China, Growth, and the Weakness of Real GDP

Sara Hsu asks if All Growth is Good? The Case of China Of course, not all growth is good. It makes little difference, whether it’s economic or human tissue growth. Edward Abbey famously wrote that “growth for the sake of growth is the ideology of the cancer cell”. Obesity is another form of high-growth, yet it hardly improves well-being or health.

Unfortunately, we economists have not (yet?) developed measures that help us or policy-makers distinguish between healthy growth and malignant growth.  The only real comprehensive measure of growth we have is growth of real GDP. We do know better, as Sara notes:

Since the seventies, with the assertion by Gunnar Myrdal that economic development should prioritize equality, economists have increasingly come to believe that not all types of growth are wholly “good.” Growth that ignores human well-being and equality are viewed as problematic.  Certainly growth that results in severe environmental destruction, as in the case of China over the past twenty years, cannot be classified as good, either, despite the country’s much-lauded successes during this period. Real-world views of growth depicted in the mainstream media do not fall in line, however, with the economic development literature. The focus on China’s growth in the news has distracted from a more balanced view of the looming inequality problems or polluting production methods in the world’s most populous nation.  As China’s growth has slowed, headlines have read, “China’s Economic Growth at Stake,” “China’s Economic Growth Slows,” and “China’s Second Quarter Growth Slows.” –

Yes, China’s real GDP growth rate has been spectacular for several decades now. That growth has lifted literally hundreds of millions of people into better lives. Yet, in strange case of the metaphor becoming real, that economic growth has literally brought cancer with it. Specifically, many “cancer villages” along the Huaihe River.

China’s economy illustrates the problem of growth measured in numbers versus measured in real economic change. The surge in fixed asset investment carried out post-global crisis resulted in an inflation of growth figures, despite the creation of uninhabited apartment buildings, or even entire cities. This is socially unproductive growth, wasteful production, “bad” or false growth. Although the distinction between “good” and “bad” growth exists only in theory, it is essential to clarify the difference to the public in order to move along the path of long-term development.

Admittedly, it may be overambitious to request that a more comprehensive view of growth penetrate the media. However, it would benefit our understanding of China’s economic performance; reconceiving growth would increase competition to generate “good” growth and discourage the race to build businesses that produce “bad” growth.

Yes, I agree. It is indeed an ambitious project, the idea that we could create more comprehensive measures of growth that help us to separate healthy improvement in well-being from cancerous, destructive economic growth. But it seems to me no more an ambitious goal than the vision less than 100 years ago to create the national accounts systems and begin collecting the data (from whence we get GDP measures).

GDP for 2nd Qtr: Economy In “Growth Recession” – Very Bad News

The Bureau of Economic Analysis released the “advance estimate” of 2nd Quarter 2011 GDP growth.  The numbers are bad.  Worse than most analysts expected.  I’ll let BEA explain:

Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011,
(that is, from the first quarter to the second quarter), according to the "advance" estimate released by the
Bureau of Economic Analysis.  In the first quarter, real GDP increased 0.4 percent.

A 1.3 percent annualized growth rate is very bad.  Yes, it’s a positive number which indicates real growth and not decline, but it’s not enough to keep people even, let alone putting unemployed people back to work.  What’s worse, the BEA, as part of it’s annual revision process in July of year, revises the past numbers based on better data and better information than what was available at the time.  They revised their estimate of real GDP growth in first quarter 2011 down to 0.4% annualized rate from the previously estimated 1.8%.

Putting both quarters together it means the U.S. economy has grown at a 0.8% growth rate for the first six months of 2011.  As said earlier, yes, that’s a positive number so it indicates “growth”.  But that’s growth in the total or aggregate size of the economy.  During those same six months our population grew at a 1% annualized rate.  So do the math.  The pie is 0.8% bigger but there’s 1% more mouths at the table.  It means less per person.

I’ve mentioned before how economists have an inadequate vocabulary when it comes to describing the condition of the economy.  We tend to use only the terms “recession”, which means decline or negative growth, and “recovery” which technically means “not a recession” or any positive growth rate.  But not all positive growth rates have positive results.

There’s an unofficial term used in economics called a “growth recession”.  A growth recession is when real GDP is growing – the rate is above zero – but it’s too small to really make an improvement in living standards or improvement in employment.  That’s where we’re at now.  We’re in a “growth recession”.  Technically GDP is still growing, but it’s so slow and so weak that unemployment will actually rise.

Today’s news on GDP in first and second quarters has taken many most analysts by surprise.  But it really shouldn’t be a surprise.  The Obama “stimulus” spending program started in 2009, which was way too small to begin with, is being phased out. With it federal government spending in the first six months has actually declined.  The biggest culprit in the weak GDP numbers though is consumption spending by households.  It has come to a virtual standstill at the end of June.  Why?  Well, unemployment is rising again – no jobs, no money to spend.  Unemployment compensation has been cut in many states and many long-term unemployed have run out of benefits.  Again, that cuts spending.  And in Congress, Republicans with Obama’s help have been pushing a cut-spending, cut-deficits agenda.  In economics this is called “contractionary fiscal policy”.  And that’s what we’re getting – a contraction of GDP.  No surprise really.


Downbound Again: GDP in 1st Quarter

Yesterday the “flash” estimate for GDP growth in 1st quarter 2011 was released.  Not good. GDP only grew at a 1.8% annual rate, down from the 3.1% we experienced in the 4th quarter of 2010.  This is very disappointing, but not really surprising. Before I comment, I’ll let CalculatedRisk report and show one of his great graphs.

From the BEA:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2011 (that is, from the fourth quarter to the first quarter) according to the “advance” estimate released by the Bureau of Economic Analysis

GDP Growth RateClick on graph for larger image in graph gallery.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The dashed line is the current growth rate. Growth in Q1 at 1.8% annualized was below trend growth (around 3.1%) – and very weak for a recovery, especially with all the slack in the system.

The graph really puts into context just how slow and disappointing this “recovery” has been.  The recession of 2007-09 (the blue shaded area) was worse than the recessions in the early 1980’s.  But look at how fast the economy was able to recover from those earlier recessions. Growth rates in 1981, 1983, and 1984 were well over 6% and at times over 8%. The economy truly “recovered” the ground lost in the recessions before settling down to the long-term growth trend (the dotted line).  In contrast, we are almost two years into this poorly-named “recovery” and we are struggling to even get up to the long-term growth rate.  We haven’t really recovered at all.

It’s worse, though.  The signs are pointing down.  To recover, we needed to have better than 4th quarter growth.  But instead, things are slowing down.  And they are slowing down despite having gotten some significant stimulus at the beginning of the first quarter.  Remember last December Congress and President extended the large Bush-era tax cuts for the top-bracket income earners.  Republicans told us it was necessary to grow the economy and create jobs.  We also cut the payroll tax for this year only for Social Security as an attempt to stimulate the economy.  The Federal Reserve implemented Quantitative Easing II program throughout the first quarter, promising us it would stimulate the economy. Yet despite these efforts to stimulate the economy, the economy is actually slowing.

Why?  Let’s look at the data.  There’s lots of culprits, but the most significant ones are drops in Investment spending and drops in Government spending. Again, Calculated Risk reports from the  BEA news release yesterday (emphasis mine):

• Investment: Nonresidential structures decreased 21.7 percent… and real residential fixed investment decreased 4.1 percent.

Government spending subtracted 1.09 percentage points in Q1 (unusual)

Basically it’s two big things.  First, Investment spending is decreasing overall, not increasing.  The exceptions were increases in inventories (business probably expected more sales than they got) and sales of software grew.

The second one is the disappointing one.  Government spending dropped so much that it subtracted 1.09 percentage points from the growth rate.  In other words, instead of the weak 1.8% growth rate, we could have had at least a 2.9% growth rate if only we had kept government spending unchanged.  Instead we have been cutting government spending like mad.  The federal government’s 2009 stimulus bill is over. The spending’s gone and now total spending is declining.  More significant is that state and local governments are cutting spending big time.  And state and local governments are cutting business taxes so that they have cut to spending even more.

It’s really not a surprise.  We’ve known for at least 75 years that cutting government spending is contractionary – it slows the economy.  Yet our so-called leaders in Washington persist in cutting right now at a time when the economy needs help, not hindrance.  All the first quarter numbers have proven is that, yes, contractionary fiscal policy (cutting spending and cutting the deficit) is indeed contractionary.  Well duh.  What is amazing is how so many politicians and businesspeople and bankers keep claiming that somehow, someway, if we cut spending and the deficit, some magic “confidence fairy” will inspire the entire economy to grow despite a lack of demand.

As Brad Delong put it:

Contractionary fiscal policy is contractionary.

With overall government spending on the decline and with severe aftershocks from the Japanese earthquake and rising oil prices, we’re down-bound again.  Buckle up.

Technology, Growth and Printing Press

We know that new technology and information technology in particular can spark enormous long-run economic growth. Today we’re in the middle of an explosion of new info technologies based on computers, networks, and the Internet.  The last time the world experienced a similar phenomenon was probably the invention of printing via moveable type by Gutenberg in Mainz, Germany around 1450.

A new study of the diffusion, spread, and growth triggered by printing at the city level is summarized at voxeu.orgInformation technology and economic change: The impact of the printing press.

Part of what’s new here is the study of growth at the city-level.  A few interesting observations:

I find that cities in which printing presses were established 1450-1500 had no prior growth advantage, but subsequently grew far faster than similar cities without printing presses. …The estimates suggest early adoption of the printing press was associated with a population growth advantage of 21 percentage points 1500-1600,

…Printing presses were not set down at random across European cities. Cities that adopted the printing press 1450-1500 subsequently enjoyed unusual dynamism.

…Cities that adopted print media benefitted from positive spillovers in human capital accumulation and technological change broadly defined. These spillovers exerted an upward pressure on the returns to labour, made cities culturally dynamic, and attracted migrants.

The paper includes some nice maps showing the spread of printing through Europe 1450-1500.

Overall, I think one lesson we can take away is that it does make sense for cities/small states to invest in creating conditions and early adoption of new technology.  This is another role for government. Leaving adoption to the random effects of a totally private market risks letting the growth go to other cities/states.