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Why the Government Says The Great Recession Ended When it Never Did … and Why the Press Doesn’t Get it

In the statement below, CNBC (Reuters actually) tells us in one breath that we’re worse off than we’ve been in 28 years, but in the next breath, they tell us the recession ended two years ago. How does it not occur to them to ask, “If the Great Recession ended two years ago, why are we worse off now then before it supposedly ended?” I aim to answer that.

“An unofficial gauge of human misery in the United States rose last month to a 28-year high as Americans struggled with rising inflation and high unemployment…. The data underscores the extent that Americans continue to suffer even two years after a deep recession ended, with a weak economic recovery.” (CNBC)

Clearly the gauge economists use to identify a recession is not adequate. Common sense should tell any journalist writing a story like this that things cannot be worse after they have been recovering for two years than they were before recovery. It should lead journalists to ask WHY things are worse if the economy if the economy is no longer “receding,” but it doesn’t because the press is too lazy to think and to investigate. It now likes to take stories as they are fed to it by the government and report that as news.

The government says the recession ended for one reason: gross domestic product (GDP) is expanding. The mere rise and fall of GDP cannot be the only measure of an economy that is in ascension or decline because it misses so much of what an economy is, which is a highly complex system. What the misery index tells us is that the economy is providing fewer jobs, less income, and less buying power with the income that remains. Regardless of GDP, then, the economy is in every humanly meaningful way, worse off, not better than it was two years ago. If those characteristics are getting worse by the month, then the economy is clearly in decline — recession. If the decline drags out long enough, it should be called a “depression,” not a “recovery.”

So, to say the recession ended two years ago is to utter … utter nonsense. And, yet, you see reporters and economists continuing in blithe ignorance to sing the U.S. government’s refrain as if it were a fact.

Is the following light at the end of the tunnel the end of The Great Recession?

Ah, but there is good news we are told in this same article. Inflation cannot get worse:

“While the misery index rose in September, many economists expect some respite in coming months, driven by softer inflation…. Wednesday’s data showed that businesses’ ability to raise prices on clothing, movies and toys was ‘hitting a wall.’ Weak incomes also will make it harder for building owners to raise rents, further dampening inflation.”

In other words, the silver lining on this great recession of ours is that your terrible income is now so overstretched that prices cannot go any higher. With good news like that, who needs an enema?

History, however, does not agree with that reasoning … not when governments are rolling out money as fast as toilet paper production. Prices can go up even when no one can afford more. At the start of the Great Depression, the people of Germany had very little buying power and, yet, saw hyper-inflation that would make today’s inflation look like a Yugo standing next to a Mercedes Benz. The poor in third-world countries have often seen hyper-inflation, regardless of the fact that they already couldn’t buy a thing. Look at Zimbabwe in recent years. People could not afford water, yet uber inflation ran up at something like a thousand percent a month!

Once governments start trying to inflate their way out of debt, as the U.S. has been doing for two years, inflation can spin out of control no matter how poor the citizenry is.

The Christian Science Monitor does a little better job than Reuters of telling the same story:

“Think life is not as good as it used to be, at least in terms of your wallet? You’d be right about that. The standard of living for Americans has fallen longer and more steeply over the past three years than at any time since the US government began recording it five decades ago. Bottom line: The average individual now has $1,315 less in disposable income than he or she did three years ago at the onset of the Great Recession.”

There you have it. We’re worse off now than when The Great Recession began. How, then, can any intelligent person say the recession has ended when it has consistently gotten worse for nearly three years?

And, yet, the very next words from the CSM repeat the same mantra in mental absentia:

“– even though the recession ended, technically speaking, in mid-2009.”

They don’t just say it “supposedly ended.” As with the Reuters article, they regurgitate, as if it were a fact, that it ended in 2009. Almost makes you want to go listen to a dog howl as a better source of good thought.

Then, as if they did not hear themselves over their own baying, they go on to say…

In short, it means a less vibrant economy, with more Americans spending primarily on necessities. The diminished standard of living, moreover, is squeezing the middle class, whose restlessness and discontent are evident in grass-roots movements such as the tea party and Occupy Wall Street.”

So, an economy that is “less vibrant” than when it was in recession and that is producing a lower standard of living than it did when it was declared in recession is out of recession?

“Real median income is down 9.8 percent since the start of the recession through this June”

Real income is off by almost ten percent since the Great Recession started. Therefore, the recession has ended? And that decline is just for those who are employed. Meanwhile real unemployment is probably at something like 16% since the government does not count any of those who went off the unemployment roll simply because they’ve been unemployed so long that their benefits ran out.

But the recession is over?

Why is the Great Recession over when it clearly ain’t over?

Here is the telling little detail that no one else has sniffed out.

“Many found their jobs gone for good as companies moved production offshore or bought equipment that replaced manpower.”

When the U.S. government says that the recession is over, it bases that on the rate of growth in gross domestic product — essentially the aggregate value of everything produced by U.S. companies. If GDP is growing at a good rate, the government determines that we are not in recession. End of story for them. What the press is not factoring in when it fails to question the government’s statement that the Great Recession ended in June of 2009 is whether or not GDP is even accurately calculated. Then there is the further question of whether gross domestic production fully represents the condition of an economy.

Part of the answer is phantom GDP

The biggest reason GDP has improved above “recession” levels, while employment and income are worse, is that GDP calculations do not adequately adjust for imports. Gross Domestic Production is typically measured by adding up all consumption (purchases) in the United States plus the value of all exports and then subtracting the value of all imports. The assumption is that people can only purchase (consume) something that has been produced, so consumption equals production. To find what portion of all U.S. consumption was produced domestically, one has only to subtract out the value of all imports (both those used by U.S. manufacturers as components of things manufactured in the U.S. and those bought directly by consumers as end sales). To that U.S. consumption of domestic products one has to add exports because those are a part of domestic production, even though they are consumed outside the country. That gives you GDP.

The fly in the ointment is this: When purchases are made in the U.S. (as part of the calculation of total consumption), they are often made at retail level by individual consumers, and that final price is the one used to determine the value of goods produced. Imports and exports, however, are usually bulk purchases that happen at wholesale price levels. So, when consumption is added up, the final price (retail) paid by consumers for imports is used, but when imports are subtracted back out, it is the wholesale price that gets subtracted. That is because no one knows what portion of gross retail sales is due to imported goods (on the consumption side), and no one knows what price all the imported goods coming through port will eventually sell for. We only know they are imports because they entered the country through our ports, and we know their declared value based on what the importer paid for them when they entered the country. That is almost always a wholesale price (plus shipping, etc.), except in the case of small shipments directly to the end consumer.

That’s true for exports, too, which are added to GDP, rather than subtracted. No one knows what the final retail prices will be for goods leaving the country; so the price used is the price paid by the foreign entity that is buying the items, not the end consumer. Exports, being priced at wholesale, would roughly cancel out the pricing imbalance in imports if not for the fact that the U.S. runs a very large trade imbalance stacked toward imports.

Other methods of calculating GDP that try to adjust for inflation have also been discovered to include significant phantom GDP. When the government adjusts GDP to compensate for inflation, it often has no information on which to factor inflation on imported items that were never imported before. As a simplified example, when an American factory has been manufacturing tables for a century, the government can see how the price for a particular style of table has gone up due to inflation and can adjust for that so that GDP today can be compared back to the year 2,000 to see if GDP has improved. In other words, if the rise in consumer spending on tables is due solely to inflation, then that rise is really not an improvement in Gross Domestic Production at all. So, the government tries to factor inflation out of GDP, but what if you are suddenly in a deflationary environment? How do you determine what part of the price came down due to general deflation in that industry and what part came down due to parts being made overseas so that you can properly adjust the table’s end price for deflation? In other words, what is the proper inflator or deflator to adjust a price by when comparing one year to the next when the ground is shifting so much all around you? That’s very hard to get a handle on.

A similar problem happens when the American factory suddenly outsources all production of that exact table to a Chinese factory but sells it domestically at the same price as it did the table it manufactured in the U.S., capturing its savings as a boost in profits for the shareholders. While the shareholders are better off, the factory workers go unemployed. The government sees the end sale to the consumer and adds that to GDP and then subtracts out the declared value of the imported table so that imported tables do not get counted as a domestically produced table. That creates phantom GDP in this case, making the economy look much better than the reality:

Let’s say the table sold retail at $2,000 last year and that the factory produced (domestically) 1,000 tables that sold in the U.S.. That’s $2 million in gross table sales that got legitimately added to the nation’s gross domestic product last year. Now, let’s say this year the factory imports all of its tables at $1,000 each, including shipping, etc. This year, it sells the same number of tables under its label at the same price as last, but they were all made in China. What the government sees is that U.S. consumers again bought $2 million dollars worth of tables this year but that there was a sudden burst of $1 million in imported tables at our ports. It subtracts those with the intention that imports not be included, but that still leaves a million dollars in its GDP figures that came from table sales. It concludes those had to be domestically produced tables, since it subtracted out all the known imports, so it keeps that million dollars as part of GDP. In real fact, the production of domestic tables ended completely. So, the government is over-counting domestic tables by a million dollars.

With so many products once made in the U.S. having been outsourced in recent years, it’s hard to get a accurate picture of changes in GDP, especially when the value figured by customs for imports (and subtracted out of consumption to calculate GDP) is not the same as the price the end consumer paid. The Great Recession, as it turns out, is only great for China and other countries to which U.S. work has been outsourced by the free-trade agreements created during the Bush dynasty.

Other reasons GDP wrongly indicates The Great Recession ended when it did not

GDP is really a poor measure by itself of whether a country is in economic growth or decline because it does not factor how much benefit expenditures are bringing to the populace. It includes all government spending. So, it includes what is being spent on military pursuits outside the country, which may be entirely wasted in the sense that the products are blown up for the sake of getting rid of some despot that was no threat to the country doing the spending. The populace feels no improvement from those expenditures, other than the jobs they create. This is GDP. that is really a transfer of wealth to another nation. It does create jobs, which is beneficial, but that is all it does for the nation doing the spending. The people of that country could be spending themselves into oblivion on foreign wars, yet GDP would not tell you that. On the GDP side, things would look great; but all of that was done with new debt, so it represented no wealth building. It is GDP that is actually a liability — creating jobs now that future people will pay for. It will not build a nation.

On the other hand, if that same amount of money were spent on roads, the populace would be more wealthy because it would live in a land with better roads. It would have something to show for its debt. The future people, who will have to pay for those jobs, will have the benefit of roads built at lower prices, which they do not have to pay to create in their own time. So, their debt is offset by their savings. Thus, one scenario of an increase in GDP creates jobs while the other creates both jobs and more and better roads, which enable faster commerce, which improves job prospects down the road. The latter is economically sustainable growth — REAL growth — because it raises your economic platform for future performance and because people feel a direct benefit. The former is not economically sustainable because the people spending the money are deriving no benefit outside of the jobs they are creating, and the people who will eventually pay the bill have nothing to offset the cost when the bill comes due. It is not sustainable economically.

Because GDP includes all government purchases, it also includes all government waste. So, that is another way that GDP can misrepresent economic growth. The more money the government wastes, the better GDP looks. If the government decides to hire two people to do the same work one was doing, the amount added to GDP for that work doubles. The tax payer gets twice as much taken from him in taxes, but feels no additional benefit. So, GDP goes up, even though the tax payer feels poorer. That may be offset by the fact that one more person has a job, but that benefit is not nearly as great as if the new person were doing additional work that benefited tax payers so they, too, derive the benefit of their higher taxes.

In short, G.D.P can look great even if we blow up everything we create or if we pay people to make nothing!

It turns out that a nation can actually be in serious decline and yet show GDP increases every year of its decline. Thus, GDP should be only one component used to assess whether an economy is rising or receding. Unfortunately, it is the only measure used, and that is why economists and the government are so out of touch in stating that The Great Recession ended two years ago when, in fact, the ravages of a failing economy are clearly worsening as we go.

And that is why the Great Recession never ended when it ended.

 

More reading on the The Great Recession:

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