Macroeconomics 117
I know you’ve all been anxiously awaiting this episode since I teased it back on April 6th, the introduction to GDP. The first official BEA estimate for U.S. gross domestic product through Jan/Feb/March came out yesterday, and it concluded our economy decreased by 4.8%, compared to that same time period in 2019. Do you want to know what the official prediction was? Depends who and when you ask. In the articles yesterday, they were quoting the official prediction as -3.5% [only 1.3% off? Ackchually, that’s 27% off]. On April 13, the prediction was -2.5%. Six weeks before that, at the end of February, more than halfway through the quarter, it was +1.2%.
Is my point clear? The predication game is a losing one. Riddle me this, why does anyone ever feel certain of anything? All these models, and all we ever do is revise them. My theory is there is something comforting about attaching numbers to things. It gives us something to hold on to—cuddle, if you will, until someone takes that number away and gives us another one. Okay, I’ll cling to this number now; in fact, this is the number I actually wanted, anyway! Each new number is the right one, until it isn’t.
I’m not done. This theory also explains why we’re all so fascinated by ranking things that can’t be ranked. I’m a fan of Scoop & Score, but every time someone tries to tell me x-flavor of ice cream was ranked y-best the world, all I have are questions, starting with who decided this and how much time passes before the next worldwide ranking? Yes, Elf has already covered this territory. In reality, there are roughly three categories of ice cream: good, really good, and not good. Do we actually enjoy eating ice cream more if we suspend disbelief and remind ourselves with every lick that someone else has a very high opinion of this flavor, very high indeed! By every indicator, yes. We seem to act the same way with our romantic interests as well, and often care a whole lot about who we think other people think is desirable, or not.
Back to 2020 Q1 USA GDP. The craziest part is, “-4.8%” is still going to change! “When the Commerce Department makes its revisions to the initial GDP reading, the result could show a decline of about 3 to 4 percentage points for a total slide of 8.25%,” according to a Goldman Sachs estimate. So we’re going to look at all the data, write all the articles, come to all the conclusions, only for the rug to get pulled, once again.
Who else is excited to look at all the data? Just me?
GDP is intended to be a measure of the output of a country’s economy. When all is said and done, what do the factors of production add up to? Factors of production are broken down into four categories: land, labor, capital, and entrepreneurship. These are the inputs, and GDP is the output. Land and labor are fairly self-explanatory; do you know what capital is? The simplest way to understand the simplest definition is this: capital is something that is manmade, assists in production, and is not used up in the process. If two people want to start a lawn mowing business, and one of them has a lawnmower, and the other has no capital, what is going to happen? Most likely, the guy without capital is going to work for the guy with capital, or pay to borrow (rent) the capital. The gasoline required does not count as capital, because it is used up in the process of “production”. We’ll talk about entrepreneurship another time, it’s closely tied to the concept of residual claimants.
How can we add up all the factors of production? Add up every sale of every good and service in the country? Not quite. We can only count the *final* sale. If a lumberjack cuts down a tree and sells it to a carpenter, and the carpenter makes a rocking chair and sells it to Home Depot, and Home Depot sells it to a hipster who wants a rocking chair on his 4′ x 6′ apartment patio, the only sale counted in GDP is that final sale. It’s counted in “consumer spending”, which makes up ~67% of total GDP. If the carpenter had sold it to Cracker Barrel, it would have been counted in “business investment” (~18% of GDP). Who remembers the equation and what is coming next? C+I+G+(x-m)=GDP. If the Bureau of Economic Analysis bought the chair for their waiting room, it would be counted in “government spending” (~17% of GDP). And, finally, if Kim Jong Un bought the rocking chair for the DMZ, it would be counted in exports (~-5% of GDP; we import more than we export). Simple enough, right?
If a grandpa make the chair for his grandaughter as a gift, the chair is not counted in GDP. In fact, all exchanges of goods or services off the *official* record are not counted in GDP, so countries with a thriving black market may be underrepresented. Oh wait, that might be, *checks notes*, US?
Now that we’ve reviewed the basics, here’s the breakdown.
Consumer spending dropped 7.6% in the first quarter, but spending on “goods” was only down 1.3%, while “services” was down 10.2%. Intuitive. Federal government spending was up 1.7%. Also intuitive.
To be super-clear: “goods” are physical products, like TV’s, or crocs. Services are things that don’t create a “product”, but public consumers pay for. Haircuts. Accountants. The “product” is measured by a problem you no longer have, in fact, like an overgrown lawn. Mowing lawns is a service, see?
Want to know the single-biggest component of that 10.2% decrease? This is where I earn my keep, you’re not gonna stumble across this scanning the news. Health care. A decrease in spending on health care was responsible for 18% of that 10.2% decrease (within that 7.6%) of that 67% of that estimated Q1 GDP!
No one has any real idea what that means, long-run, the reason I’m bringing it up is to critique GDP again. If some girl stops going for a jog a few days a week, then develops health problems, then starts going to the doctor, this development is reflected in GDP as “growth”.
Turns out, Benjamin Franklin was wrong when he said “An ounce of prevention is worth a pound of cure“. The updated quote is “An ounce of prevention leads to a decrease in GDP”.
Americans spent twice as much on health care in 2019 as they did in 1984. That number is adjusted for inflation, I’m not trying to trick you. So, one of the drivers of our *economic growth* the past few decades has been deteriorating health, nationwide (and increasing cost of health care, sure). Health care accounts for ~18% of our GDP, total. Have you started questioning everything yet?
Pause for a few points of clarification. First, I’m not writing these things to ruin how you experience eating ice cream. My true goal is to make you a little more self-reliant. Focus a little more on your experience and interpretation, rather than relying on other people’s data and opinion. Does that make sense? While I’m explaining my dark humor.. yes, the title is a reference to Bon Jovi’s “Livin’ on a Prayer“. With Q1 GDP coming in negative, we are halfway to *officially* being in a recession.
If I was a cynical pessimist, I wouldn’t be in education, definitely not for nine years. Economics/teaching brings out the *dark* side of me, and P.E./coaching brings out the *light*. I know, right? It makes so much sense now that I said it. There’s a reason I prioritize my specialization in athletics ahead of economics. Both. favorites. [if you click on anything in this post, click that one]
Okay, everything so far has been the good news, let’s cover the bad news.
We were only in a lockdown for less than three of the twelve weeks in the first quarter. March broke a streak of 113 consecutive months where the U.S. created more jobs than it lost. Official unemployment numbers are due to be released on May 8th (mark your calendars), and our six-week running total of unemployment claims are over 30,000,000 (30M).
“We’re going to see economic data for the second quarter that’s worse than any data we’ve ever seen.”
-Jerome Powell, U.S. Federal Reserve Chairman
When it comes to economic recovery, it’s been common for economists to use letters to describe how they think it will look. The letter is supposed to represent the “output” line on a graph, for example, a “V-shaped” recovery would mean a quick drop and a quick recovery, see? A “U” would be more gradual, and now we’re seeing more predictions for a “W”, in which the economy stops and starts over and over. A Nike swoosh would be the worst.
For those eager to calculate what second quarter GDP could look like, Morgan Stanley predicted -38% back on April 3.
China reported a -6.8% drop in their first quarter GDP, and they were on lockdown for 76 days. How is that possible, when we’re looking at closer to -40%? Maybe, the same way that Luckin Coffee (a China-based company trying to overtake Starbucks) reported profits. They doctored the numbers.
China doesn’t play by the rules, and Luckin Coffee got caught.
Did anyone listen to the Angels & Airwaves songs I linked to on Tuesday? They were supposed to be uplifting; the sound makes me think of springtime and freedom. They were also supposed to be a nod to Tom DeLonge’s obsession with aliens and UFOs, but my editor cut the paragraph where I explained the connection. I’m intentionally limiting my movie and music recommendations to content that influenced high-school-me significantly, which has been a fun exercise. So far, my book recommendations haven’t followed that pattern, but I’m giving you a throwback today. I read this book before high school and re-read it a few years ago, and I was shocked to realize how much it had influenced the way I think and empathize. And it has aliens!
Many of you are familiar with Ender’s Game—this is a sequel, but it can stand alone. Since this book is longer (382 pages), I’m assuming fewer of you will be interested, so I’m expanding the giveaway pool to include current AND former students. Seriously, hit me up! I will mail copies to the first three claimants, starting from when I publish the post and ending in one week.
Orson Scott Card wrote this in Ender’s Game, and explores it further in Speaker for the Dead:
“In the moment when I truly understand my enemy, understand him well enough to defeat him, then in that very moment I also love him. I think it’s impossible to really understand somebody, what they want, what they believe, and not love them the way they love themselves. And then, in that very moment when I love them…. I destroy them.”
This is the mindset I try to channel in the classroom (just substitute “teach” for “destroy”), and why remote teaching is challenging. Learning works best as a two-way dialogue, not a monologue.
Three weeks to go!
