Doug Henwood's Blog, page 65

Fresh audio product

Just added to my radio archives:

August 22, 2013 Darius Charney of the Center for Constitutional Rights on the NYPD’s odious stop & frisk strategy • Philip Mirowski, author of Never Let A Serious Crisis Go To Waste, on the durable ideology of neoliberalism

Socialize housing finance! [by Michael Pollak]

This lbo-news guest post is written by Michael Pollak, a writer living in New York.

Some kinds of socialism make simple financial sense. We start with something we all need, like housing, or health care, or old age pensions. Then we all pool our money and pay for it. We all know how this works for single-payer health insurance. How would it work for housing?

The original Fannie Mae (full name: Federal National Mortgage Association), as set up under FDR in 1938, was a pretty good equivalent of a single-payer housing system. It was a government agency which bought all home mortgages which certain other agencies (the Federal Housing, Veterans and Farm Agencies) had insured. They inspected you and the property, ensured sure both were good risks, and insured your payments in exchange for a continual small percentage fee. Fannie Mae then gave the local bank money or a security and took the mortgage in return.

In single payer health care, you go to the doctor, the government pays, and we pay the government in the form of taxes. Here, the government buys the mortgage from the bank who sells it to you, and this keep your mortgage payments down. The initial affordability gain was enormous, thanks to the FHA having recently introduced the 30-year self-amortizing (i.e., fixed payment) mortgage—before Fannie and the FHA, most payment plans were impossible for most people, with 50% down payments and balloon payments at the end. And the system was safe as houses. For the next 30 years the insurance agencies and Fannie were not only self-financing, they consistently made more than they spent, which provided a substantial buffer to protect them in down markets, even while their monopoly kept mortgage prices low.

Fannie was “privatized” in 1968 for the most trivial, short-termist and ultimately futile of reasons: to make the Johnson administration look good for the 1968 election. Back then, running a budget deficit was a serious campaign liability, like sexting is today. Johnson felt he had to close it. But he didn’t want to raise taxes, curtail the war, or curtail the war on poverty, all of which would have been liabilities as well. So he cut a hundred million here and two hundred there through a fistful of budgeting gimmicks like deferring highway expenditures for six months. And one of these gimmicks was to “sell” Fannie to a “private” company the government created (“5 Dumb Fannie Mae Bailout Assertions That Are Actually Secretly Smart!”). It was intended to change nothing in its functioning.  The sale of its huge assets for one-time income of $160 million was all to help that year’s budget. (You will often read that Johnson privatized Fannie to “get it off the books,” which implies it was a huge debt liability. That’s exactly wrong. Johnson’s whole motivation was based on the fact that Fannie was making money. It wouldn’t have made sense otherwise.)

In succeeding years, a series of  things happened (“History of the Government Sponsored Enterprises”) which really made Fannie and its much younger sibling Freddie Mac (founded in 1970 and from the first a private corporation, though federally sponsored) more and more like normal companies. (Normal companies that financial markets always believed had an unspoken federal guarantee.) And finally, 40 years of transformation later, they ended up doing an entirely normal company thing: they leapt in late in a bubble screaming “Me too!” and died a semi-normal death.

They were put in into “conservatorship” in July 2008, which means the feds now effectively own both Fannie and Freddie.

So what is to be done? When you take this long view, the obvious thing would seem to be go back to 1967, when things worked perfectly, because they could work even better now. In the age of technology, conforming mortgages are so simple that all you need is a well-oiled bureaucracy. (Conforming mortgages, as defined by Fannie Mae, have standard debt-to-income ratio limits, documentation requirements, and a maximum loan amount.) A competent clerk can figure out in minutes whether the odds of you paying your mortgage back are greater than the interest rate using their laptop. In fact, Fannie Mae has been doing this since the late 1990s using their own program called “Desktop Underwriter.” The data has to be confirmed, but that was originally chiefly the job of the agencies who insured the mortgages. There’s no reason it couldn’t be again.

Basically you don’t need mortgage banks for conforming mortgages, which are now commodities. But to make a new, reunified Fannie conceivable even in our dreams, let’s stick to the single-payer model instead of going on to Britain’s NHS.  We’ll keep the mortgage banks and let them originate conforming mortgages. We’ll closely regulate their practices via the Consumer Protection Agency that Elizabeth Warren created. (It’s part of their brief already. And while we’re dreaming, we’ll make it an independent agency.) And then we’ll keep mortgage interest down by giving the now reunified and socialized Fannie a monopoly on buying these mortgages from banks. By these mortgages, I mean homes people live in (not second properties) that aren’t mansions—about 60% of the market. Landlords, speculators and rich people don’t need our collective aid.

There’s only thing we’d have to change from the pre-1968 period. Back then, Fannie bought the mortgages and held them to maturity, living off the steady payments. It was a great and simple business model. They only accepted rock solid mortgages, their portfolio was gigantic, and it was diversified to the greatest extent conceivable. So default and prepayment risks could be calculated to a hair and incorporated in the rates and buffer.

But one key thing has changed since then. The end of Bretton Woods brought us the world of gyrating interest rates, and with it, interest rate risk. In fact, the real pressure that transformed Fannie into a normal looking-and-acting company was that these gyrating interest rates killed its old business model of buy-and-hold during the 1970s.

The solution to that problem is securitization. Essentially New Unified Fannie says to investors: “We’ll keep the default and prepayment risk we’re comfortable with—we’ll guarantee them—and you take the interest rate risk off our hands.” If we keep that one change, but otherwise return to the original model of a unified, monopoly, government agency, we’ve essentially recreated the original FDR model, souped up only slightly for the post-Bretton Woods world.

Of course, mortgage-backed securitization has a terrible name now, but that’s because there were shit mortgages at the bottom of it. If all you securitize are widely diversified conforming mortgages, the resulting securities are just as solid as they are. And will be eagerly sought by bond buyers who live to trade interest rate risk.

So that’s the obvious solution to Fannie’s woes. We should declare that the privatization of normal, owner-occupied mortgages is a 40-year-old experiment that has spectacularly failed. And we should go back mutatis mutandis to the previous New Deal model that worked. We should siphon off the interest rate risk through securitization, and then the new Super Fannie can go back to sitting like a brood hen on the nation’s nest eggs.

So what have Obama and the ruling class decided? Exactly the opposite: to wind down Fanny and her brother so as to leave everything to the private markets—even more than before.  The Corker–Warner Bill (S. 1217), introduced on June 25, and publicly endorsed by Obama on August 6, proposes to wind both down “no later than five years after passage.” Obama makes clear that the primary reason for this unwinding is “to protect the American taxpayer.”  But how on earth is the taxpayer protected by returning to—nay intensifying—the free market dynamics that crashed so spectacularly?

Primarily this is the result of instinct and inertia. Obama is the anti-FDR. Facing the biggest financial crisis in 2 generations, and hence a momentous chance to really change things, he has done everything he can to restore the status quo ante. But to the extent anyone is really thinking about this, rather than just oiling us, this policy choice represents a complete misreading of every lesson we should have learned from this crisis.

The Lesson We Seem to Have Learned


The Obvious Opposite Lesson We Should Have Learned

Government Entities Increase Risk Because We Have To Bail Them Out

Every single entity we bailed out including Fannie and Freddie was private. Lesson: making large financial entities private doesn’t protect the government of the future one bit from having to bail them out if they cause a crisis.

Bailouts are huge and expensive costs to the taxpayer and we must do everything we can to avoid them

The government is making money on every single part of the bailout including Fannie and Freddie. Lesson: A well managed bailout doesn’t cost anything. What costs money is the economic slump a financial crisis can cause. That’s the risk we want to minimize.

Fannie and Freddie failed because they were private entities living on the public tit, unfairly making extra profits through the implicit promise the government would save them.

Fannie and Freddie didn’t fail because they harvested unfair rents. They failed because they were tasked with returning profits and dividends to the private market. That’s the part we need to remove. Instead we’re doing exactly the opposite.

New Unified Fannie should have two stated goals: to minimize mortgage rates, and to buffer itself (and ourselves) against downturns. The monopoly rent is a feature. It is the source of the buffer funds.

There is, however, one thing everyone today agrees on about the Corker-Warner-Obama plan: it will make mortgages more expensive. So the ruling class proposal fails the only two goals we say we have, to make mortgages more affordable, and to protect the taxpayers from risk. But hey, that’s capitalism for you. Anything better is called socialism.

Socialize housing finance!

This lbo-news guest post is written by Michael Pollak, a writer living in New York.

Some kinds of socialism make simple financial sense. We start with something we all need, like housing, or health care, or old age pensions. Then we all pool our money and pay for it. We all know how this works for single-payer health insurance. How would it work for housing?

The original Fannie Mae (full name: Federal National Mortgage Association), as set up under FDR in 1938, was a pretty good equivalent of a single-payer housing system. It was a government agency which bought all home mortgages which certain other agencies (the Federal Housing, Veterans and Farm Agencies) had insured. They inspected you and the property, ensured sure both were good risks, and insured your payments in exchange for a continual small percentage fee. Fannie Mae then gave the local bank money or a security and took the mortgage in return.

In single payer health care, you go to the doctor, the government pays, and we pay the government in the form of taxes. Here, the government buys the mortgage from the bank who sells it to you, and this keep your mortgage payments down. The initial affordability gain was enormous, thanks to the FHA having recently introduced the 30-year self-amortizing (i.e., fixed payment) mortgage—before Fannie and the FHA, most payment plans were impossible for most people, with 50% down payments and balloon payments at the end. And the system was safe as houses. For the next 30 years the insurance agencies and Fannie were not only self-financing, they consistently made more than they spent, which provided a substantial buffer to protect them in down markets, even while their monopoly kept mortgage prices low.

Fannie was “privatized” in 1968 for the most trivial, short-termist and ultimately futile of reasons: to make the Johnson administration look good for the 1968 election. Back then, running a budget deficit was a serious campaign liability, like sexting is today. Johnson felt he had to close it. But he didn’t want to raise taxes, curtail the war, or curtail the war on poverty, all of which would have been liabilities as well. So he cut a hundred million here and two hundred there through a fistful of budgeting gimmicks like deferring highway expenditures for six months. And one of these gimmicks was to “sell” Fannie to a “private” company the government created (“5 Dumb Fannie Mae Bailout Assertions That Are Actually Secretly Smart!”). It was intended to change nothing in its functioning.  The sale of its huge assets for one-time income of $160 million was all to help that year’s budget. (You will often read that Johnson privatized Fannie to “get it off the books,” which implies it was a huge debt liability. That’s exactly wrong. Johnson’s whole motivation was based on the fact that Fannie was making money. It wouldn’t have made sense otherwise.)

In succeeding years, a series of  things happened (“History of the Government Sponsored Enterprises”) which really made Fannie and its much younger sibling Freddie Mac (founded in 1970 and from the first a private corporation, though federally sponsored) more and more like normal companies. (Normal companies that financial markets always believed had an unspoken federal guarantee.) And finally, 40 years of transformation later, they ended up doing an entirely normal company thing: they leapt in late in a bubble screaming “Me too!” and died a semi-normal death.

They were put in into “conservatorship” in July 2008, which means the feds now effectively own both Fannie and Freddie.

So what is to be done? When you take this long view, the obvious thing would seem to be go back to 1967, when things worked perfectly, because they could work even better now. In the age of technology, conforming mortgages are so simple that all you need is a well-oiled bureaucracy. (Conforming mortgages, as defined by Fannie Mae, have standard debt-to-income ratio limits, documentation requirements, and a maximum loan amount.) A competent clerk can figure out in minutes whether the odds of you paying your mortgage back are greater than the interest rate using their laptop. In fact, Fannie Mae has been doing this since the late 1990s using their own program called “Desktop Underwriter.” The data has to be confirmed, but that was originally chiefly the job of the agencies who insured the mortgages. There’s no reason it couldn’t be again.

Basically you don’t need mortgage banks for conforming mortgages, which are now commodities. But to make a new, reunified Fannie conceivable even in our dreams, let’s stick to the single-payer model instead of going on to Britain’s NHS.  We’ll keep the mortgage banks and let them originate conforming mortgages. We’ll closely regulate their practices via the Consumer Protection Agency that Elizabeth Warren created. (It’s part of their brief already. And while we’re dreaming, we’ll make it an independent agency.) And then we’ll keep mortgage interest down by giving the now reunified and socialized Fannie a monopoly on buying these mortgages from banks. By these mortgages, I mean homes people live in (not second properties) that aren’t mansions—about 60% of the market. Landlords, speculators and rich people don’t need our collective aid.

There’s only thing we’d have to change from the pre-1968 period. Back then, Fannie bought the mortgages and held them to maturity, living off the steady payments. It was a great and simple business model. They only accepted rock solid mortgages, their portfolio was gigantic, and it was diversified to the greatest extent conceivable. So default and prepayment risks could be calculated to a hair and incorporated in the rates and buffer.

But one key thing has changed since then. The end of Bretton Woods brought us the world of gyrating interest rates, and with it, interest rate risk. In fact, the real pressure that transformed Fannie into a normal looking-and-acting company was that these gyrating interest rates killed its old business model of buy-and-hold during the 1970s.

The solution to that problem is securitization. Essentially New Unified Fannie says to investors: “We’ll keep the default and prepayment risk we’re comfortable with—we’ll guarantee them—and you take the interest rate risk off our hands.” If we keep that one change, but otherwise return to the original model of a unified, monopoly, government agency, we’ve essentially recreated the original FDR model, souped up only slightly for the post-Bretton Woods world.

Of course, mortgage-backed securitization has a terrible name now, but that’s because there were shit mortgages at the bottom of it. If all you securitize are widely diversified conforming mortgages, the resulting securities are just as solid as they are. And will be eagerly sought by bond buyers who live to trade interest rate risk.

So that’s the obvious solution to Fannie’s woes. We should declare that the privatization of normal, owner-occupied mortgages is a 40-year-old experiment that has spectacularly failed. And we should go back mutatis mutandis to the previous New Deal model that worked. We should siphon off the interest rate risk through securitization, and then the new Super Fannie can go back to sitting like a brood hen on the nation’s nest eggs.

So what have Obama and the ruling class decided? Exactly the opposite: to wind down Fanny and her brother so as to leave everything to the private markets—even more than before.  The Corker–Warner Bill (S. 1217), introduced on June 25, and publicly endorsed by Obama on August 6, proposes to wind both down “no later than five years after passage.” Obama makes clear that the primary reason for this unwinding is “to protect the American taxpayer.”  But how on earth is the taxpayer protected by returning to—nay intensifying—the free market dynamics that crashed so spectacularly?

Primarily this is the result of instinct and inertia. Obama is the anti-FDR. Facing the biggest financial crisis in 2 generations, and hence a momentous chance to really change things, he has done everything he can to restore the status quo ante. But to the extent anyone is really thinking about this, rather than just oiling us, this policy choice represents a complete misreading of every lesson we should have learned from this crisis.

The Lesson We Seem to Have Learned


The Obvious Opposite Lesson We Should Have Learned

Government Entities Increase Risk Because We Have To Bail Them Out

Every single entity we bailed out including Fannie and Freddie was private. Lesson: making large financial entities private doesn’t protect the government of the future one bit from having to bail them out if they cause a crisis.

Bailouts are huge and expensive costs to the taxpayer and we must do everything we can to avoid them

The government is making money on every single part of the bailout including Fannie and Freddie. Lesson: A well managed bailout doesn’t cost anything. What costs money is the economic slump a financial crisis can cause. That’s the risk we want to minimize.

Fannie and Freddie failed because they were private entities living on the public tit, unfairly making extra profits through the implicit promise the government would save them.

Fannie and Freddie didn’t fail because they harvested unfair rents. They failed because they were tasked with returning profits and dividends to the private market. That’s the part we need to remove. Instead we’re doing exactly the opposite.

New Unified Fannie should have two stated goals: to minimize mortgage rates, and to buffer itself (and ourselves) against downturns. The monopoly rent is a feature. It is the source of the buffer funds.

There is, however, one thing everyone today agrees on about the Corker-Warner-Obama plan: it will make mortgages more expensive. So the ruling class proposal fails the only two goals we say we have, to make mortgages more affordable, and to protect the taxpayers from risk. But hey, that’s capitalism for you. Anything better is called socialism.

Fresh audio product

First there was a vacation, then some fundraising at KPFA, and then some delay on my part—but finally some fresh material posted to my radio archives.

But first, a word to our sponsors. If you like these shows and want to keep them coming, then please support KPFA. I doubt I’d continue doing them if it weren’t for KPFA, and KPFA does a lot of great broadcasting for the other 167 hours of the week: Support KPFA… Online!

Ok, now the shows:

August 15, 2013 Thomas Sugrue, author of The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit, on the long history behind that city’s bankruptcy filing • Alfred Blumstein on crime and punishment stats

August 8, 2013 Penny Lewis, author of Hardhats, Hippies, and Hakws: The Vietnam Antiwar Movement as Myth and Memory,on how elites didn’t oppose that war and the working class didn’t support it, and what that means today

The decline & fall of WBAI

My piece on the decline and fall of WBAI (“The Excruciating Demise of WBAI”) is up at the New York Observer. I wouldn’t choose the word “demise” myself, since it’s not over yet.

Rasmus: my last word

The previous post is Jack Rasmus’ return of fire. Here’s my last word.

Rasmus: “YOU REFERENCE ‘IP PRODUCT’ (COPYRIGHTS, MOVIES, ETC.) AS “THE MAJOR CONCEPTUAL CHANGE” IN THE REVISIONS, PROVIDING ONLY MINOR BOOSTS TO GDP.  BUT THAT’S NOT CORRECT.  IP PRODUCT RELATED CHANGES ONLY ADDED 0.5% OF THE 3.6% IN 2012 UPWARD REVISIONS.  AGAIN, THE BIGGEST FACTOR WAS ‘R&D EXPENSING’, NOT IP PRODUCT INCLUSION.”

R&D is part of the new category, “IP Product.” Is it really too much to expect a self-identified “professor of political economy” (though I hear he’s actually nothing of the sort) to read the news release with the definitions? Here it is, straight from the horse’s mouth (News Release: Gross Domestic Product):

In the NIPA fixed investment tables, a new category of investment, “intellectual property products,” consists of research and development; entertainment, literary, and artistic originals; and software.

Carry on, Jack. I don’t know why anyone published your original piece in the first place, but taste is at least as difficult to account for as national income.

Rasmus returns fire

This just in from Jack Rasmus, responding to my response to his critique. This is about to get too meta for me, so after this, and a very brief response, I’m declaring hostilities over. Here it is, without a lick of editing.

 

In our continuing debate on the significance of the recent revisions to US GDP, Doug Henwood has published on his blog his second reply to my counter to his critique of my original piece.  The following is my second reply to his more rational (less personalized and polemical tone) second critique. My responses are in ALL CAPS to his preceding paragraphs.(Hopefully he’ll allow this to be shared by his readers as well).

 

“Here’s my response to Jack Rasmus’ complaint. His words are in purple italics; mine, in normal type.

 

GDP for 2012, as I pointed out in my prior article, ‘Economic Recovery by Statistical Manipulation’, was raised by almost 33% as a result of the BEA revisions–from the 2.1% annual growth to 2.8%.

 

OK, DOUG. YOU GOT ME. I DIDN’T ADD THE WORD, ‘RATE’, TO THE WORD GROWTH. I ASSUMED READERS ARE ASTUTE ENOUGH TO RECOGNIZE THAT NUMBERS LIKE 2.1% AND 2.8% REPRESENT RATE. I DIDN’T SAY $16 TRILLION TO $25 TRILLION, WHICH WOULD HAVE BEEN A REFERENCE TO A 33% GDP LEVEL AND NOT A RATE.  BUT IF YOU THINK THAT IS A MISREPRESENTATION, GO FOR IT.

 

GDP wasn’t revised up by almost 33%—it was more like a tenth that. Rasmus means that the growth rate was revised up by 33% (no almost about it). It’s a minor error, but telling, and one he repeats several times.

 

WHERE WE DIFFER IS YOU THINK A $559 BILLION 2012 UPWARD REVISION OF GDP IS NOT SIGNIFICANT, WHEREAS I DO. THAT’S A 3.6% GDP 2012 INCREASE. AND THE FACT THAT 2.5% OF THAT 3.6% REFLECTS ‘EXPENSING’ OF R&D, NOW COUNTED AS INVESTMENT, IS ALL THE MORE SIGNIFICANT.  REAL INVESTMENT IN GOODS AND SERVICES HAS BEEN DECLINING IN THE US, AS US CORPORATIONS SHIFT MORE OF THEIR INVESTMENT OFFSHORE. THE IMPACT ON JOBS IS SIGNIFICANT.  BY ALLOWING ‘EXPENSING’ OF R&D, AND OTHER ‘INTANGIBLES’ COUNT AS INVESTMENT, IT MAKES IT APPEAR THE ECONOMY IS GROWING WHILE THE RATIO OF JOBS TO INVESTMENT IS FALLING. YOU SEE NOTHING WRONG WITH THAT; I DO.

 

Moreover, the consensus forecasts by economists for the recent 2nd quarter 2013, which averaged 0.9% according to the Reuters survey, came in at nearly twice that, at 1.7%, due to the revisions. This is not a normal upward revision, most of which made in previous years by the BEA had very little effect on GDP numbers.

 

Economic stats frequently depart from consensus projections. In fact, trying to beat consensus estimates and bet you’re right and the market is wrong is a major pastime on Wall Street. Also, there were no “revisions” involved. This was the first estimate for the second quarter, so there’s nothing to revise. Rasmus may mean that the changes to the definition of GDP were responsible for the above-consensus result, but if you strip out the gain in the new IP product sector, the major conceptual change, the growth rate would have been roughly 1.6%, all of 0.1 point below the actual number.

 

YOU REFERENCE ‘IP PRODUCT’ (COPYRIGHTS, MOVIES, ETC.) AS “THE MAJOR CONCEPTUAL CHANGE” IN THE REVISIONS, PROVIDING ONLY MINOR BOOSTS TO GDP.  BUT THAT’S NOT CORRECT.  IP PRODUCT RELATED CHANGES ONLY ADDED 0.5% OF THE 3.6% IN 2012 UPWARD REVISIONS.  AGAIN, THE BIGGEST FACTOR WAS ‘R&D EXPENSING’, NOT IP PRODUCT INCLUSION. AND THAT’S A SLIPPERY SLOPE, POINTING TOWARD ADDING MORE BUSINESS ‘EXPENSES’ AS INVESTMENT IN THE FUTURE TO ARTIFICIALLY BOOST (NON-JOB CREATING) INVESTMENT AND GDP. HOW FAR SHOULD THE INCLUSION OF ‘INTANGIBLES’ GO TO BOOST INVESTMENT? SHOULD THEY INCLUDE THE VALUE OF COMPANY ‘BRANDS’ AND ‘GOOD WILL’ AS CATEGORIES OF INVESTMENT—TO COVER UP THE FACT REAL, JOB CREATING INVESTMENT IS BEING INCREASINGLY SHUFFLED OFFSHORE, OR TO ALLOW CORPORATIONS TO LAY TAX DEDUCTION CLAIMS TO INVESTMENT TAX CREDITS?

 

In other words, the massive upward revision to GDP in the 2nd quarter, as reported by the BEA, appears largely attributable to its revisions to how investment is defined. If how we define investment can have that big an impact on GDP, the changes should not be accepted without challenge.

He liked this argument so much he had to repeat it, but there were  no “revisions” in any direction to 2nd quarter GDP, since this is the first we’ve heard of it. The first estimate will be revised next month, and we’ll see if it’s up or down.

 

AGAIN, THE RECALCULATIONS OF GDP HAD TO HAVE HAD A MAJOR IMPACT ON 2ND QUARTER GDP RESULTS.  EXACTLY HOW MUCH IS STILL UNCLEAR. BUT IT MUST HAVE BEEN SIGNIFICANT. MOST OF THE 1.7% GDP INCREASE APPEARS DERIVED FROM INVESTMENT—AFTER INVESTMENT (OLD DEFINITION) HAD BEEN SLOWING NOTICEABLY THE PREVIOUS SIX MONTHS (INVENTORIES, COMMERCIAL AND GOVT CONSTRUCTION, SOME EQUIPMENT).

 

YES, THERE WILL BE SUBSEQUENT ‘REVISIONS’ TO THE PRELIMINARY DATA FOR 2ND QUARTER GDP, BUT THAT’S NOT THE ‘REVISIONS’ IN THE REDEFINITIONS OF INVESTMENT RELEASED BY THE BEA. THE TWO ARE DIFFERENT.

 

My article has raised some hackles in some quarters, including among some segments of the ‘liberal left’ that continues to be apologetic for the Obama administration despite its abysmal record economically, in terms of civil rights, wars, concessions to corporations, and so forth for the past five years.

 

Is Rasmus calling me an Obama apologist? That’s funny.

 

NO IT’S NOT FUNNY. I WON’T MENTION THE MAGAZINES WITH WHICH YOU’RE ASSOCIATED THAT REPEATEDLY APOLOGIZE FOR THE OBAMA ADMINISTRATION.

 

Some among them claim I am arguing there is a ‘conspiracy’ to falsely boost GDP by the Obama administration.

 

Saying they “manipulate” and “rewrit[e] the numbers to make failure go away” sounds pretty  close to a conspiracy (from the thesaurus: “plot, scheme, plan, machination, ploy,trick, ruse, subterfuge”) to me.

 

ALL STATISTICS ARE BE DEFINITION A MANIPULATION OF RAW DATA. ALL REVISIONS ARE REWRITES OF PAST DATA.  IT’S IN THAT SENSE THAT I’VE USED THE TERMS.  AND THE BOOSTS TO GDP FROM THE REVISIONS CERTAINLY MAKE IT LOOK LIKE THE DISMAL ECONOMIC RECOVERY OF RECENT YEARS WASN’T ALL THAT BAD.

 

Much of the increase in investment by the BEA’s redefinition is associated with research and development expenditures by business. The BEA previously considered R&D an ‘expense’. Now it’s an investment. Where does the slippery slope of redefining expenses as investment stop? Obama has proposed in his 2014 budget to significantly increase tax credits to businesses for R&D expenses. That will significantly boost R&D investment. That spending in turn will boost GDP still further in months to come. Does anyone naively think the two developments are completely unrelated? It’s not paranoid to raise the point.

 

Actually they probably are completely unrelated. Also, what Obama proposes often has a hard time getting through Congress, and while R&D tax credits probably aren’t massively effective, they probably do raise research spending some (see “Do Tax Credits Stimulate R&D Spending?”). And that spending includes buying equipment and hiring scientists, which is economically stimulative—and if the research has any payoff, might lead to some actual innovations, which could be additionally stimulative. But elections and the prestige of American capitalism won’t turn on the results. Most people will hardly notice.

 

DO YOU REALLY THINK TEAPUBLICANS IN THE US HOUSE WILL REJECT HIS OFFER TO SIGNIFICANTLY BOOST R&D TAX CREDITS HE (OBAMA) HAS ALREADY OFFERED UP IN HIS 2014 BUDGET PROPOSALS? OR HIS OFFER TO CUT THE CORPORATE TAX RATE FROM 35% TO 28%. OR HIS VARIOUS OTHER BUSINESS TAX CUT PROPOSALS HE UNILATERALLY OFFERED IN HIS MARCH 2014 BUDGET? TO ARGUE THAT BUSINESS TAX CUTS CREATE JOBS IS A REPUBLICAN-CORPORATE CLAIM THAT HAS LITTLE SUBSTANCE IN RECENT DECADES. THE US HAS PASSED TRILLIONS OF DOLLARS IN CORPORATE AND INVESTOR TAX CUTS, AND WE’VE LOST 7 MILLION JOBS IN MANUFACTURING AND MILLIONS MORE IN CONSTRUCTION. AT LEAST THE CORRELATION BETWEEN THE TWO DOES NOT SUPPORT A VIEW THAT ‘BUSINESS TAX CUTS CREATE JOBS’.

 

INVESTMENT TAX CUTS (LIKE R&D) MORE OFTEN RESULT IN JOB LOSSES, NOT GAINS.  THEY MAY RESULT IN BUSINESSES HIRING A FEW RESEARCHERS, TO DEVELOP NEW PROCESSES OF PRODUCTION THAT SUBSTITUTE CAPITAL FOR LABOR—A RECOGNIZED MAJOR SOURCE OF JOB LOSS IN THE US THE PAST TWO DECADES MATCHED ONLY BY FREE TRADE RELATED JOB LOSS.

 

DO YOU REALLY THINK ‘MOST PEOPLE WILL HARDLY NOTICE’ THIS?  YOU SEEM TO STRONGLY SUGGEST IT WILL ALL RESULT IN MORE ‘ADDITIONAL STIMULUS’. I DON’T AGREE.

 

Nevertheless, my critics—some New York left liberal types in particular—insist on defending the BEA and the administration.

 

Busted. We plotted this response out yesterday afternoon over cronuts and pour-over coffee at an undisclosed location in Brooklyn.

 

WHETHER YOU HAD COFFEE OR NOT I DON’T KNOW..BUT YOU ARE ON RECORD REPEATEDLY DEFENDING THE BUREAUCRACY AS A-POLITICAL CIVIL SERVANTS. THE DAY TO DAY WORKERS THERE, I AGREE ARE NO DOUBT HONEST AND HARD WORKING. BUT THEY DON’T CALL THE SHOTS.  THERE’S BIG CORPORATE TAX CUT LARGESSE IN THESE GDP CHANGES. MORE R&D EXPENSING MEANS MORE R&D TAX CUTS MEANS LARGER DEPRECIATION BUSINESS SLUSH FUNDS.

 

These critics think that adding more than $500 billion to 2012 GDP is normal. They point out that the BEA revisions had little effect on long run GDP since the 1960s. That’s true. But the changes have had a big impact on GDP since the so-called end of the Great Recession in 2009, and especially in the latest 18 months. They are ‘frontloaded’, in other words, having their greatest effect on GDP during the ‘recovery’ period since 2009, during which time it has become clear neither fiscal or monetary policies have done much to generate a sustained economic recovery. So that the 33%-50% boost to GDP in the last 18 months does result in making the failure at recovery appear significantly less so. To point that out is to engage in ‘agitprop’, I’m told.

 

The revisions do nothing to change the picture of the 2009–2010 recession as the worst in modern history, nor does it change the current recovery’s status as the weakest.

 

SEEMS LIKE YOUR REPLY DUCKED MY POINT HERE. MAYBE I MISSED SOMETHING.

 

Critics also pooh pooh my point that gross domestic income, GDI, is rising faster than GDP, even though the likes of Bernanke, chair of the Federal Reserve, does not think the trend is unimportant—as I quoted him in my original article. Something of import is going on here, between gross domestic income (GDI) and gross domestic product (GDP). The historical ratios between the two are changing in the last decade. But why so, we should ask? In reply to my critics, of course incomes from capital gains, dividends, etc. are not directly included in GDP calculations.

“Of course”? Your original piece didn’t read as if you knew this. And the “directly” is superfluous.

 

NO, ‘DIRECTION’ IS NOT SUPERFLUOUS. CLEARLY, THE GDP REVISIONS HAVE RESULTED IN AT LEAST A $250 BILLION BOOST TO DEPRECIATION NUMBERS IN 2012, AND DEPRECIATION IS JUST A FUND FOR PROFITS EARMARKED FOR FUTURE INVESTMENT. SO THE REVISIONS DO RAISE GDI. BUT I’M MORE CURIOUS ABOUT HOW GDI MAY BE GROWING DUE TO NON-PRODUCTION ACTIVITY.

 

The differences between GDI and GDP are a favorite topic of data connoisseurs. Fed economist Jeremy Nalewaik has written several papers arguing, among other things, that GDI may be more accurate, especially at business cycle turning points, than GDP. (Here’s a ‎paper [PDF] and here’s an interview.)

 

But the BEA revisions, by increasing investment, do raise corporate profits (as Dean Baker has correctly pointed out, by more than $250 billion in 2012 alone). Corporate profits then get distributed to shareholders in the form of dividends and other capital gains. Raising investment by redefinition raises profits, which raises the distribution of those profits in the form of dividends, capital gains, etc. Ok, that direction of causation is clear.

 

Raising investment raises profits? Really? Not all investments are profitable, and sometimes profits can be raised, at least in the short term, by stinting on investment. There’s quite a bit of that going on right now, in fact. And Rasmus is slipping capital gains back into the national income accountants’ definition of income, which is wrong.

 

DEPRECIATION IS A FORM OF PROFITS (I ASSUME YOU’RE STRONGLY DISAGREE), THAT FINANCES FUTURE INVESTMENT THAT OFTEN (NOT ALWAYS) BOOSTS SUBSEQUENT PROFITS.  AND WE SHOULD LOOK MORE CLOSELY AT HOW MULTINATIONAL CORPORATIONS MANIPULATE THEIR PRICING AND DATA TO TAKE ADVANTAGE OF REVENUE SHIFTING TO REDUCE TAXES. (MY GOSH, DO MNCs REALLY MANIPULATE PRICING AND REVENUE TO EXPLOIT TAX LOOPHOLES!). YOU HAVEN’T ADDRESSED MY PRIOR SUGGESTION THAT NON-GDI INCOME MAY BE SHIFTING INTO GDI, CAUSING GDI TO RUN AHEAD OF GDP.

 

So there could be a motive for counting profits from financial speculation as part of GDI, which might explain why BEA corporate profits (and GDI) are running ahead of GDP in recent years. It’s a legitimate question to raise, and doing so is not to suggest ‘conspiracy’ or reflect ‘paranoia’.

Sometimes GDP runs ahead of GDI, and sometimes GDI runs ahead of GDP. GDI grew more quickly than GDP in 2006, but GDI lagged GDP in 2007—which is often what happens before a recession, and Nalewaik has shown. GDP ran ahead of GDI for much of 2012, as well, a portent of the recent slowdown.

 

GDI LAGGED GDP IN 2007 PERHAPS BECAUSE FINANCIAL PROFITS COLLAPSED FASTER THAN REAL GDP.

 

There are serious problems with GDP reporting if GDI is somehow rising faster than the value of those goods and services themselves. But critics of my view believe that to raise such questions is to ‘insult their friends at the BEA who are all skilled and honest servants’, as one of my ‘left liberal’ critics puts it in a recent reply to my article.

 

They are skilled and honest public servants. I’m guessing Rasmus never actually spoke with one.

 

FOR THE RECORD, OF COURSE. BUT SO WHAT, THOSE THAT TALK TO THE PUBLIC DON’T MAKE OR CHANGE THE RULES. THE POLITICO APPOINTEES DO THAT RUN THE AGENCIES.

 

To say now, as the BEA is saying with its recent GDP revisions, that ‘expenses’ constitute investment is a major shift of definition of GDP. It has resulted in a record upward revision of the numbers, and a slippery slope to further false upward revisions that will follow no doubt.

 

This “record upward revision” has done almost nothing to change the growth numbers over the long term, and the changes to recent figures are relatively minor.

 

AS I AGREED, THE IMPACT GOING BACK TO 1929 OR 1960 IS VERY MINIMAL. BUT $559 BILLION IN 2012 IS NOT MINIMAL.

 

Perhaps the ‘expenses’ incurred in derivatives investing by multinational corporations will soon be considered ‘investment’ in the next round of BEA revisions.

 

Financial transactions of this sort are excluded from the national income and product accounts by definition; they cover only production and incomes earned in production. Stock trading, derivatives slinging, and foreign exchange transactions have nothing to do with GDP.

 

ACCORDING TO THE BEA’S FORMAL DEFINITIONS AND METHODOLOGY, UP TO NOW.  BUT ONCE THEY START COUNTING ‘INTANGIBLES’ AND ‘EXPENSES’ AS INVESTMENT, THAT’S A GAME CHANGER.  AND HOW DO WE KNOW, AT THE CORPORATE PRICING LEVEL, WHETHER FINANCIAL TRANSACTIONS ARE NOT  BEING REPORTED AS NON-FINANCIAL PROFITS IN ORDER TO EXPLOIT TAX LOOPHOLES?

 

Also, if the Obama administration was looking for a political payoff with this redefinition, wouldn’t it have been better to do it a year ago, before the 2012 election, rather than after?

 

NO. THAT WOULD HAVE BEEN TOO OBVIOUS, TO TRY TO BOOST GDP BEFORE THE ELECTION. BETTER TO WAIT UNTIL THE SECOND TERM.

 

IN CONCLUSION, DOUG, I APPRECIATE THE LESS PERSONALIZED AND LESS POLEMICAL RESPONSE IN YOUR LATEST REPLIES.  THAT’S HOW DEBATES AND DISCUSSION ON SUCH MATTERS SHOULD BE CONDUCTED. AFTER ALL, WE’RE NOT OPPONENTS OR ENEMIES, THOUGH WE MAY DIFFER IN OUR LEVEL OF SUSPICION OF THOSE WHO ARE.

 

JACK RASMUS, AUGUST 2, 2013

 

 

 

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Response to Rasmus

Here’s my response to Jack Rasmus’ complaint about my fact-checking him (“GDP revisions: not a conspiracy, Jack”). His words are in purple italics; mine, in normal type.

GDP for 2012, as I pointed out in my prior article, ‘Economic Recovery by Statistical Manipulation’, was raised by almost 33% as a result of the BEA revisions–from the 2.1% annual growth to 2.8%.

GDP wasn’t revised up by almost 33%—it was more like a tenth that. Rasmus means that the growth rate was revised up by 33% (no almost about it). It’s a minor error, but telling, and one he repeats several times.

Moreover, the consensus forecasts by economists for the recent 2nd quarter 2013, which averaged 0.9% according to the Reuters survey, came in at nearly twice that, at 1.7%, due to the revisions. This is not a normal upward revision, most of which made in previous years by the BEA had very little effect on GDP numbers.

Economic stats frequently depart from consensus projections. In fact, trying to beat consensus estimates and bet you’re right and the market is wrong is a major pastime on Wall Street. Also, there were no “revisions” involved. This was the first estimate for the second quarter, so there’s nothing to revise. Rasmus may mean that the changes to the definition of GDP were responsible for the above-consensus result, but if you strip out the gain in the new IP product sector, the major conceptual change, the growth rate would have been roughly 1.6%, all of 0.1 point below the actual number.

In other words, the massive upward revision to GDP in the 2nd quarter, as reported by the BEA, appears largely attributable to its revisions to how investment is defined. If how we define investment can have that big an impact on GDP, the changes should not be accepted without challenge.

He liked this argument so much he had to repeat it, but there were  no “revisions” in any direction to 2nd quarter GDP, since this is the first we’ve heard of it. The first estimate will be revised next month, and we’ll see if it’s up or down.

My article has raised some hackles in some quarters, including among some segments of the ‘liberal left’ that continues to be apologetic for the Obama administration despite its abysmal record economically, in terms of civil rights, wars, concessions to corporations, and so forth for the past five years.

Is Rasmus calling me an Obama apologist? That’s funny.

Some among them claim I am arguing there is a ‘conspiracy’ to falsely boost GDP by the Obama administration.

Saying they “manipulate” and “rewrit[e] the numbers to make failure go away” sounds pretty  close to a conspiracy (from the thesaurus: “plot, scheme, plan, machination, ploy,trick, ruse, subterfuge”) to me.

Much of the increase in investment by the BEA’s redefinition is associated with research and development expenditures by business. The BEA previously considered R&D an ‘expense’. Now it’s an investment. Where does the slippery slope of redefining expenses as investment stop? Obama has proposed in his 2014 budget to significantly increase tax credits to businesses for R&D expenses. That will significantly boost R&D investment. That spending in turn will boost GDP still further in months to come. Does anyone naively think the two developments are completely unrelated? It’s not paranoid to raise the point.

Actually they probably are completely unrelated. Also, what Obama proposes often has a hard time getting through Congress, and while R&D tax credits probably aren’t massively effective, they probably do raise research spending some (see “Do Tax Credits Stimulate R&D Spending?”). And that spending includes buying equipment and hiring scientists, which is economically stimulative—and if the research has any payoff, might lead to some actual innovations, which could be additionally stimulative. But elections and the prestige of American capitalism won’t turn on the results. Most people will hardly notice.

Nevertheless, my critics—some New York left liberal types in particular—insist on defending the BEA and the administration.

Busted. We plotted this response out yesterday afternoon over cronuts and pour-over coffee at an undisclosed location in Brooklyn.

These critics think that adding more than $500 billion to 2012 GDP is normal. They point out that the BEA revisions had little effect on long run GDP since the 1960s. That’s true. But the changes have had a big impact on GDP since the so-called end of the Great Recession in 2009, and especially in the latest 18 months. They are ‘frontloaded’, in other words, having their greatest effect on GDP during the ‘recovery’ period since 2009, during which time it has become clear neither fiscal or monetary policies have done much to generate a sustained economic recovery. So that the 33%-50% boost to GDP in the last 18 months does result in making the failure at recovery appear significantly less so. To point that out is to engage in ‘agitprop’, I’m told.

The revisions do nothing to change the picture of the 2009–2010 recession as the worst in modern history, nor does it change the current recovery’s status as the weakest.

Critics also pooh pooh my point that gross domestic income, GDI, is rising faster than GDP, even though the likes of Bernanke, chair of the Federal Reserve, does not think the trend is unimportant—as I quoted him in my original article. Something of import is going on here, between gross domestic income (GDI) and gross domestic product (GDP). The historical ratios between the two are changing in the last decade. But why so, we should ask? In reply to my critics, of course incomes from capital gains, dividends, etc. are not directly included in GDP calculations.

“Of course”? Your original piece didn’t read as if you knew this. And the “directly” is superfluous.

The differences between GDI and GDP are a favorite topic of data connoisseurs. Fed economist Jeremy Nalewaik has written several papers arguing, among other things, that GDI may be more accurate, especially at business cycle turning points, than GDP. (Here’s a ‎paper [PDF] and here’s an interview.)

But the BEA revisions, by increasing investment, do raise corporate profits (as Dean Baker has correctly pointed out, by more than $250 billion in 2012 alone). Corporate profits then get distributed to shareholders in the form of dividends and other capital gains. Raising investment by redefinition raises profits, which raises the distribution of those profits in the form of dividends, capital gains, etc. Ok, that direction of causation is clear.

Raising investment raises profits? Really? Not all investments are profitable, and sometimes profits can be raised, at least in the short term, by stinting on investment. There’s quite a bit of that going on right now, in fact. And Rasmus is slipping capital gains back into the national income accountants’ definition of income, which is wrong.

So there could be a motive for counting profits from financial speculation as part of GDI, which might explain why BEA corporate profits (and GDI) are running ahead of GDP in recent years. It’s a legitimate question to raise, and doing so is not to suggest ‘conspiracy’ or reflect ‘paranoia’.

Sometimes GDP runs ahead of GDI, and sometimes GDI runs ahead of GDP. GDI grew more quickly than GDP in 2006, but GDI lagged GDP in 2007—which is often what happens before a recession, and Nalewaik has shown. GDP ran ahead of GDI for much of 2012, as well, a portent of the recent slowdown.

There are serious problems with GDP reporting if GDI is somehow rising faster than the value of those goods and services themselves. But critics of my view believe that to raise such questions is to ‘insult their friends at the BEA who are all skilled and honest servants’, as one of my ‘left liberal’ critics puts it in a recent reply to my article.

They are skilled and honest public servants. I’m guessing Rasmus never actually spoke with one.

To say now, as the BEA is saying with its recent GDP revisions, that ‘expenses’ constitute investment is a major shift of definition of GDP. It has resulted in a record upward revision of the numbers, and a slippery slope to further false upward revisions that will follow no doubt.

This “record upward revision” has done almost nothing to change the growth numbers over the long term, and the changes to recent figures are relatively minor.

Perhaps the ‘expenses’ incurred in derivatives investing by multinational corporations will soon be considered ‘investment’ in the next round of BEA revisions.

Financial transactions of this sort are excluded from the national income and product accounts by definition; they cover only production and incomes earned in production. Stock trading, derivatives slinging, and foreign exchange transactions have nothing to do with GDP.

Also, if the Obama administration was looking for a political payoff with this redefinition, wouldn’t it have been better to do it a year ago, before the 2012 election, rather than after?

There are a lot of criticisms that can be made of conventional economic and social statistics, but you should actually know what you’re talking about before undertaking the project.

Rasmus responds

Jack Rasmus has filed this remarkable response to my post yesterday criticizing his criticism of the GDP revisions. I’m posting this unedited (including leaving his Twitter handle, which he’s coded as a hashtag). I’ll respond shortly in the next post.

TO Doug Henwood: Here’s my reply to your personalized polemic to my recent article on GDP revisions, which is published on my blog and elsewhere. Jack Rasmus

“On Wednesday, July 31, the Bureau of Economic Analysis, undertook a major revision of GDP statistics. The result was a major upward revision of GDP numbers for the 2nd quarter and for 2012. While the BEA revises numbers and its methods every five years, this time the revisions were extraordinary and particularly significant.

GDP for 2012, as I pointed out in my prior article, ‘Economic Recovery by Statistical Manipulation’, was raised by almost 33% as a result of the BEA revisions–from the 2.1% annual growth to 2.8%. Moreover, the consensus forecasts by economists for the recent 2nd quarter 2013, which averaged 0.9% according to the Reuters survey, came in at nearly twice that, at 1.7%, due to the revisions. This is not a normal upward revision, most of which made in previous years by the BEA had very little effect on GDP numbers.

Changes made by the BEA to the contribution of investment to GDP were especially important. As I noted in my previous article, nearly all other areas of economic sectors that make up GDP were flat or declining in the 2nd quarter. In other words, the massive upward revision to GDP in the 2nd quarter, as reported by the BEA, appears largely attributable to its revisions to how investment is defined. If how we define investment can have that big an impact on GDP, the changes should not be accepted without challenge.

My article has raised some hackles in some quarters, including among some segments of the ‘liberal left’ that continues to be apologetic for the Obama administration despite its abysmal record economically, in terms of civil rights, wars, concessions to corporations, and so forth for the past five years.

Some among them claim I am arguing there is a ‘conspiracy’ to falsely boost GDP by the Obama administration. But I nowhere raise the charge of conspiracy in my article. Notwithstanding that, those who charge me with such are rather naïve if they think that the BEA bureaucrats, before they reported such numbers, didn’t check it out first with the Obama administration and get its ok. And that it is quite likely there was even more to it than mere reporting of things to come. Who knows for sure. But with what’s going on with data these days in Washington, it’s not realistic to assume the BEA changes had nothing to do with politics. Perhaps not overtly, but tacitly and maybe even covertly.

Much of the increase in investment by the BEA’s redefinition is associated with research and development expenditures by business. The BEA previously considered R&D an ‘expense’. Now it’s an investment. Where does the slippery slope of redefining expenses as investment stop? Obama has proposed in his 2014 budget to significantly increase tax credits to businesses for R&D expenses. That will significantly boost R&D investment. That spending in turn will boost GDP still further in months to come. Does anyone naively think the two developments are completely unrelated? It’s not paranoid to raise the point. Nor is it conspiratorial. It’s just politics, in this day and age when Washington is intent on providing benefit after policy benefit to its corporate friends.

Nevertheless, my critics—some New York left liberal types in particular—insist on defending the BEA and the administration. My insistence that the 33%-50% boost to GDP numbers is not a ‘normal’ revision is dismissed as ‘paranoid’ and ‘conspiracy’ theory. They argue that the changes to investment by the BEA, producing the 33%-50% GDP increase, are reasonable. But are they?

These critics think that adding more than $500 billion to 2012 GDP is normal. They point out that the BEA revisions had little effect on long run GDP since the 1960s. That’s true. But the changes have had a big impact on GDP since the so-called end of the Great Recession in 2009, and especially in the latest 18 months. They are ‘frontloaded’, in other words, having their greatest effect on GDP during the ‘recovery’ period since 2009, during which time it has become clear neither fiscal or monetary policies have done much to generate a sustained economic recovery. So that the 33%-50% boost to GDP in the last 18 months does result in making the failure at recovery appear significantly less so. To point that out is to engage in ‘agitprop’, I’m told.

Critics also pooh pooh my point that gross domestic income, GDI, is rising faster than GDP, even though the likes of Bernanke, chair of the Federal Reserve, does not think the trend is unimportant—as I quoted him in my original article. Something of import is going on here, between gross domestic income (GDI) and gross domestic product (GDP). The historical ratios between the two are changing in the last decade. But why so, we should ask? In reply to my critics, of course incomes from capital gains, dividends, etc. are not directly included in GDP calculations. But the BEA revisions, by increasing investment, do raise corporate profits (as Dean Baker has correctly pointed out, by more than $250 billion in 2012 alone). Corporate profits then get distributed to shareholders in the form of dividends and other capital gains. Raising investment by redefinition raises profits, which raises the distribution of those profits in the form of dividends, capital gains, etc. Ok, that direction of causation is clear.

But should we raise the possibility that the direction may be reversed as well? To explore that point: it is a fact that multinational corporations, for example, now earn on average 25% of their total profits from what is called ‘portfolio investment’—i.e. from financial speculation. Some like General Electric even more. Could it be that corporations are counting more of such profits in the totals reported to the BEA, that then gets reported in GDP-GDI calculations? Doing so might permit them to claim tax reductions on those portfolio profits, just as they do on production profits. So there could be a motive for counting profits from financial speculation as part of GDI, which might explain why BEA corporate profits (and GDI) are running ahead of GDP in recent years. It’s a legitimate question to raise, and doing so is not to suggest ‘conspiracy’ or reflect ‘paranoia’.

There are serious problems with GDP reporting if GDI is somehow rising faster than the value of those goods and services themselves. But critics of my view believe that to raise such questions is to ‘insult their friends at the BEA who are all skilled and honest servants’, as one of my ‘left liberal’ critics puts it in a recent reply to my article.

There are many things wrong with GDP as a measure of how the US economy is doing. But when GDP is revised upward by a stroke of the pen by such a significant amount, we should not be overly defensive of those responsible, or of the politicians who either collude in the process or let it happen.

To say now, as the BEA is saying with its recent GDP revisions, that ‘expenses’ constitute investment is a major shift of definition of GDP. It has resulted in a record upward revision of the numbers, and a slippery slope to further false upward revisions that will follow no doubt. Perhaps the ‘expenses’ incurred in derivatives investing by multinational corporations will soon be considered ‘investment’ in the next round of BEA revisions.

Government data should not be accepted on its face value. We should be challenging it, especially when changes to it are so significant as the case of the recent GDP revisions. Doing so should not critiqued on a personal level, calling those who raise challenges ‘paranoid’ and ‘conspiracy theorists’. That’s just juvenile. We should debating these issues, not polemicizing over them.

Jack Rasmus, August 2, 2013

Jack is the author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, Pluto Press, and host of the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network. His website is www.kyklosproductions.com, and blog, jackrasmus.com. His twitter handle is #drjackrasmus.

GDP revisions: not a conspiracy, Jack

The irrepressible Jack Rasmus, who never tires of displaying his ignorance, has a piece up on Counterpunch (“Economic Recovery by Statistical Manipulation”) on the recent revisions to the U.S. national income and product accounts (NIPAs). No doubt speaking for legions of paranoids, left and otherwise, Rasmus describes the revisions as yet another politically driven scheme to make the economy look better than it is—“rewrit[ing] the numbers to make the failure ‘go away.‘” They’re not, and they don’t.

Like almost all economic stats, the national income numbers—GDP and its supporting cast—are revised frequently as better data replace early estimates. In order to produce timely data—the first estimates of GDP et al come out less than a month after the quarter ends—some components have to be estimated. Over time, as more definitive numbers come into the Bureau of Economic Analysis (BEA), which produces the NIPAs, earlier estimates are revised. First takes are revised over the two subsequent quarters, and then every summer there’s an annual revision to the NIPAs that goes back several years. Every five years there’s a so-called benchmark revision, which involves not only the incorporation of better underlying data, but often conceptual rethinks as well. If Rasmus has any idea of this revision schedule, he doesn’t let on—not surprisingly, because it might interfere with the conspiracy theory (sorry, hate that cliché, but it’s earned in this case) he’s trying to weave. You can read all about the machinery behind the NIPAs yourself by following the links on this page: BEA National Economic Accounts; revisions are specifically addressed here.

With this benchmarking exercise, the 14th iteration, the major rethink was the reclassification of expenditures on research & development as well as the creation of original works of art and entertainment as investment; previously they were classed as routine business expenses. These new categories, along with software (previously counted along with investment in machinery and equipment), form a new aggregate, intellectual property (IP) products. The difference is that investment adds to GDP and routine expenses don’t. You can argue with the details, but this change is not conceptually outrageous. R&D that leads to a new drug or processor chip is a lasting commitment that produces income over time, which is what investment is all about. Ditto the creation of a new movie, even if it’s dumb. (Valuing these things can be very hard, but that’s more a practical than theoretical problem.) The effect of this change is to add about $470 billion to 2012’s GDP (which, by the way, is the total value of goods and services produced in the U.S.). Other conceptual changes add another $55 billion or so, and better source data, another $34 billion. You can find plenty of details in the news release.

But these changes were applied to previous years as well—more in recent years, as IP products have grown in importance, but the revisions go all the way back to when the NIPAs begin in 1929. So while the level of GDP was revised upward by 3.6%, earlier years were also revised upwards, meaning that growth rates weren’t affected all that much. The average growth rate for the 2000–2012 period was revised up all of 0.1 point, from 1.6% to 1.7%. That’s still a very weak number, half the 3.1% average since 1960 in fact. And that average was unaffected by the revisions. The Great Recession was marked down somewhat in severity, from a loss of 4.7% in real GDP to 4.3%, but it remains the worst recession since the 1930s by a considerable margin. And the recovery since 2009 has been upgraded a bit, but it remains the weakest upturn in modern history. In other words, Rasmus is completely wrong about revising failure away.

He’s wrong about many other things as well. The entire passage about Gross Domestic Income (GDI) is deeply wrong. Note that the full name of the accounts is the national income and product accounts. That is, there are two sets of books, one for income and one for product. Income, by definition, has to be earned in production (like wages or profits—leaving aside the theoretical question of whether capitalists “earn” their profits). In theory, the two estimates, income and product, are supposed to match. In practice, they don’t, because real life is never as neat as a textbook. Often the income estimate has run ahead of product, which Rasmus wrongly attributes to income earned in speculation. Speculative incomes, like capital gains, have nothing to do with production, and are therefore excluded from the NIPAs. But income doesn’t always run ahead of product; sometimes it lags. If Rasmus knows this, he doesn’t let on about this either. Of course, doing so would have undermined his agitprop.

That’s not all Rasmus is wrong about. He asserts that the GDP revisions may lead to revisions to the employment numbers. In fact they won’t, since the two are computed separately. (Actually the employment numbers are an input to GDP estimates, not the other way around.) He repeats the baseless claim that Reagan revised the unemployment numbers to make them look lower; in fact, there have been only minor changes to these stats over the decades, and the changes have been in both directions (though always in small magnitudes).

The people who produces economic and other statistics are skilled and honest civil servants. I’ve been talking to these people for over 20 years—they’re very open about what they do, and the virtues and limitations of the numbers they produce. You could argue—as I would—that GDP is only a very partial measure of economic welfare. It says nothing about distribution or quality, and takes no accounting of the degradation of the natural environment nor of unpaid domestic labor. You could argue that Iron Man 3 is not a positive contribution to human welfare, so counting it as an “investment” is some sort of cruel joke. You could argue that the whole idea of IP is a subtraction from human welfare, since information wants to be free (though that’s not how capitalism works, alas). But Rasmus doesn’t make these arguments. Instead, he just makes stuff up.

Official stats will show you that chronic unemployment is a major and lingering problem, that the U.S. income distribution is horribly unequal and has gotten worse over the last three or four decades, and that poverty remains scandalously high. Official stats, as they are, without the ministrations of Jack Rasmus. In fact, it’s amazing how much damning information the government publishes about American society almost every business day. You don’t need to spice it up with phantasmic plots.