U.S. Economy Grows 5.7% -- Stimulus Still Working

A recession is two consecutive quarters of gross domestic product (GDP) shrinkage. A depression is GDP shrinkage of 10%. President Obama's ongoing stimulus package and Ben Bernanke's management of the Federal Reserve have apparently reversed the former and averted the latter... if you believe statistics. The Bureau of Economic Analysis says our GDP grew 5.7% in Q4 2009.

That growth may yet be revised down—BEA's latest report revises their Q3 2009 figure down from 4.2% to 2.2%. But remember: a year ago, we were in economic free fall, suffering contractions of –5.4% in Q4 2008 and –6.4% in Q1 2009. In one year, we reverse the trend and post the highest quarterly growth in six years.

The Bush II economy beat that growth rate once, growing at 6.9% as we went to war in Iraq in Q1 2003.

This is why the market-rattling Bernanke-bashing fizzled: even Tennessee Republican Senator Bob Corker acknowledges that the Fed chairman has prevented a worse economic collapse. This is also why we need to learn that the federal budget is not like a family budget: as Robert Reich explains, when the economy goes down, it's government's job to fill the gap and boost the economy, as it appears to have done in Q4 2009.

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Update 20:03 CST: But when it comes to jobs, we're still up a creek... maybe through 2015.

Latest Cause of Recession: Common Sense

We're still not in a recession: Gross Domestic Product is still growing (1% in 2008 Q1). We haven't even had one quarter of economic shrinkage, let alone two to meet the standard economists' (or CosmoGirl's) defintion of recession. We're still buying more stuff and doing more business than the same period last year, just not as much as various financial interests would like us to.

Yet some pundits insist on calling the current economic situation a recession. Recession or not, why isn't the economy chugging along as vigorously as some would like? I humbly suggest the economy is experiencing a recession of foolishness and a resurgence of common sense:

1. Americans are being "more cautious in their spending and investment, restraining overall economic activity." If "normal" growth of 2.5–3% requires risky mortgages and other unhealthy financial behavior, maybe it's time to redefine "normal."
2. The economy is weak only because we let "market fundamentals" get "badly out of whack." To paraphrase business columnist Steven Pearlstein ["This Recession, It's Just Beginining," Washington Post, 2008.06.27], we did lots of things that don't make sense: consuming more than we produce, overexpanding industries, and pushing real estate values beyond our incomes with bad mortgages. In other words, we spent much of this decade living beyond our means. Restoring common sense means spending less on stuff we don't need... and accepting smaller GDP growth rates for some time.
3. The Big 3 U.S. automakers suffered double-digit declines in sales in April, largely because folks aren't buying trucks and SUVs at the breakneck pace of the 1990s. Toyota sales in April increased 3%. Could it be people are realizing they don't need four-wheel drive to go get groceries in June? When you build your business on irrational desires (as GM, Ford, and Chrysler have) rather than practical needs, common sense and frugality are your worst enemy.

The folks who blindly chant "growth is good" buy into a phony economy. Common sense may not produce double-digit growth, but it does lay the groundwork for a sustainable economy that serves real needs, not simply shareholder portfolios.

Governor Rounds Celebrates Phony Economy

AP reports that Governor Mike Rounds is touting the achievement of the second goal of the 2010 Initiative: increasing South Dakota's gross state product by $10 billion.

Obviously, the governor doesn't read Harper's. The June 2008 edition runs "Our Phony Economy," a reprint of Jonathan Rowe's March 12 testimony before the U.S. Senate. (A free PDF version of the article is available at PeakWatch. You can also read and hear the testimony here.)

Rowe says gross domestic product (that's the national version of Governor Rounds's happy stat) is a terrible measure of the actual wealth of a nation:

Suppose that the head of a federal agency came before this committee and reported with pride that agency employees had burned 10 percent more calories at work last year than they did the year before. Not only that — they had spent 10 percent more money too. I have a feeling you would want to know more. What were these employees doing when they burned those calories? What did they spend that money on? Most important, what were the results? Expenditure is a means, not an end, and to assess the health of an agency, or system, you need to know what it has accomplished, not just how much motion it has generated and money it has spent [Jonathan Rowe, testimony, U.S. Senate Committee on Commerce, Science, and Transportation, 2008.03.12].

Using GDP (or GSP) as a measure of economic success or general welfare ignores all sorts of damage and loss that can udnermine the well-being of a society. The folks up by Thief River Falls who've had to evacuate their homes due to the stink from the Excel Dairy are probably spending more money on food and lodging this week, but it's unlikely they feel their quality of life has increased. Thousands of people going to the hospital for chemotherapy do wonders for the GDP, but more cancer wouldn't exactly be a mark of positive distinction for a society. I could boost the GDP by running around town smashing windows and thus providing a lot of business for the lumberyard, but I think my neighbors would rather I leave my baseball bat at home.

And imagine this: suppose we all got serious about putting an end to our of our personal deficit spending. Suppose people quit using their credit cards and limited their spending to the cash they have on hand. Perfectly reasonable approach to personal finance... and it would bring GDP growth to a crashing halt.

Rowe reminds us that Stanley Kuznets, one of the inventors of GDP, never intended his mathematical construct to be used the way Governor Rounds and pretty much everyone else in government and the media are using it:

Kuznets concluded his report with words that ought to be inscribed on the wall of every office on Capitol Hill and over every computer screen within a twenty-mile radius: "The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above" [Rowe, 2008.03.12].

The Economist's Madelaine Drohan notices that same warning from Kuznets in her 2006 CBC News Viewpoint essay. "Beware of Politicians Who Equate Rising GDP with Happiness," Drohan warns. Beware, indeed. Economic development and quality of life are more than the numbers in Governor Rounds's ledger.

For more from Jonathan Rowe, read his 1999 Washington Monthly essay with Judith Silverstein, "The GDP Myth: Why Growth Isn't Always a Good Thing."