Tuesday, May 25, 2010

U.S. Economy on Continued Life Support

Calculated Risk details that according to the CBO, stimulus (i.e. the American Recovery and Reinvestment Act "ARRA") raised GDP in Q1 by an estimated range of 1.7% to 4.2%. Since reported GDP growth was 3.2% annualized for the quarter, this means that if the impact of stimulus was at the high-end of the range, GDP "would have" been negative in Q1.

The chart below shows actual GDP and a range for GDP ex-stimulus (simply actual GDP less the estimated impact of the stimulus at the low and high-end ranges as detailed by the CBO).



The bad news?

This shows just how fragile the system is.

The good news?

The impact of stimulus is expected to be strong the remainder of the year (Q2 '10: 1.7% - 4.6%, Q3 '10: 1.4% - 4.2%, Q4 '10: 1.1% - 3.6%)

Source: BEA

9 comments:

  1. This is a great example of Bastiat's "Seen and Unseen"

    What you see is the impact of the stimulus. What you dont see is the private economic activity that didnt happen because the Govt was sucking capital out of the economy.

    Like if banks instead of buying treasuries to finance the budget deficit were instead lending to business.

    The CBO is notorious for their inability to do any type of dynamic scoring.

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  2. Do you have any empirical proof that the Govt's "sucking capital out of the economy" reduced any economic activity?

    I see huge cash balances everywhere, money market funds, short term treasuries, cash on corporate balance sheets.

    Perhaps the reason banks didn't loan money was because of a lack of qualified borrowers and a lack of investable ideas with ROI's.

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  3. Maybe but they would have been better for the future without the life support......we might have actually clean up the festering mess and be on our way ex the $3 trillion in new debt.

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  4. Just love this idiotic commentary regarding the stimulus. It totally ignores the cost of the stimulus and the lasting negative impact from it.
    The rationale displayed here is tantamount to this: "the heroin junkie has really been helped by the daily morphine injections." How stupid!

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  5. jim- i agree and for that reason GDP is likely a pure measure of actual economic performance (some interesting debate on this such topic a few weeks back in the ny times).

    the point of all of this is to re-invigorate animal spirits (i.e. lending and consumption) so the rebound becomes sustainable. the problem i've detailed time and time (and time) again is that the u.s. has a problem of over-indebtedness and over-consumption, thus that is NOT a long term solution.

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  6. What stimulus? The Obama Administration has done nothing to stimulate the private sector. Permanent increases in the deficit to reward Democratic constituencies, a tsunami of actual and potential government regulation, uncertainity about future taxes, threats of tax increases on small business and investors, huge tax increases on health care and the prospect of drastic marginal disincentives to work in Obamacare, union thuggery, etc., etc.

    There is no stimulus in paying people unemployment compensation for two years and unraveling the welfare reform of the 1990s. There is no stimulus in counter-productive investments in so-called green energy that will raise costs and have to be paid for by our children.

    The economy should be roaring back at this point but instead we had a phony stimulus package.

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  7. "The economy should be roaring back at this point but instead we had a phony stimulus package."

    So what's stopping the private sector? Interest rates could hardly be lower. Banks are liquid; they report weak loan demand.

    Is it your point that just SEEING the government do things disheartens business? Or what? It can't be crowding out, or we'd see a pop in interest rates.

    I mean, it's obvious that you guys all hate the idea of the stimulus, but can any of you at least attempt to explain why it isn't giving a boost to the economy?

    LT debt problems, okay -- that's a legitimate issue, but if you think that a much deeper recession would improve the debt numbers you're mistaken. Again, please explain to me why you think the stimulus has actually worsened ST economic performance.

    And this: "What you dont see is the private economic activity that didnt happen because the Govt was sucking capital out of the economy." - is not an explanation; the government has been pouring capital INTO the banks, and the Fed has been holding ST interest rates at zero. It's not a shortage of capital that's holding back business.

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  8. > So what's stopping the private sector? Interest rates could hardly be lower. Banks are liquid; they report weak loan demand.

    Prices are being artificially levitated by the Fed, via accounting fraud, they are assisting the banks in lying about asset prices, and also via outright printing, they are preventing monetary deflation from occurring. When there is expectation of future price declines, people put off their purchase decisions to some later date, and the economy languishes as a result. We are all waiting for the Fed to recognize the loan/mortgage losses, so the price declines can occur and real growth can resume. These are the fruits of Bernanke's policy of lying about bank losses to animate the insolvent zombie banks... we are stuck in economic limbo.

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  9. Contrary to the comment by "Anonymous" about "What you dont see is the private economic activity that didnt happen because the Govt was sucking capital out of the economy," Robert Pollin & Dean Baker in December 2009 provided empiracal proof that the "crowding out" argument is wrong because it simply is not happening. In the section entitled "Crowding Out through Financial Markets?" on pages 10 through 13 of Public Investment, Industrial Policy and
    U.S. Economic Renewal
    Pollin and Baker present the hard evidence and conclude"

    "What becomes clear here is that, since the late 1970s, trading in corporate stocks has dramatically outstripped the amount of money that has been channeled into new investments. Clearly, financial market investors are far more attracted to the gains from buying up existing assets as opposed to spending money to create new assets.

    "This pattern supports our central point: considering the U.S. economy for roughly the past 30 years, there has been, in general, no shortage of funds available to corporations. The corporations have not experienced financial crowding out. Rather, credit has been abundantly available, as long as the funds were channeled into Wall Street speculation and related forms of financial asset purchases rather than into productive investments."

    link = http://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1179&context=peri_workingpapers

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