when in fact it is a movement from false growth to real growth.

Euro Zone: Interactive Debt Graphic

Below is a link to a most excellent interactive graph showing what the many players of the euro zone crisis owe to one another. The graph also shows gross domestic product [GDP], foreign debt outstanding, foreign debt per person, foreign debt to GDP, and government debt to GDP.

Eurozone debt web: Who owes what to whom? BBC 11/18/2011

 http://www.bbc.co.uk/news/business-15748696

h/t Mark Perry at Carpe Diem

High persistent unemployment: a statistical outlier or an indicator?

An item heard over and over from pundits, talking-heads, and media types, regarding firms in association with job creation, is expectations [uncertainty]. And yes, there is a difference between general uncertainty which is with us all the time and extreme uncertainty which is with us now.

Another item, which you hear less of, is the persistent below trend number in GDP and the associated “snap back” after recession [in trend] for several quarters settling back to trend. The snap back which is associated with job creation (in most instances).

Consider for a moment the persistent below trend GDP number and lack of snap back eventually settling to trend. GDP has remained well below historical trend since the second quarter on 2007. (1) Therefore, GDP has remained well below trend for four years and one quarter. The recession according to economic indicators ended June 2009. (2) (3)

The “snap back” is really Milton Friedman’s “Plucking Model”. Basically, when an economy goes into recession, based on historical economic cycle statistics, the GDP trend acts like the plucking of the string of a guitar [hence Plucking Model]. That is, when the economy recedes, like pushing a guitar string, it snaps back [like a guitar string] and trends above historical GDP trend for several quarters before returning to trend [a still guitar string]. (4) (5) Generally speaking, the “snap back” would have occurred and continued surrounding the June 2009 date.

Consider the “snap back” aka Plucking Model in conjunction with expectations [uncertainty and extreme uncertainty]. Pundits currently depict the persistent below trend GDP and persistent poor economic expectation (uncertainty and extreme uncertainty) as outlier phenomena. Yes, statistically speaking you could make the outlier argument given historical economic cycle statistics.

-Or- is the statistical phenomena not an outlier but an indicator of summation. Does GDP trend fall and remain below trend and snap back becomes eliminated due to the summation of factors?

At some unknown but certain point does the historical summation of a political tax code, the funding of a politically promised social welfare state, continuing and historical class warfare rhetoric, mountains of regulation associated with a nanny state, crony capitalism, failure to foster private capital formation, etc. (lending itself to a summation-effect regarding expectations), finally create such a bottle neck that the current phenomena is not an outlier, rather an indicator of the summation?

Notes:

(1)    Deep freeze, The Economist, 08/18/2011, http://www.economist.com/blogs/dailychart/2011/08/gdp-recovery-recession?page=2

(2)    The Recession Has (Officially) Ended, NYT, http://economix.blogs.nytimes.com/2010/09/20/the-recession-has-officially-ended/

(3)    Recession officially ended in June 2009, CNN Money, http://money.cnn.com/2010/09/20/news/economy/recession_over/index.htm

(4)    Milton Friedman’s ‘Pluck’ Gives Hope to Jobless, Bloomberg, 04/06/2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeHgUQWKHL3Y

(5)    In-Depth Look - Snap Back In The Economy – Bloomberg, http://www.youtube.com/watch?v=wH4rnKuNCRw