3rd Quarter GDP Revised Down, Underlying Economy Still in Decline

December 22, 2009

This morning the Bureau of Economic Analysis issued its 3rd estimate of 3rd quarter GDP, revising it downward once again.  Its “advance estimate,” published in October, was that real GDP grew at an annual rate of 3.5%.  Last month, that was revised down to 2.8%.  This morning it was cut again, to 2.2%.

However, if we remove stimulus spending from the equation to see what’s really happening in the underlying economy, we find that chained GDP (expressed in constant 2005 dollars) fell in the 3rd quarter at an annual rate of 1.4%.  Stimulus spending added $113.2 billion to the economy in the 3rd quarter – an annualized rate of stimulus spending of $453 billion.  It’s important to understand what’s happening in the underlying economy because the stimulus spending will end soon, probably in early 2011. 

But GDP is the whole pie.  What’s really important is the slice of pie that each American gets.  When population growth is factored into the equation (and again, with stimulus spending factored out), we find that the underlying chained GDP per capita actually continued to decline in the 3rd quarter at an annual rate of 5.5%, falling from $41,270 per person to $40,704.  That’s better than the 9.0% rate of decline in the 2nd quarter, but a decline nonetheless.  And it’s the lowest level in 5-1/2 years.  Clearly, if the stimulus spending were stopped at this point, the economy would immediately slip back into recession. 

It’ll be interesting to see what happens in the 4th quarter next month.  3rd quarter GDP was goosed by the cash-for-clunkers program and by a lot of restocking following many months of inventory depletion by businesses.  That restocking rate is likely to slow, and auto sales fell back into a funk once the cash-for-clunkers program ended. 

The point is that the stimulus spending is helping a little, but it’s doing a poor job of boosting the underlying economy in any meaningful way.  We’re still waiting for Obama to begin addressing our trade imbalance as he had promised.  Until that happens, we can expect to keep muddling along with high unemployment.

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Copenhagen: A Failure of Economics

December 21, 2009

President Obama, like other world leaders, returned home from Copenhagen empty-handed.  No binding agreement to reduce carbon emissions.  Some blame Obama for not offering enough.  Others blame Chinese President Jintao for resisting verification.  Others blame developing countries for demanding too much in exchange for reductions in deforestation. 

But the real blame lies at the feet of the field of economics.  For the better part of two centuries, after disowning Malthus and vowing never again to consider the ramifications of population growth, economists have clung to a doomed model of perpetual growth.  They fail to understand that just because limitations have been pushed back a hundred or even a thousand times, doesn’t mean they can be pushed back forever in this finite world.  Closing their eyes to this reality like the “see no evil” monkey, they steadfastly maintain that man is clever enough to overcome any obstacle to growth. 

Until now, nothing has proven them wrong.  Oceans over-fished?  No problem!  Fish are now raised on “farms.”  Oil getting scarce?  We learned to drill off-shore.  Even when the earth’s ozone layer was threatened by CFCs, we were ready with benign, substitute refrigerant compounds.  Global cooperation in the interest of the common good wasn’t a problem when technological solutions were waiting in the wings.  But then came global warming.    

It’s not as though they didn’t see it coming.  We’ve known for at least half a century that we would run out of oil some day in the future.  And suspicion about the climate effects of rising CO2 levels has been building for at least two decades.  Our leaders, scientists and economists calmed our fears with talk of alternative energy – primarily wind and solar.  What they didn’t tell us was that the energy needed to keep the economy humming at its current level dwarfs what could be provided by those renewable sources even in their wildest dreams, not to mention the energy needed by developing nations clawing their way out of poverty and the energy needed to sustain economic growth into perpetuity. 

Some spoke of converting the economy to natural gas on a huge scale, a short-term solution at best.  Others spoke of more nuclear plants, ignoring the fact that nobody wants a nuclear waste dump in their back yard, and there’s no longer any place left that isn’t someone’s back yard. 

What they were counting on all along was the holy grail of energy – nuclear fusion – the energy that powers the sun.  Clean and limitless, it promised to remove energy as a constraint to growth for all time.  But after decades of pouring billions of dollars into research, the sad reality is that it’s simply not feasible. 

So we’re left with nothing.  If you don’t believe this, just read the “cap and trade” legislation that’s pending in the house of representatives.  You’ll find that it relies heavily on technology to capture and store CO2 underground – technology that doesn’t even exist yet – while continuing to burn fossil fuels.  Included in the bill is money to incentivize the development of such technology. 

So for the first time in Copenhagen, political leaders, economists and the scientific community came together to face a global threat to the common good with goals, but no solution.  They reached deep into the economic tool bag and found only one tool left – delaying the inevitable.  Given a choice between acting for the common good of future generations vs. basking in the “we can grow forever” delusion for just a little longer, they chose the latter.  Given the opportunity to finally cast off their failed model in exchange for one built on stability and sustainability, the “see no evil monkey” of economics and its minions of gullible political leaders chose to close their eyes even more tightly. 

Whether you believe that global warming is man-made or not is probably irrelevant.  The point is that the majority of scientists, political leaders and even economists believe that it is, enough so that they convened this conference in Copenhagen to address it.  They came with goals for cutting emissions, but because they were without solutions, they couldn’t bring themselves to pull the trigger.  At Copenhagen, the field of economics,  its model of perpetual growth and its blind faith in man’s ability to push back boundaries was finally exposed as a fraud.


Congested States Are the Least Happy

December 19, 2009

http://news.yahoo.com/s/livescience/20091217/sc_livescience/happieststatesrevealedbynewresearch

You may have seen on the news a couple of nights ago a report of a study conducted by a group of scientists that ranked the states in terms of their happiness.  The fact that Louisiana ranked as the happiest state caught my attention, since it seemed to defy logic.  So when this article appeared (link provided above), I was curious to find out why.  As it turns out, the study was conducted pre-hurricane Katrina.

But as I read down the list, I began to wonder if population density might play a role.  So I decided to plot population density vs. the happiness index to see if there was any correlation.  Here’s the result:

Happiness Index

There’s not a strong correlation until you reach the bottom of the scale – the 12 least happy states.  At that point, there is a very strong correlation.  Of those bottom twelve states, only two have population densities below 200 people per square mile.  (And those two are Indiana and Michigan, states already hard-hit by the loss of manufacturing jobs even before this study was taken.) 

And, of the twelve states with population densities greater than 200 people per square mile, only one – Florida – ranked in the top twenty.  Delaware ranked 24th.  All the remainder were in the bottom twelve. 

Why?  Could this be an indication that the hard-to-define “optimum population density” I spoke of in Five Short Blasts occurs at some point before a density of 200 people per square mile is reached?  Is that the density at which over-crowding really begins to limit a person’s ability to consume and enjoy a high standard of living?  Is that where housing becomes so expensive that people are forced to buy and rent smaller dwellings than they’d like?  Are people who would love to have a yard and a garden forced to settle for apartments?  Is that the point at which roads become so congested and parking so scarce that it becomes too much of a hassle for some people to own a car?  It’s impossible to say, but it’s a good indicator – worthy of more study. 

This effect wasn’t lost on the researchers:

They were also surprised at the least happy states, such as New York and Connecticut, which landed at the bottom two spots on the list.

“We were struck by the states that come at the bottom, because a lot of them are on the East Coast, highly prosperous and industrialized,” Oswald said. “That’s another way of saying they have a lot of congestion, high house prices, bad air quality.”

He added, “Many people think these states would be marvelous places to live in. The problem is that if too many individuals think that way, they move into those states, and the resulting congestion and house prices make it a non-fulfilling prophecy.”

I’m reminded of the words of the Eagles’ song “The Last Resort”, a song that laments how the west, especially California, was ruined by over-crowding once word spread to the east that a paradise lay to the west:

… Who will provide the grand design?
What is yours and what is mine?
‘Cause there is no more new frontier
We have got to make it here

We satisfy our endless needs and
justify our bloody deeds,
in the name of destiny and the name of God

And you can see them there,
On Sunday morning
They stand up and sing about
what it’s like up there
They call it paradise
I don’t know why
You call someplace paradise,
kiss it goodbye


U.S. Trade with Peru

December 17, 2009

When I published Five Short Blasts in 2007, the most recent trade data available was for 2006.  At that time, the U.S. enjoyed a small trade surplus in manufactured goods of about $1.1 billion with Peru.  But, overall, we had a trade deficit with Peru thanks to high imports of metals and minerals. 

So, as I continue my slog through the 2008 data, I found the evolution of trade between the U.S. and Peru to be particularly interesting.  Because Peru is less densely populated than the U.S. – with 56 people per square mile vs. 85 for the U.S. – Peru is one of those countries that would remain completely free of tariffs under my population density-indexed tariff plan for manufactured goods. 

So what’s happened since 2006?  Take a look:

Trade with Peru

As a result of rising prices for metals and minerals, our overall trade balance with Peru deteriorated from 2002 to 2006.  But from that point, their increased wealth enabled them to import a lot more manufactured products from the U.S.  In 2008 we had a slight overall trade surplus with Peru, thanks to our exports to Peru almost tripling in just two years.  The U.S. is Peru’s largest trading partner. 

Once again, we see that free trade with nations similar in population density to the U.S. is a win-win situation for both nations, in stark contrast to what happens when we attempt to apply the same free trade policy to those that are much more densely populated.


Was November Dip in Unemployment Faked or a Fluke?

December 17, 2009

http://www.dol.gov/opa/media/press/eta/ui/current.htm

The Labor Department announced this morning that jobless claims rose to 480,000 last week, the second consecutive week of rising claims since bottoming at 454,000 in the November 28th week.  (Link to the Labor Department report provided above.)

In light of the continuing high level of claims, one has to wonder if the administration was playing games – the same kind of games they’ve been accused of using to inflate their figures for jobs created by the stimulus program – to show a drop in unemployment last month.  In November the Bureau of Labor Statistics reported that the employment level actually rose by 227,000 – a key factor in holding job losses to only 11,000.

That seems highly unlikely, given the current rate of weekly jobless claims.  In a normal, healthy economy we typically see weekly jobless claims of about 250,000.  Yet, unemployment holds steady because laid off workers normally find employment elsewhere at about the same rate.  About a million are laid off each month and about a million find new work, keeping the employment level steady.  But analysts have noted that in today’s environment, almost no one is hiring.  Hiring is well below the rate we’d see in a normal economy. 

So if no one is hiring, how did the employment level jump by 227,000 in November?  In order for that to happen, employers would have to be snapping up workers at a much higher than normal rate.  At this rate of weekly jobless claims, employers would have to be rehiring these workers at a rate almost double that of a normal, healthy economy.  It doesn’t seem plausible.

The current rate of weekly jobless claims – 200,000 more per week than normal, should be translating into unemployment rising at a rate of about 0.5% per month, especially considering the rate at which the labor force is growing as a result of a growing population.

Are they fudging the numbers as part of a campaign to talk up the economy and restore confidence?  I don’t generally subscribe to conspiracy theories, but these numbers just don’t add up. 

                                       *****

As an aside, the Labor Department report for this week reports that only two states – Kansas and Kentucky – reported that weekly jobless claims (unadjusted) fell by more than 1,000.  By contrast, 29 states reported increases in claims of at least 1,000.  California was by far the worst, with a rise of more than 28,000.  Now, let’s do some more math:  If we add up the net increase in jobless claims for these 31 states, the figure comes out to an increase in jobless claims of 200,000 in one week.  Not exactly a picture of a stabilizing employment situation.


Democrats Introduce Legislation Aimed at Granting Amnesty to Illegals

December 17, 2009

http://blogs.reuters.com/frontrow/2009/12/15/democrats-take-first-step-on-uphill-path-to-immigration-overhaul/#comment-405588

House Democrats, led by Luis Gutierrez of Illinois, have launched an effort to make good on a campaign promise to Hispanic voters to pass “immigration reform,” a euphemism for granting amnesty to approximately 12 million illegal immigrants. 

Democratic lawmakers in the U.S. Congress on Tuesday introduced a bill to overhaul immigration laws, the first step in what analysts say will be an uphill slog to get the controversial issue to a vote before midterm elections next year. Rep Luis V. Gutierrez, an Illinois Democrat, introduced the Comprehensive Immigration Reform for America’s Security and Prosperity Act of 2009, that seeks to give millions of illegal immigrants a shot at legal status. It was backed by more than 20 other Democrats in the U.S. House of Representatives.

You have to wonder if this is a serious effort, or a token gesture to placate their pro-amnesty constituency.  With Congress’ approval ratings at a record low level, and falling further as the health care debate drags on, sucking the life out of other critical issues like the economy and climate change legislation, nothing would make the American people angrier than an amnesty bill getting priority over these other issues.  And the Democrats know it:

Democratic officials in Washington, however, said last month they were skeptical there will be enough time or political will to tackle the issue next year, although it could be on the agenda in 2011 or 2012 depending on the outcome of congressional elections next November — a position shared by political analysts on Tuesday.

Better for them to get it out there now, when it is sure to be pushed aside by much more pressing issues.  At least they can then tell their pro-amnesty bloc, “at least we tried.”

Still, the irony of debating a measure designed to import more labor, more carbon emitters and more oil consumers while, at the same time, debating how to mitigate the problems of unemployment, global warming and dependency on foreign oil would be wonderful political theater.  Anti-immigration forces would likely pounce on the opportunity to link these issues, waking people up to the consequences of our continued self-destructive lax immigration policy.  The pro-amnesty bloc woud be well-advised to simply let this legislation die.


U.S. Trade with New Zealand

December 14, 2009

I’ve resumed my slow slog through all of the U.S. trade data and just finished New Zealand.  New Zealand is a fairly small country, but a relatively wealthy, developed one.  With combined imports and exports of over $3 billion, I thought it was worth a look.  With a population density less than half that of the U.S., the new economic theory I proposed in Five Short Blasts predicts that the U.S. should enjoy a trade surplus in manufactured goods with New Zealand.  Is that what we have?  Let’s take a look.  The following chart displays the balance of trade with New Zealand for five major categories of trade:  food products, energy raw materials (primarily oil and gas), metals & minerals, lumber and manufactured products. 

Trade with New Zealand

As you can see, as the theory predicts, we have a nice trade surplus in manufactured goods with New Zealand.  But that surplus is offset by deficits in food and lumber products.  Thus, we trade manufactured products for natural resources.  This is exactly how free trade is supposed to work to both nations’ benefit when both are relatively comparable in population density, unlike the disastrous results we get when trading with badly overpopulated nations. 

Yet another data point in support of the theory.  What a shame that economists have closed their minds to the consequences of population density.  They’re completely missing the most powerful relationship in the global economy and thus continue to make a mess of it.