Any economic whizzes? Forgive my ignorance(Re: GDP growth)

[a_random_joel]

Just curious, but with all this buzz about the "surging" GDP - can any of that be attributed to the war spending? I have always heard that war provides a boost to the economy via increased military weapon and supply spending, and considering the huge contracts given to Halliburton, Bechtel, etc. in addition to the defense contractors could this possibly impact the growth rate(especially considering the unemployment rate still stagnant)? I'll be the first to admit that I am by no means an economic guru, but it seems to me that this is a possibility. What makes this more infuriating is that if this is at least partially the case, not only is the economy surging because of an unethical and unnecessary political policy, but it is actually OUR tax dollars funding said surge.

Any thoughts?

[ProfessorGAC]

1. It's Almost All Based Upon War Spending

The nominal GDP is tautalogically equated as:
GDP = C + GS + TP + NE

The C is consumer spending, or consumption at the final stage of production. (Retail, mostly.) This value hasn't gone up in 7 quarters.

The NE is Net Exports. As a trade deficit grows, this becomes an increasingly negative number. So, that actually reduces the GDP. This has happened.

There has been zero change in Transfer Payments, so the only thing left to drive GDP upward is Government Spending (GS).

Also, if one looks at the numbers in SAUS from Commerce and Treasury, they don't wash with the 7.2 or 8% growth projections. Somebody either has made a mathematical error, or they're lying.

So, not only is the change in GDP almost fully attributable to additional gov't spending, using solely borrowed funds, but the government's own numbers don't support these news reports. Hmmmmmm?
The Professor

[the_real_38]

3. great post, Professor...

...n/t

[a_random_joel]

4. Excellent!

Thank you professor.

And a Happy Turkey day to you as well!

[markus]

5. Are deficits calculated as part of TP?

If the government is spending more than its taking in, and borrowing the difference, does that constitute in increase in TP?

Where, precisely, do Durable Goods orders fit in there? As part of C?

[ProfessorGAC]

8. No It Does Not

Durable goods orders are not part of GDP either. It is not part of C. C is only measured at the final stage of production or final stage of commerce. It is, however, one of many generalized indicators of future GDP growth.

The correlation of most of the common indicators is not terribly strong. They must be taken in combination to accurately model GDP growth potential. In addition, there are some of these that are only valuable when interactively combined with some other indicator.

DGO is generally a better indication of what analysts think than of any actual GDP growth preditions. I have found that DGO needs to be weighted lightly as opposed to some other input indicators. The lag is fairly long and the leverage fairly weak. So, it's almost ignorable in the short term meaning that the weighting is based upon the time horizon of the model under review.

The transfer payments are those things in which the government gives money directly to its citizens. (Social Security, Medicare, Disability, et al) The source of the funds is irrelevant within the equation of GDP. So, borrowing the money doesn't impact the GDP growth or retraction.

Remember that the other tautology of GDP is mv = pq. The source of m is constant (for the most part) so borrowing just increases "v". Since we have huge overcapacity right now, "q" can rise to meet the increased "v" without inflating prices ("p"). So, all we've really done is increased "v". That's not real growth, since it's not sustainable and will, eventually, lead to monetary, then price inflation.
The Professor

[tom_paine]

Thanks, Professor, but I didn't need analysis to know the Busheviks lied

Nice to see confirmation, though.

But at this point, the Iron Fist of Free-Market Stalinism has clamped down to such a point...key positions and agencies have been purged and their institutional ethics stripped and remolded in the Bushevik Image, I just look at them as I would look at Toilet Paper Production estimataes from the Soviet Union, circa 1980.

In this way I am correct some 99% of the time, lately. But it's only because the Busheviks are found to be lying 99% of the time.

Totalitarianism is actually quite predictably boring. Amerikan-style is and will be no different.

[wakfs]

14. It's so simple....

....even the mainstream media could understand it. And report it.

We wish.

[Mattforclark]

2. 1%

I'm no Joseph Stiglitz or Paul Krugman, but...

The cost of the Iraq war, which is IIRC at about 150 billion, is only about 1% (maybe closer to 2) of the GDP. So it does help, but I would think that its impact is limited.

The fact that we are running a massive deficit right now also helps in the short term, but deficits have certain negative long term effects.

Then there are natural fluctuations in the numbers, and then beneath it there is the business cycle, which usually recovers after a certain amount of time.

[a_random_joel]

7. I am not so sure...

The 150 billion... not sure if ALL of the contract work is included in that cost, plus with the lack of accounting or disclosure in the appropriations how do we know what is actually being spent? Does this include intelligence costs(which are tyoically NOT represented in any budget figures for security reason), does this include replacement of weapons/equipment that were used during the war but purchased BEFORE the war(I seem to remember hearing about them using a bunch of older stockpiles to "use them up") which may not necessarily be reflected in current budget estimates. Additionally as the Professor pointed out above - Government Spending is the main thing that is "up"; these expenditures are actually based on future money!

[ProfessorGAC]

12. You Need To Review Your Math

First 150 billion is more like 1.3% of GDP.

Secondly:
They spent over 70 billion on war money in one quarter. Since they annualize the quarterly growth, this would indicate the equivalent of 0.63% in a quarter. Compounded, this would result in more than a 2.5% GDP growth vs. an actual compounded projection (from Dept of Commerce and Treasury values, taken off the SAUS database this morning) of 6.6%. So, nearly 40% of the growth is war spending.

Also, since the rate of inflation in Q3 was annualized at 2.9%, this means that the real GDP growth was only about 3.7%. Since the gov't is spending money it already had in hand, it's not appropriate to adjust the income for inflation. So, now it's 2.5% out of 3.7% real growth.

I think the answer is yes, and you need to rethink how you arrived at your numbers.
The Professor

[papau]

6. Welcome to the world of changing "seasonal adjustments"

Like the Professor - I do not see the GDP growth of 8.2% in the raw numbers -

but the increase in Gov spending has indeed increased the raw numbers so things look better than last year.

I still hold to a little over 4% growth in the 4th qtr - and a rapid slide to 3% in the 4th qtr of 04 - and I suspect a continued slide in 05 due to higher than they would otherwise be interest rates in 05 and later reflecting our out of control deficit. Lousy economy will keep the rates rather low (I expect 1st qtr 05 to have the 10 year bond over 5%- but that is all) - but they will be higher than they would otherwise be for such a lousy economy - and that will kill this "growth" fairly quickly. personal debt growth will slow, and business debt will not grow in the absence of new demand, and gov debt can take this train only so far.

[ProfessorGAC]

10. You're Actually More Optimistic Than I Am

And, i'm not a doom and gloom economist! But, i think the 3% slide will happen more like in 1Q04, not the 4th quarter.

I also see the possibility that the doofi on the Fed will adjust rates upward to support the value of the dollar, despite the existence of papers and models that show that this doesn't really work in small increments. So, the rates might edge upward, but because of manipulation of rates to affect some other change, and not due to true economic growth.
The Professor

[tritsofme]

18. What difference if any do you think we will see in the fed

when Greenspan is gone in June?

[David__77]

9. GOP Keynesians...

Keynes was the economist who best formulated a "demand-side" conception of stimulating economic growth. Put more money out there, and people will spend it, stimulating demand for goods and services. Bush, like Reagan, is a firm apostle of this thinking. Despite the rightist blather against New Deal policies, they are in fact proceeding from the same postulates.

[LiberalEconomist]

13. Not really

Keynes posited short term deficit spending, while the Reaganites (of whom Bush II is one) hold to long term deficit spending.

[ProfessorGAC]

15. Neocons are NOT Keynsian

Keynes felt that his approach was based upon increasing the money supply commensurate with certain economic conditions and emergent national situations. That's why he advised Roosevelt to engage in deficit spending during the back end of the Depression. The Depression was a valid and serious national emergency, as was WWII.

The neocons are not really Keynsians because they feel that the money flow to the populace should be narrowly targeted and require no economic or social emergency to foment this move. This is counter to what Keynes wrote.
The Professor

[JHB]

16. The difference being...

...where they put the money:

"GOP Keyesians" put it at the top (tax breaks) to keep it withing elite circles;

Regular Keynesians put it in the middle and bottom (assistance programs, Social Security, high wages) where it can circulate more thoroughly, but can't be controlled.

[Cocoa]

11. I have an easier way of judging this number

Consider the source, the Commerce dept.

Rummy's defense dept. has made up an incredible number of war-related stories to help Bush, Ashcroft's Justice dept. has announced bogus arrests and bogus terror war progress to help Bush., I don't see any reason why Bush's old oil friend Don Evans's dept. wouldn't hesitate for a second to make up GDP numbers to help out.

[a_random_joel]

17. I just have to say to the good Professor

Your knowledge on this subject is impressive. Thanks again for the concise and factual posts.

DU has so many wonderful assets!