Broken

Reread what I said:

As if that was not enough stimulus, add a $600 billion increase in deficit spending. The combined effect of this govt spending plus the effects of ultra-low interest rates is about $800 billion in "stimulus" GDP per year. In other words, the entire GDP growth by Jan 2005 was equal to the stimulus, with no net real GDP growth.

I am using chain-weighted dollars, as Highsea objected to using current dollars.

GDP (chain-weighted)
2000: $9,817 (billion)
2004: $10,755 (billion)

GDP increase: $938 billion

Surplus/Deficit from OMB:
2000: +$236 (billions)
2004: -$412

Deficit increase: $648 billion

Interest rate change (Fed Funds): -5%. Interest rate stimulus (from FT article above): +$200 billion

Total stimulus: $848 billion

So, over 90% of the GDP growth as of Jan 2005 is accounted for by defict spending and interest rate stimulus. Satisfied?



Now let's run the same calculation for the Clinton years.

GDP:

1992: $7,336 (billion)
2000: $9,817

GDP increase: $1,481 billion

Surplus/Deficit:
1992: -$290 (billion)
2000: +$236

Deficit increase: -$526 billion

Interest rate change (Fed Funds): +2.75. Interest rate stimulus: -$100 billion.

Total Stimulus: -$626 billion

So, the Clinton economy growth rate exceeded Bush's, despite a $1.47 trillion disadvantage in deficit and interest rate stimulus.

Shek

The deficit is the difference between what is spent by the government and what it brings it. If the government runs a surplus, it doesn't mean that government spending went down. It means that revenues have increased relative to spending.

The counterexample is the same. A deficit doesn't mean that the government spent more, it means that it spent more relative to its revenues. You can easily construct an example (really only a thought experiment, as we know the chances of a decline in government spending is next to impossible) where government spending is decreased, but revenues decrease by a greater amount, resulting in a deficit.

You are trying to compare apples and oranges. What you need to compare is government expenditures, as that is what is used when calculating GDP.

Y = G + I + C + (X-M)

As I showed, the increase in G is responsible for only 20% of the increase in GDP. Both values are nominal. If you put them into constant or real dollars, the ratio is the exact same, 20%.

Shek

Thanks for correcting me. I was under the false impression that it was a single quarter of negative growth since I've heard so many folks in the MSM describe the Bush 43 recession in 2001. Well, there's still many quarters left, but Bush 43 is on track to join Clinton.

Broken

Not according to the National Bureau of Economic Research . According to the NBER figures, the Bush recession lasted eight months, slightly less than the typical recession.

Shek

There's something amiss here, as they quote BEA figures, yet if you query the BEA figures, they show a 1.2% growth in real GDP during the 2nd quarter of 2001. Something has to give here, and given that the NEBR relies upon BEA figures, I'd say that there wasn't a recession.

http://www.bea.doc.gov/bea/dn/nipaweb/TableView.asp#Mid

There Q&A at the end address some of these issues, but they clearly don't address the positive growth of output in the 2nd quarter of 2001.

Broken

You are confusing yourself. You are correct that a deficit or surplus is the difference between revenues and spending. Clinton ran a surplus. A net flow of money into the government. Bush is running a deficit. A net flow of money into the private sector. The difference is $648 billion. This is how much more money is being dumped into the economy.

The other stimulus source is the roughly $200 billion boost from the 5% reduction in interest rates.
This overly simple model assumes a constant money supply and does not account for budget surpluses or deficits. In other words, Y, (GDP), can be increased by increasing G (govt spending) without raising taxes. Furthermore, by dropping taxes, there is more money available for I and C (investment and consumption).

Y can also be increased by simply adding more money to the system. As an extreme example, the Fed could reduce rates to zero. Then I + C would go through the roof since everyone would be borrowing this very cheap money.

Add these two cases together and you have exactly what Bush (and Greenspan) have done, to the tune of $848 billion dollars in 2004 (as I calculated for you earlier). Dumping so much money into the system causes inflation.

In our present economy, this inflation is showing up as asset inflation- the housing bubble. US real estate prices have increased 55% in the last five years. Inflation is also high in healthcare and education.

Also, this huge jump in the money supply dilutes the value of the dollar overseas. Hence, the exchange rate drop in the dollar of 30% versus the Euro. This, in turn, drives up the price of imports, particularly oil. Since Chinese exports are pegged to the dollar, these prices have not gone up yet, but Bush is pushing for the Chinese to float their currency.

Broken

I've noticed that as well. I remember a few years ago that the BEA figures showed the recession that NBER speaks of. Now the BEA figures don't show a two quarter recession. I wonder if the BEA has been "revising" their figures. It might be worth researching.

Shek

Your hurting yourself here. Let me help you out. We are not a closed economy. A deficit doesn’t necessarily mean a net flow of money into the private sector. You have to look at your net export position as well, and if you are comparing to previous year data, then you have to look at what direction the deficit is going as well. There are many variables. I develop it in detail for you much further below. Now, let’s turn to your calculations and why they are wrong.

GDP, Total receipts, Total expenditures, Net lending (surplus), Net borrowing (deficit)
1993 – 5995.9, 1963.4, 2292.4, -328.9
1994 – 6337.7, 2109.2, 2361.0, -251.8
1995 – 6657.4, 2232.7, 2464.9, -232.3
1996 – 7072.2, 2399.2, 2570.0, -170.7
1997 – 7397.7, 2578.9, 2645.0, -66.1
1998 – 8747.0, 2756.6, 2718.7, 37.9
1999 – 9268.4, 2931.7, 2852.7, 79.0
2000 – 9817.0, 3161.6, 3002.6, 159.0
2001 – 10128.0, 3148.4, 3188.2, -39.3
2002 – 10469.6, 2991.5, 3,388.2, -396.7
2003 – 10971.2, 3046.1, 3,589.4, -543.3
2004 – 11734.3, 3238.4, 3,792.0, -553.6

1. Clinton ran a deficit for 5 of 8 years in office, and a surplus for the other 3. Over his presidency, he ran a deficit.
2. Let’s look at the figures step by step, and maybe that will help. Let’s look at 2001-2002. Government spending increased by $200bn and GDP increased by $341bn. Now look at 2002-2003. Government spending increased by $201bn and GDP increased by $502bn. Now look at 2003-2004. Government spending increased by $203bn and GDP increased by $763bn. Now, when you add up everything, you’ll find that government spending increased by a total of $604bn over that time period, while GDP increased by $1606bn. That means that the increase in government spending accounted for approximately 3/8 of the growth, or around 37%.

For such a simple model, you still don’t understand it.

1. I address constant money supply below. Bottomline, the classic dichotomy holds.
2. It does account for budget surpluses/deficits. Let me develop the model for you. For those that didn’t like economics, I have placed asterisks around the text that develops the model. You can continue reading below this portion to get to the bottomline.

************************************************** ***************In a closed econonmy (no trade), Y = G + I + C
Rearranging the terms, I = Y – C – G
In English, investment = GDP – consumption – government expenditures
By definition, this is savings, so S = I

Now, let’s break savings into both private and government portions
Sp = Y – T - C
Private savings = GDP – taxes - consumption

Sg = T – G
Government savings = taxes – government expenditures

Now, we can develop this further:
S = Y – C – G = Y - C – G + (T – T) = (Y - T - C) + (T – G) = Sp + Sg

What you have is the savings identity in the first portion, then you add and subtract taxes for net change of 0, then you separate the terms, and you show that national savings, S, equals the sum of private and government savings

In an open economy, Y = G + I + C + NX
What we have done is add NX (net exports), which is X (exports) – M (imports)

Using the savings identity that we previously developed, in an open economy, S = Y – C – G + NX

In English, savings = GDP – consumption – government expenditures + net exports (or exports – imports)

What do you do with savings? You either invest it domestically or abroad. This leads to the following:

S = I + NX
Savings = domestic investment plus foreign investment

You can then expand the equation yet again
Sp + Sg = I + NX
Sg = I + NX - Sp
************************************************** ***************
If the government spends more than it makes, then T – G is a negative number, then one of the other variables is affected: Sp, I, NX. In other words, investment must decrease, net exports must decrease, or private savings must increase. How does this translate from an equation to the real world? Here are two examples. If there is a deficit, then the US Treasury will print bonds and sell them to raise the revenue to pay the bills. This is done by a US citizen purchasing the bond (an increase in private savings) or a foreigner purchasing the bond (this would be a reduction in net exports). Bottomline, this simple model captures both changes in the money supply and deficits and surpluses. No soup for you.

1. Interest rate changes don’t change the money supply, it changes liquidity.
2. If consumer interest rates went to zero, then you’d have banks defaulting. Bad example.
3. Now, if you want to add money to decrease interest rates, you’ll have short run effects. However, your real interest rate will quickly catch up to the nominal change, and in the end, the only change is a nominal one. What’s really pertinent is to look at the growth of the US money supply (I’ll use M2, since that’s what the Fed targets). Using figures from the Fed (http://www.federalreserve.gov/releas.../h6hist10.txt), I calculated the growth of M2 in Bush 43’s first four years in office (29.3%) and Clinton’s final four years in office (30.4%). So, if your claim is that Bush 43 is trying to get the Fed to dump money into the system to artificially inflate GDP, it’s wrong.

Inflation is measured by the basket of goods. If this basket consisted only of real estate, education, and health care, then you could make your argument that we are experiencing high inflation. However, people don’t consume only real estate, education, and health care. People tend to require food, transportation, and many other items in their basket. When you use real measures for inflation, inflation is well under control.

1. As the dollar has depreciated, this means that US goods are cheaper, and our exports increase. With an increased demand for American goods, US production increases. This is the other side of the story that you have left out.
2. Actually, the weak dollar doesn’t necessarily affect oil imports. For example, of the top five oil exporters to the US, accounting for around 80% of our oil
(http://www.eia.doe.gov/pub/oil_gas/p...t/import.html), you have one currency that has traded in a narrow range, one that is definitely floating and has experienced an appreciation against the dollar similar to the Euro, one that has been pegged, one that is pegged but has been revalued, resulting in an appreciation of the dollar, not the general depreciation, and one currency that I couldn’t find long-term data on. The exchange rate has had mixed results.

The Mexican Peso doesn’t appear to be pegged, but it has traded within a much smaller band that the Euro:
http://finance.yahoo.com/q/bc?s=USDP...n&z=m&q=l&c=2y

Canada is free floating:
http://finance.yahoo.com/q/bc?s=CADUSD=X&t=2y

The Saudi Riyal is pegged to the US dollar: http://finance.yahoo.com/currency/co...USD&amt=1&t=2y

Venezuela is pegged, but the peg has been moved in the direction of the dollar appreciating, not depreciating as it has against free floating currencies:
http://finance.yahoo.com/currency/co...USD&amt=1&t=2y

I couldn’t find long-term data on Nigeria.

3. Floating the Chinese yuan won’t affect the price of our imports that much. It will result in an small increase in prices, and if the prices continue to rise as the yuan appreciates, then US consumers will substitute away from Chinese goods to another importer with cheaper goods. The market will make this happen.

Broken

Say, what? Bush's trade numbers are worse than Clinton's. I didn't mention them before because I didn't need them to make my point and I'm lazy. But, if you insist...

If you go to the BEA website and load the Balance of Payments interactive tables, in Table 1 you will see that the Current Account deficit (line item 76) has grown by $80 billion from Dec 2000 to Dec 2004, the period we have been discussing.

As I said several times before, 90% of Bush's GDP growth to Jan 2005 can be accounted for by deficit spending and interest rate reduction. The other 10% of Bush's "economic growth" is this $80 billion increase in the Current Account deficit.

So there you go, Bush's GDP increase exactly matches the growth in stimulus spending from deficits and interest rates. No real growth at all. Perhaps that will change in the remainder of Bush's term. However, under the double-whammy of Greenspan's recent rate increases and the doubling of oil prices, I wouldn't count on it.
To begin with, your deficit numbers do not match the OMBs. Not that that helps your argument, since the Clinton-Bush spread in your tables is even greater than the OMB numbers. Let us stick with the official deficit numbers, as published in the OMB's historical tables . Load Table 1.1
This has nothing to do with calculating Bush's deficit vs Clinton's, but I'll bite anyway.

In his second term, Clinton ran a net surplus - the first president to run a surplus in any term since Harry Truman fifty years ago. Clinton inherited a $255 billion deficit, turned into a $264 billion surplus, and recorded an average GDP growth rate of 3.7% over eight years. Them's tough numbers to beat.
First off, you still haven't grasped the concept of deficit. SPENDING does not equal DEFICIT. SURPLUS/DEFICIT = REVENUES - SPENDING. If we can't get past this simple point, I'm afraid I can't help you.

Bush both raised spending and cut taxes (revenues). The cut resulted in more money in our pockets, hence more spending and investment, hence more stimulus.

Second, you are using current dollars for GDP, not real inflation-adjusted dollars. Please use the chain-weighted GDP figures.
I said your simple consumption model of the GDP does not account for the effects of money supply growth. It is a measure of GDP, not the factors of GDP growth. As Einstein said, "Simplify as much as possible... but not more so".
You are misunderstanding the Consumption model of GDP. As you point out, taxes do not appear in this model. Taxes are not consumption.

Take the following example, assuming fixed government spending (G). If the Government raised taxes to 90%, GDP would take a horrendous nose dive. If the Government lowered taxes to 0%, GDP would skyrocket (and so would inflation). You know that, but your model doesn't account for taxes. This model doesn't account for the effects of interest rates on GDP growth, either. That's because a Consumption model measures GDP, not the factors that caused that GDP in the first place.
That is because Sp = Y - T - C and Sg = T - G, so
Sg + Sp = I = Y - C - G - NX.
As pointed out before, taxes cancel out and disappear completely from this model, as they should in a measurement of GDP. Taxes and interest rates are drivers of GDP, not components of GDP. Likewise, employment is a driver of GDP not appearing in your model. If employment went to zero, so would GDP, but employment is not in your model.
When foreigners buy US debt, it is not counted as part of the Trade Deficit, although it is counted as part of the Current Account deficit. By the way, foreign purchase of US Govt securities was $311 billion in 2004.
No, it does not account for foreign purchases of US Debt, nor does it properly account for domestic purchases of US Debt. By your model, deficits are a zero-sum game: all debt created by the government must be purchased at face value by private institutions. This is simply not the way it works.

Although governments no longer just directly print money to cover their debt, reserve systems such as the US Federal Reserve follow a practice which amounts to the same thing. Let me explain.

In a free market, if the government were to drop an extra $600 billion in debt on the bond market, interest rates would soar. This is simple supply and demand: too many bonds competing for too few buyers. So, how is it that Bush can run a defict $600 billion larger than Clinton and have interest rates DROP from 6% to 1%? Is he defying gravity?

This is how it works: the Fed intervenes by use of it's open market purchase/sale of bonds and it's Fed Funds rate. By maintaining the Fed Funds rate below the interest rate of Govt securities, banks have a strong incentive to borrow at the Funds rate and purchase Govt securities at the higher rate, making a nifty profit on the difference in rates. This causes the money supply to grow and interest rates to drop. In a nutshell: the Fed is printing money, just like the old days.

In the four years since Jan 2001, the basic money supply (M1) has grown by 30% to 1.3 trillion. In contrast, the money supply grew only 6% in the eight Clinton years. On an annual basis, the Bush money supply has grown nine times faster than under Clinton.

Such are the wonders that can be achieved with massive deficits combined with ultra-low interest rates.
The Fed Fund rate combined with the Fed's Open Market bond transactions do change the money supply. In addition to the "printing money" scheme outlined above, the Fed Funds rate allows banks to operate with a much smaller real reserve. The banks can make up reserve shortfalls by borrowing at the Funds rate. If the Funds rate is high, banks will depend on real reserves instead, hence reducing the amount they can lend, hence reducing the money supply.
I said Fed Fund rates, not consumer rates. If Fed Funds rates went to zero, that would really be printing money- the banks would make a killing.
The most liquid measure of the money supply, M1, grew 9 times faster under Bush than Clinton. M2 is less liquid, and M3 is less liquid still. Remember also that GDP growth rate in Clinton's second term was double (in real dollars) what it was in Bush's first term, not to mention the stock market. The money supply will naturally increase with a fast growing economy. Bush's increase is not natural.

Also, Bush had help last year from foreign banks buying up US debt. Over 90% of US debt obligations were bought by foreigners in 2004.

Since 2000, real estate prices have gone up 55%. What do you think is causing this asset inflation, besides too many dollars chasing too few assets?


Why did you leave out gasoline and natural gas prices? The CPI has become an almost meaningless statistic- politically manipulated into uselessness. This isn't Bush's fault, just about every one of his predecessors modified the CPI downward. Housing costs are the largest budget item for most people, and housing prices have gone up 55% in 4 years. Fuel prices have doubled. Healthcare and education costs are up 30%. Even food prices- ground beef prices are up 38%. You can check food price increases at the Bureau of Labor Statistics .
I think the dollar devaluation is a good thing for US exports. US manufacturing needed a devaluation, big time. Besides, I made 30% last year buying foreign bonds.

However, US manufacturing keeps losing jobs, 40,000 in May alone, and 2.8 million since Jan 2001. This is a serious problem that needs addressing- unless we want to become a nation of burger flippers and insurance adjusters.

The dollar depreciated 30% against the Euro, but the US economy did not grow 30% in response. That means the US economy shrank relative to Europe. We should be more careful bragging about how much faster our economy is "growing" than Europe's.
Oil has always been paid for in dollars. However, with the drop in the dollar, producers are either raising prices or switching currencies. Let's just hope the dollar doesn't lose it's place as the favored reserve currency any time soon. If that happened, all hell really would break loose.
Since the Chinese are the low price producer for manufactured goods, who will we switch to if they float the yuan? Realistically, the yuan is almost 100% undervalued. I doubt if the Chinese will let it rise more than 20% anytime soon, but I am hedging in yuan just in case.

Parihaka

Broken, some points to note

The chinese are alowing 0.3% 'fluctuations' per day, and it is constantly trending upwards.

Beginning in March 2006, the Tehran government has plans to begin competing with New York's NYMEX and London's IPE with respect to international oil trades – using a euro-based international oil-trading mechanism.

China is currently divesting itself of its $US reserves through 'loans' to third country economies such as Argentina for future concessions on raw materials, and is spending more through shell companies acquiring assets, principally in the US.

If I was in charge of the Fed, I'd be shovelling the money into the burner just as quick as I could.

__________________
In the realm of spirit, seek clarity; in the material world, seek utility.
Gottfried Wilhelm Leibniz