In the State of the Union, George Bush loudly trumpeted that the Gross Domestic Product (GDP), the main statistic cited for overall growth in the economy, had in the third quarter jumped at "the fastest rate in twenty years," an annual rate of 8.2% -- a startlingly high number by historic standards.
Especially given the fact that the economy has restored so few new jobs to replace the millions lost during this recession.
Now, the fact that growth is way up shouldn't be a surprising. Between massive government debt and personal debt being cashed out in tax cuts and home equity loans, it would be a shock if there wasn't some boost to the GDP growth numbers. Whether it's sustainable is the big question.
But with so little job growth accompanying the GDP numbers, it does make you ask: What's going on?
The basic answer is that the GDP statistics may be partially bogus.
Adjusting GDP Numbers for "Quality": Most folks recognize that you have to adjust GDP growth numbers for inflation; a higher total value of goods doesn't mean much unless growth is more than the increase in the costs to consumers. But most people don't know that the government adjusts those numbers for more than the basic Consumer Price Index inflation numbers widely publicized.
One key statistical game by government analysts is trying to account for "quality" inflation as well as dollar inflation -- for example, the idea that the same dollar buys more computer power than it did a few years ago. But this has some perverse effects. Here's how the numbers work. In dollars actually spent, businesses spent $70.9 billion on technology in 1996. By 2002, that spending had risen to only $74.2 billion in actual dollars spent.
But accounting for "quality inflation" -- the greater computer power that could be bought with those dollars by 2002, the government was claiming that businesses were spending $283.7 billion by 2002 in inflation-adjusted terms.
Despite the late '90s tech boom, business is not spending any more on tech equipment than in the mid-'90s. The government just counts what's being bought as more valuable because of getting more power and quality for the same price.
Let's be clear -- it's no conspiracy that the government uses such quality-adjustments in GDP data. Quality improvements are worthwhile and worth measuring.
But it does mean folks should be careful about using GDP growth as a pure proxy for the health of the economy, especially when you are worried about jobs. "Growth" in computing power may be nice, but if there's no increase in actual dollars spent, that means no new jobs to employ people, despite higher supposed GDP numbers.
In fact, in December, the main economic statistical agency of the government, the Bureau of Economic Affairs, announced that these "quality" adjustments to inflation are flawed and that they will be reworking all growth numbers to eliminate their distortion. They haven't done this for the famed third-quarter growth number, but many analysts expect a large revision downwards.
Problem of Housing Inflation: On top of these "quality" adjustments, there is also a fundamental problem in the inflation statistics related to the housing market.
A serious problem with inflation measures is that they include changes in the cost of rental housing, but do not take account of increases in housing prices for home owners. The assumption is that even home owners are merely saving the costs of renting their homes, so the numbers are substitutable.
In most periods, the two numbers -- rental costs and home ownership costs -- go up together, but at the moment, rental prices are dropping nationwide, even as home purchasing costs continue to rise. The result is that the housing portion of the CPI inflation number -- 22% of the total - has grown at just 2.1% over the past year, even as Americans furiously purchase ever more expensive homes.
Unless there is a crash in housing prices, the inflation numbers accounting for housing costs are just unrealistic and are distorting how we measure overall growth.
This low housing portion of CPI disguises sharp increases in other prices. A whole range of commodity prices have jumped sharply:
The industrial materials index administered by the Journal of Commerce and the Economic Cycle Research Institute was rising at a rate of 33.7% in December.
From September of 2002 to September 2003, the cost of education had risen 7%.
Medical costs are up 4% and utilities costs have increased 8.6%.
All of these increases are much higher than reported inflation, which grew at just a 2.3% rate this past year, and the "core" CPI inflation index, excluding fluctuating food and energy prices, grew just 1.2%.
So if the housing price component is distorting the real measure of inflation, real inflation-adjusted growth is much less than what's being reported.
Productivity Myth: A lot of apologists for the growth numbers point to productivity numbers showing how much more efficient American workers are getting each year -- and they argue that kind of productivity growth implies that the overall growth numbers must be real.
Steve Roach, chief economist at Morgan Stanley, is almost the designated head of the skeptics of the "New Economy" and has argued repeatedly that the massive productivity gains are essentially bunk.
Essentially, his argument is that folks aren't producing more stuff each hour -- the statisticians are just missing a lot of work time. As he argued in one recent op-ed:
"Courtesy of a profusion of portable information appliances (laptops, cell phones, personal digital assistants, etc.), along with near ubiquitous connectivity (hard-wired and now increasingly wireless), most information workers can toil around the clock. The official data don't come close to capturing this cultural shift. As a result, we are woefully underestimating the time actually spent on the job."
So this means that all the statisticians are "guilty of overestimating white-collar productivity." A lot of time we think is leisure is just folks working off the clock, making people look more efficient for the time they actually spend at work.
Fake Growth/Lost Jobs: If "productivity" just leads to firing some people and making the rest work longer hours, it's a dead end strategy for real growth. And with economic growth numbers riddled with these statistical problems, don't hold your breath for the large GDP numbers to restore the millions of jobs lost under Bush.
Nathan Newman is a lawyer, longtime union and community activist and author of Net Loss [Penn State Press] on inequality in the Internet economy. Email firstname.lastname@example.org or see www.nathannewman.org.