WASHINGTON, Aug. 4 (UPI) -- Second quarter gross domestic product growth figures, released Thursday, made the permabulls of Wall Street bellow with joy. Yet why should they? -- for most of the growth was in government.
Of the $56.1 billion growth in real GDP recorded in the second quarter, a 2.4 percent annual rate, $31.7 billion was in government. GDP in the private sector, let's call it Gross Private Product, (GPP) grew at an annual rate of only 1.6 percent, following growth rates of 0.7 percent and 0.4 percent in the previous two quarters. If you deflate by estimated population growth GPP per capita was 0.9 percent lower than three years ago, at the peak of the boom in the second quarter of 2000. Only government has grown since then, by 13.4 percent in real terms over the 3 years, or by 9.9 percent per capita.
Effectively therefore, in terms of what ordinary people and businesses have to spend, the last 3 years has been one continuous recession. Only government has grown, and it has borrowed the money to do so, reducing the immediate blow to our pocketbooks but storing up repayment problems for the future.
This raises a philosophical argument about how GDP is constructed. In every other sector of the economy, output is calculated at market prices, on the assumption that the market price is what the market consensus assigns as the item's "value." For government, this is not the case; the output of the government sector is simply its cost, with no regard as to whether that output might be worth anything.
This is clearly wrong. For almost all government services, if they were worth more than they cost, somebody in the free market would already be providing them. The fact that these services are left to government to provide is a pretty good indication that in a completely free economy, less of them would be provided.
Of course, much that the government does has economic value, but it is quite clear that its value is not adequately captured by measuring government output on a cost basis, as is done at present -- after all, misguided regulations, such as the CAFE fuel economy standards for automobiles, may well have negative value, in terms of the overall economy, by damaging the U.S. automobile industry, diverting consumption into wasteful and unattractive SUVs, and sub-optimizing the purchase preferences of the U.S. automobile consumer. Thus conventional national income accounting fails to capture the true output of government -- or its true cost.
Of course, in some case, government is a monopoly provider because that's the way our system works. To have free competition for military services, for example, would return us to the Middle Ages, with bands of mercenaries pillaging the countryside. But equally, it is difficult to see what is economically gained by the government assembling a lot of economic value and then firing it off at an enemy; disaster, in the form of terrorism or conquest by the enemy, may be averted, but the welfare of the populace is not directly improved by the activity.
To see the effect this has on economic statistics, it is interesting to calculate GPP for the early years of World War II, statistics for which are provided by the Bureau of Economic Analysis (their GDP data goes back to 1929 but alas, no further, so one cannot examine in detail the makeup of the last similar period to the 1990s.)
The common myth is that the entry into World War II finally killed off the Great Depression, pulling everybody back into employment (which it clearly did) and causing a rapid increase in GDP (which it also clearly did.) By GDP data, the early years after the war were the difficult ones, with real GDP declining by more than 10 percent between 1945 and 1947, and not recovering to its 1945 level until the onset of another war in 1950. By GDP data, war is unquestionably good for the economy.
By GPP data, the picture is quite different, and since GPP is what ordinary people and businesses have to spend, it is GPP we should look at. GPP, even more than GDP, recovered slowly from the Great Depression, with the bottom year being 1933, not 1932, and a sharp reversal in 1938. However, the years 1939-41 were good ones with GPP up more than 8 percent in each year. Then in 1942-3, GPP went into reverse, dropping 8 percent in 1942 and a further 1 percent in 1943. Private sector prosperity was NOT increased by the war, it diminished -- all the extra output was taken by the government, and financed in the bond markets.
In 1944, the private economy turned around, with an 8 percent increase in GPP, followed by a further 11 percent in 1945, but the truly magnificent year was 1946, when GPP increased by no less than 25.4 percent, as government was cut back and resources redeployed into the private sector -- all this at a time when GDP was declining.
It's little wonder that Americans felt good about themselves after the war; they'd just had a fantastic boom, which in terms of GPP brought back all the prosperity of the 1920s, even though government was much larger in 1946 than in 1929. Peak to peak, GPP increased by 3.0 percent per annum, at a compounded rate, between 1929 and 1946, not much below the 3.2 percent per annum achieved in 1929-2002, the full period for which we have data. Per capita, with population growth low in the 1930s, real GPP in 1929-46 grew by 2.44 percent per annum, higher than the 2.15 percent for the 1929-2002 period as a whole.
The Great Depression therefore lasted 14 years, from 1929 to 1943, but the huge re-conversion boom of 1944-46 put the U.S. economy right back on track.
Accounting for government in terms of its inputs rather than its outputs is akin to accounting for stock options on the basis of a zero imputed value; we do not know what the correct accounting treatment is, but we can be absolutely sure that the conventional treatment, chosen for political rather than accounting purposes, is the wrong one.
In the case of stock options, management wants to hide the fact that they are using such options to transfer huge amounts of value from shareholders to themselves. In the case of conventional GDP accounting, government and leftist economists want to hide the cost of government, and make it appear that an expanding government is producing economic growth, when the truth is generally the reverse. John Maynard Keynes' absurd theory, that expanding government spending helps an economy to recover from a recession or depression, would have been exposed for the absurd and delusionary flim-flam that it is, were it not for the fact that conventional GDP accounting records the government spending itself as an increase in GDP, totally failing to inquire whether public utility has actually been improved thereby.
Accounting on a GPP basis highlights that the 1930s were a lost decade for the American economy, with 1929's per capita GPP not exceeded until 1944-45, and with the increasing government spending of those years tending to retard the natural trade cycle upswing after the stock market bottomed and sound values were restored. Government spending, 9.9 percent of GPP in 1929, shot up to 17.6 percent of GPP in 1932 (so much for Herbert Hoover's Republicanism) and then continued a mildly increasing trend for the rest of the decade, peaking at 19.1 percent in 1938. If Keynesian government spending had worked, 1929-32 would have been years of wild boom, followed by steadily increasing prosperity thereafter.
Neville Chamberlain's Britain, in which public spending was cut back in 1931-2, and held down until serious rearmament began in 1937, and yet where output exceeded the 1929 level by 1934, shows how the Great Depression could and should have been reduced to the dimensions of a mere recession.
More recently, GPP accounting shows that the period since 1990 has contained no economic, technological or productivity "miracle" that could justify permanently higher stock prices and asset valuations. Trough to trough (if 2002 was indeed the trough) GPP per capita grew at 2.15 percent per annum between 1992 and 2002 -- exactly the same rate, to within two decimal places, at which it grew in 1952-2002 or, peak to peak, in 1929-2000. The overall trend in GPP per capita is remarkably constant, far more so than GDP per capita. Large increases in government, such as in the 1930s or the early war years (government spending peaked at over 90 percent of GPP in 1943-44, and then dropped back to 1930s levels by 1947-8) reduce GPP per capita, but GPP bounces back once the share of government is curbed.
Since the second quarter of 2000, government spending has increased from 21.6 percent of GPP, a level only modestly above that of the late 1930s, to 24.0 percent in the second quarter of 2003, reversing the decline of the 1990s (spending was last above 24 percent of GPP in 1992-3.) In itself, this is only moderately alarming, but the spending plans already in the pipeline suggest that government spending is likely to increase further, perhaps above the early 1970s peacetime peak of around 27 percent, which must on historical evidence have a substantial dampening effect on GPP going forward.
Instead of rejoicing at the apparently stronger growth of GDP in the second quarter of 2003, Wall Street and consumers should have been bemoaning the shrinkage in per capita GPP in the last 3 years, and the quite rapid growth in government spending that has accompanied it. It is little wonder that the average American is not feeling confident; he has ceased to grow any richer, and sees his personal economic skies darkening by the day.
Only the government can see growth ahead; needless to say that bodes ill, not only for our freedom but for our economic future.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
