Wednesday, August 5, 2009

Chump Change in the Latest GDP Report

Copyright, The New York Times Company

On Friday, the Bureau of Economic Analysis released its advance estimate of real G.D.P. for the second quarter of 2009. Although some say it provides some of the first evidence of the stimulus law’s efficacy, a close inspection of the results shows that the government sector’s contribution to real G.D.P. growth so far has been trivial at best.

G.D.P. measures the total amount produced and spent in the nation during a particular time frame, like a year or a quarter of a year, indicating the country’s economic fitness.

Real G.D.P. for the first quarter of 2009 was sharply lower than it was in 2008’s last quarter, which was itself sharply lower than the quarter before that. Thus, it came as a bit of a surprise that second-quarter real G.D.P. was not also sharply lower, but rather was pretty close to what it was in the first quarter.

Some advocates were quick to congratulate the stimulus law that was passed in February, claiming that “The marked improvement in this quarter relative to last is largely due to the American Recovery and Reinvestment Act (ARRA).”

A closer inspection of the B.E.A.’s estimates gives no support for this claim. The chart below shows the change in the United States’ real G.D.P. from the first to the second quarter, broken into five expenditure categories: private domestic purchases, net exports, defense, federal nondefense purchases, and state and local government purchases.

We were told that the stimulus law would invigorate the economy by spending on federal nondefense programs and helping state and local governments maintain and grow their public services. Stimulus advocates point to the fact that these spending categories indeed grew from the first to the second quarter, as shown in the chart by the fact that those two bars point upward. (Perhaps they believe that tax cuts and unemployment insurance have important effects, but these are not separate G.D.P. categories — they are included in whatever category the recipient spends them).

However, the chart also shows that these types of purchases were trivial. Real federal nondefense purchases increased by a mere $4 per American, while state and local government purchases increased by a mere $8 per person. Real defense purchases increased by $17 per person, which seems large when compared to the other government purchase categories, but is trivial by any other measure.

Another reason that we know that the stimulus bill had not yet delivered on its promise: employment plummeted from the first to the second quarter. We can continue to grade the stimulus law as the economy further evolves, but it finds no congratulations in the second quarter’s economic performance as measured.

No comments: