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GDP and Net Real GDP

October 14, 2011

GDP – gross domestic product – is economic activity. At present – looking at it from the demand side – that economic activity, GDP, in the US is underwritten by massive government activity.

We hear dissonant messages from the same mouths that (1) the economy is in recovery and (2) government spending is out of control. Both cannot be true. As we’ve shown in previous podcasts and posts, it takes only Algebra, Kalecki’s and Minsky’s Algebra, to demonstrate that the profits of corporations in the absence of investment are logically linked to these deficits.

(click on chart for larger image in new window)

So, GDP less government deficits should show us the underlying strength of a private economy. We call this metric Net Real GDP. Remarkably, or perhaps not, this calculation portrays an economy that looks very much like the economy portrayed by unemployment, real investment and median incomes.

And this has been true for decades. In the Bush II era of the early 2000s, and in spite of the immense private debt build-up, jobs languished and with them Net Real GDP. The supposed strength of the economy during the post 2001 recession was due in large part to very large budget deficits. Prior to that, the relative strength of the economy under Clinton is mirrored in the strength of Net Real GDP, and prior to that, in the Reagan-Bush I years, massive government borrowing supported the top line Real GDP number.

Of course, previous to Reagan, public borrowing was quite a bit more restrained. We paid for public services then. More under Democrats than Republicans, but more under both than under the Reagan trickle down policies. Since Reagan it has become the norm to demand services, but to be insulted when asked to pay for them.

And interesting here is to note that private debt has exploded in the past two decades, particularly since 2000, but this private deficit spending has not affected GDP to the same degree as public deficit spending. This is not visible in any of our charts, but

I suppose we should note here that the only metric that IS up is profits. Kind of sad for those who claimed – and still claim – that profitable companies spur wage growth and economic vitality. Seems to be one of the hypotheses that will survive all evidence to the contrary. Can it be called a hypothesis, if it is not vulnerable to being disproven by evidence? More of an article of faith, I would say.

This profits lead to prosperity seems to be one of the hypotheses that will survive all evidence to the contrary. Those profits, we find, were obtained by Draconian austerity by the corporations on their workforces, by Fed-sponsored interest rates that make corporate debt service as light as it could possibly be, and by demand supported not from the private sector BUT FROM FEDERAL DEFICIT SPENDING.

The charts are up, featuring our accounting for past forecasts in the We Told You So dotted lines. They look pretty good. Please note these are authentic forecasts, issued 9-12 months in advance at least. These are not adjusted for data at the end of the quarter they are forecasting. Compare us with anybody else.

Going forward we’re going to project another divot in the road. We’ve already made much of our call for negative Real GDP in the second half of this year. A call issued in January, not in the second half of the year. These are Depression numbers.

Parenthetically, we do think corporate profits will contract along with deficits.

Why would it be different? The demand side says that contracting government, households burdened with debt, and a corporate sector run for the benefit of its managers mean there is no upside.

There is no shortage of those who disagree. But insofar as I can detect, there is no explanation for an imminent recovery. There is the premise that the amazing austerity across the globe will starve returns out of the productive capacity of the economy – most notably labor – that are needed to ratify existing financial claims. But how that leads to economic recovery is not explained. Even that theory is wrong. Those claims can be ratified only to the extent that we employ that capacity.


From → GDP, Misc., Net GDP

One Comment
  1. David Lazarus permalink

    It looks like Net Real GDP might be the best metric that governments should be following. With positive changes then that would be the time for fiscal austerity. Net Real GDP shows how deep the recession/depression was and how it was mitigated by the stimulus.

    As you say the long term out look for company profits is poor. As deficits are cut the prospects for companies deteriorates. Though I see things getting worse for the US in that the solutions will be more tax cuts which will only increase the deficit yet do very little for the economy.

    My one concern for the US economy is the constant drain on vitality caused by asset bubbles. While this does create added value for property companies and makes construction worthwhile it does seriously distort investment decisions. If US commercial property prices had been stagnant then if a new restaurant or retailer wanted to set up a new outlet then it would not raise the cost of the startup. If prices are rising sharply then property investment companies would have contracts with upward only contracts or rent reviews that can drain the profits of the restaurant or retailer. This feeds through to the service sector inflation rate.

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