No economy growth over decades? 3% nixed by 3% inflation?

[oscar111]

I often see that our economy grows at 3% over long periods of boom and recession.

Yet inflation averages 3% too.

So, is the ugly truth that our GDP never grows at all? Wealthy's gadgets balanced by more homelessness?

======================
PS.. Question is sparked by striz's post:

"... consumer prices up at .. 3.3 percent rate ..., while the economy grew at a 3.4 ... annual rate...

3.3% inflation y/y and a 3.4% growth in GDP, that's only 0.1% real growth in GDP. No boom at all...
striz"

[sam sarrha]

1. The Economy is Growing.!! Exon's Profits are $2.3 billion a MONTH.!!

whadayamean.. no economy growth..??

[Anarcho-Socialist]

2. I believe that the growth rate reported is growth above inflation

Unless someone else knows otherwise.

Although the Federal government isn't getting any benefit from this economic growth (3-3.5%) when it's percentage of debt per GDP percentage (5%) is more than what the economy is growing.

[BillZBubb]

3. Reported growth is AFTER inflation.

In economics, there are two sets of numbers: Nominal and Real. Nominal is the actual values in the series, Real is the same set of numbers adjusted for inflation.

The GDP number given is always the Real (Inflation adjusted) number.

Do be careful, though, because Freeptards are very fond of citing Nominal numbers whenever the Real numbers go against them.

[Oerdin]

5. It's called real growth

Total growth minus inflation and the figers you see on TV are normally real growth figures instead of gross growth.

[German-Lefty]

4. I think it's adjusted using the CPI

Consumer Price Index.

Some people say it's suspect because it doesn't detect inflation in some areas. A stock market or other bubble can be seen as a kind of inflation, but it doesn't get detected by the CPI. So you can have lots of new money bidding up stocks in some industry, with consumer prices looking just fine. Then slowly that money leaks out to the consumer where it is used to bid up consumer articles and "oh there's the inflation".

So if the government prints X money and buys a bunch of bombs, until that money leaks out from the bomb making sector into the consumer economy, everything looks great. The GDP looks like it increased by almost X in real terms, and inflation is low. The inflation will come. Hopefully after you're reelected or you're not but you can blame the other guy for screwing up the economy. :-)

[idlisambar]

7. Actually another measure of inflation, the "GDP deflator", is used

http://econ.la.psu.edu/~dshapiro/l08sep23.htm

[German-Lefty]

8. GDP deflator

I read about that after posting. Your link doesn't really explain how it's calculated. Correct me if I'm wrong:

Real GDP Growth = value of all production this year at the prices of last year's market / last year's GDP
Nominal GDP = this year's GDP / last year's GDP
GDP Deflator = Nominal GDP / Real GDP Growth

So:
GDP Deflator = this year's GDP / value of all production this year at the prices of last year's market

Seems simple enough.

[idlisambar]

6. The story with inflation and GDP

As the other posters have said the reported GDP numbers are already adjusted for inflation, but there is still a story here that people should be aware of. Since the 80's and especially since the mid-90's there has been a concerted effort within the various government agencies to eliminate the "overestimation" of inflation. The moves were legitimized by the findings of the Boskin commission in 1996 which found the previous methods used to calculate inflation had overestimated it by 1.1%. Ever since they have been eliminating this "bias" in steps, and also finding new biases to justify further changes. The Boskin commission findings were with respect to the CPI which was once used as the inflation metric to calculate GDP, but now there is another measure called the "GDP deflator" that is used. Most of the relevent changes to the CPI were also carried over to the GDP deflator and in fact in recent years (since 2002) the GDP deflator has been even lower than the CPI.

The upshot is that GDP growth reported in recent years at a little over 3.0% would be about 2.0% by the inflation measure used in the 80's (perhaps even lower). This is one big reason why there is a disconnect between the GDP/productivity numbers and the economic reality on the ground.


On the Boskin Commission:
http://pages.stern.nyu.edu/~nroubini/NYT/NYTCPI.HTM
http://www.epinet.org/content.cfm/books_bkcpi

The upshot according to official sources...

....Clearly, the combined effect of the BLS's changes on the CPI over the 1995-2000 period will be substantial. Taken together, the changes may reduce measured inflation on the order of 0.7 percentage points compared with what would have occurred if no changes in methodology had been made. Therefore, CBO's forecast for CPI inflation in 2000, which is 3 percent, cannot be directly compared with CPI inflation measured using pre-1995 procedures.

http://www.cbo.gov/showdoc.cfm?index=31&sequence=5

Some commentary arguing against the worthiness of the changes...
http://moneycentral.msn.com/content/P72746.asp
http://larouchein2004.net/pdfs/economics/030214ref.pdf
(yes, it's a larouche analyst but the facts presented, particularly the discussion of Quality adjustment and autos is very interesting)

Agree or disagree with the changes, they should be remembered when making international comparisons...

The economic benefits of the IT revolution are now visible in Europe and Japan

AFTER years of debate about the virtues or vices of the so-called “new economy”, most economists now agree that America has, indeed, enjoyed stronger productivity growth since 1995, thanks largely to investment in information technology (IT). However, many also agree that Japan and Europe, for some reason, seem to have missed out on computer-driven productivity gains. The growth of labour productivity in Japan and most European countries has actually slowed since the mid-1990s. New research, however, suggests that the economic rewards from IT have spread outside America, but have not been measured correctly.

http://www.economist.com/finance/PrinterFriendly.cfm?Story_ID=2155438


Some commentators think that the changes to the inflation metric since the 80's are even greater than official sources acknowledge...

walter j. williams' informative site...
http://www.gillespieresearch.com/cgi-bin/bgn/

and an audio interview with him...
http://www.financialsense.com/Experts/2005/Williams.html

[German-Lefty]

9. Nice links!!!

The LaRouche cult do dig up some nice stuff every now and then. I like the donut example.

The walter j. williams site is a little over the top when he compares our deficit+liablities to other people's deficit in the deficit article.

So maybe you can't measure inflation perfectly in goods which are substitutable or increase in quality. I'm starting to think we should just measure a the price of a basket of consumer goods or plain commodities. Such metrics won't measure all inflation, but in the long term new money should leak out all over the economy.

[idlisambar]

10. on the deficit vs. liabilities

I thought the same thing, but those numbers he talks about are actually accurate -- the government even publishes them. The thing about it is that the accounting standard he is talking about projects over a 75 year period, so naturally if a lot of long term spending commitments or tax cuts are made in a single year the deficit will balloon under this standard. Still, like you, I am not concerned about 75 year projections, obviously a lot can happen in the intervening years, but the figures do indicate, as we already know, that the U.S. will have to make drastic changes to its gvoernment budget.

[German-Lefty]

11. estimating liabilities of entitlements

Here's and idea: could those long term liabilities adjusted to reflect their current worth. If you X$ in 75 years, you don't really have to set X$ aside now. The liability of SS commitments should be estimated as the cost of a private pension, to cover such a liability.

You could adjust future payments based on some interest rate, they yield of long term bonds for example. This should allow you to calculate the liability of paying SS indefinitely. It could also be compared to the asset of future indefinite tax incomes with a current system. Since the value of payments and taxes drop off exponentially, we can ignore the insanely distant future.

Hmm, I'm no accountant.