US GDP Swings to Growth

For the first time during this recession, US GDP is registering solid growth of 3.5% for Q3 of 2009.

Declining businesses inventories played a large role, but much of the growth was caused by increases in consumption spending: 40% of the increase in consumption was cars, driven by the cash-for-clunkers program, and another big slice was new home construction, driven by the $8,000 first time home buyer credit.

Those of us who were skeptical about these Federal programs to prop up consumption, may now be shown the rising GDP numbers as proof that these kind of government actions work. Well, yes, they work. But at what cost, and for how long? When the government borrows in order to give money to home buyers and car buyers, not only is that a dubious redistribution of resources, it causes a distortion in prices and in perceived demand. It causes sales from the future to happen in the present, inflating both automakers’ view of demand for cars and homebuilders’ view of demand for new homes.

It’s painfully obvious that the government cannot keep borrowing in order to funnel money toward consumption. When it ceases to do so, growth will fall, perhaps to negative territory.

Federal spending was up sharply, though state and local spending fell, due to declining revenues. States have a budget constraint that the Federal government doesn’t have.

Though the weakness in the dollar pushed up exports by 14.7%, imports increased by 16.4%, underscoring Americans’ addiction to low-priced foreign goods. The tendency to buy imports is true for cars as well as clothing and electronics: an often-overlooked feature of cash-for-clunkers was the fact that people often bought Hondas and Toyotas, which helps to stimulate Japan’s economy more than the US (with the exception of those Hondas and Toyotas produced in the US).

The Obama Administration claims the $160 billion that has been spent (of the $787 billion stimulus bill) has created or saved 640,329 jobs. Do the math: that’s $249,000 per job. That seems a bit expensive to me. For that price, we could’ve given 3.2 million Americans $50,000. Of course, the number of jobs ‘created or saved’ is already a bit dubious. Could it be that the government agencies who received stimulus funds had an incentive to say more jobs were ‘saved’ then actually was the case, to secure future stimulus funding? The Bureau of Labor Statistics doesn’t have a category for jobs saved, but it does have a category for net job creation, which has been massively negative for nearly 2 years, adding up to a total number of jobs lost of over 7.2 million. Given that the Bush administration also did a stimulus of $170 bil in Feb 2008, if $330 bil gives us only 640,329 jobs, how much would have to be spent to give us 7.2 million jobs? The answer is a staggering $3.6 trillion.

The reality is that the massive stimulus efforts have produced only small numbers of jobs, which have been swamped by the restructuring occurring throughout the economy. But such restructuring is necessary and unavoidable, and should be allowed to happen quickly rather than being dragged out through massive government consumption schemes.