Friday, January 30, 2009

A Study in Spin

From Yahoo News: Q4 GDP down 3.8 percent, biggest drop since 1982
The economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data showed, sinking deeper into recession as consumers and business cut spending.

The Commerce Department on Friday said gross domestic product, which measures total goods and services output within U.S. borders, plummeted at a 3.8 percent annual rate, the lowest pace since the first quarter of 1982, when output contracted 6.4 percent. GDP fell 0.5 percent in the third quarter. These were the first consecutive declines in GDP since the fourth quarter of 1990 and the first three months of 1991.

I've already tried to point out that recessions aren't worth this much panic, but I find it interesting that these articles focus on the negative, when the exact same story could be presented with more positives emphasized. For example, in situations of recent sluggish growth (this forum offers a snapshot of a 2004 example) where growth was "slower than expected," which is presented as a bad thing.

This report shows that the economy actually shrank at a slower rate than predicted (5.5% forecast versus the 3.8% actual rate) and yet, it's still cast as worst drop in 27 years. Same facts, different spin.

Meanwhile, inflation is at historic lows and according to the Wall Street Journal, wages and benefits are up. Furthermore, the GDP actually still retained a net increase of 1.8%, which means the economy didn't actually shrink at all, it just slowed its growth. This sluggish growth is the worst since...oh. Just eight years ago.

Unemployment seems to be the biggest fear right now. I've had several liberal friends (and certainly heard plenty of media reports) that are very worried about the latest unemployment numbers, but at the same time almost gleeful that their dislike of President Bush is exonerated. (I note with some disdain that they never gave credit to him when unemployment held steady during most of his administration.)

But how well does unemployment function as a gauge of the economy? Well, first of all, unemployment is a lagging indicator, which means that the economy, good or bad, is usually a few months ahead of the unemployment numbers. Second, as noted by economist John Lott, a massive drop in unemployment during the summer of 2008 was due to a change in unemployment insurance benefits, as signed by President Bush. Lott also writes that the stimulus package only extends unemployment benefits until December 2009...after which, politically expedient maneuvering comes into play.

So now we're talking about injecting (redistributing) $800 billion of taxpayer money into the economy under guise of a "stimulus package," ostensibly because the economy is one of the worst in decades. Ironically, Bill Clinton claimed the same thing in 1992 and wanted a $16 billion stimulus package. Republicans refused to back down, and the effort died in the Senate. Seems our economy managed to survive.

The stimulus package is an estimated $800 billion. That's just a $100,000,000,000 more than the $700 billion I wrote about a few months back.

I'd certainly like more hard data to prove once and for all that government stimulus (stimuli?) won't work, but with the plethora of other factors that change every time we have one, I suppose such research will never be conclusive anyway. This article from the Independence Institute did provide some interesting answers to my question about where the money would come from, and it doesn't look positive. This article offers some classic reasons why government bailouts won't work.

The problem is that the actual battle being fought is about perception. I loathe moral relativism, but let's face it, when it comes to the economy, truth doesn't matter, perception does. The perception (fostered by grim media reports and artificial inflation of gas prices) is that this is one of the worst economies ever. (Ahem. Chronocentrism, anyone?) Once people think that, they start to spend less, which causes businesses to sell less, which causes them to buy less, then they lay people off. Then the fun starts to circle the globe. It's not even data-driven, it's merely perception. (Disagree with me? Ask a Wall Street investor how much the market is based on data and how much is on perception.)

Based on this premise, I am going to make a prediction. Since President Obama is immune from any criticism about the economy because anything done takes a while to filter down, after about five or six months, we'll begin to see more positive stories. Come April, the first-quarter summary will probably not be that great, but will still show signs of promise. As spring comes, news about more jobs and economic progress will start to be broadcast. The sun will shine, the birds will chirp and soon this whole recession business will just be another page in history.

How will this prove my point? Why can't I just allow for the fact that maybe President Obama will get something right? How do I know that the recovery will be perception-based and not stimulus-based?

Easy. Because the stimulus package won't be injected into the economy for two years.

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