“On the other hand, the political need to avoid recession…”
I’d rephrase that as “the political need to avoid the acknowledgment of recession”. I’ve said it on many other threads, but at the risk of repeating myself I’d like to make the point again.
We are in a recession. We have been in a recession for a long time. Arguably, we were in a recession for the entire decade, all through the housing bubble.
The government will not call it officially a recession unless there are two quarters of declining real GDP. This is a bogus number. It is very easy to cause the GDP to increase in “real” terms. Step 1, rain money from the sky, causing a nominal increase in GDP because the new money all gets spent. This can be done through tax rebates or lowering the Fed funds rate. Step 2, understate inflation and use a ludicrously low GDP deflator to adjust the nominal GDP to “real” GDP. As long as the number always comes out positive, hooray, no recession. Enron cooked their books. Would we expect any less from good ol’ Uncle Sam?
Furthermore, the idea of GDP is silly. How much money changed hands during the year? That’s the measure of the health of the country? What if I measured my financial health that way. Well, as long as I borrow and spend more money than I did last year, I am in “expansion” and therefore doing well. Obviously, this is idiotic. Volume of transactions says nothing about quality of transactions. If the bulk of GDP is borrowing and spending, a growing GDP is a bad thing. In my own life, the best measure of my financial health is how much I make vs. how much I spend, and how much I’ve saved vs. how much I owe. For companies these are measured on the income statement (make vs. spend) and balance sheet (saved vs. owe). For a country, I’d offer trade balance and savings rate. During the whole bubble, the US ran a trade deficit of $700-800 billion per year. That indicates borrow and spend, which the GDP fails to indicate. Similarly the savings rate was negative. Again, bad. So the economy was always in a bad state, or at least a precarious state. Sure, there were jobs in real estate and mortgage lending and construction. But it was all short lived and phony. But it looked good politically. It was all smoke and mirrors, but at least Bush and co. never had to acknowledge a recession officially.
