In discussing the U.S. economy, I keep on seeing this refrain from Treasury Secretary Paulson (this one happens to be from the NYT)
“We have the strongest global economy I’ve seen in my business lifetime,” Treasury Secretary Henry M. Paulson Jr. said in Beijing last week. “We have a healthy economy in the U.S. So what is going on in my judgment is a reassessment of risk.”
I defintely have no disagreement with Paulson’s last sentence. The second to last sentence, I’ll leave to others to judge. Regarding the first sentence, I decided to see whether this assertion is reflected in the data. It is, at least for the overall world economy. From the IMF’s World Economic Outlook April 2007 database, augmented with the July 26 update:
Figure 1: Growth rates of real GDP for World (blue), and for Advanced Countries (red) (IMF definition). 2007 figures are IMF projections. Sources: IMF’s World Economic Outlook April 2007 database, augmented with the July 26 update.
Indeed, overall global growth, driven by China and India, is surging. However, advanced country growth (G-3, euro area, NICs) is much slower. The July revision relative to the April WEO is illuminating. US growth has been revised downward by 0.2 percentage points, while Chinese growth has been revised upward by 1.2 percentage points (India by 0.6).
So we have global growth surging, US growth being revised down. This phenomenon highlights the question of whether decoupling can occur (a topic taken up in Chapter 4 of the April WEO).
From a more casual perspective, I wonder if acceleration in growth of non-advanced country output is sufficient to keep up U.S. export growth such that the U.S. does not sink into recession. I think that’s an open question.
Parting shot: The previous graph was based on PPP/constant dollar calculations. In some respects, for economic activity across borders, world GDP might better be measured at market exchange rates. In that case one gets a slightly less rosy view of world GDP growth.
Figure 2: Growth rates of real GDP for World, evaluated at PPP (blue), and at market exchange rates (red). 2007 figures are IMF projections. Sources: IMF’s World Economic Outlook April 2007 database, augmented with the July 26 update.
Then global growth in 2000 was higher than it was in 2006, and than it is projected to be in 2007. Nonetheless, global growth looks pretty robust. Whether that means the same for the U.S economy remains to be seen.
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Methodologically, one should compare annual increments in real GDP per capita, not rates. Then one can find that all developed countries demonstrate fluctuations around some constant level of the increment, country-specific but very close in PPP representation (I can not put figures here , they are available in
http://ideas.repec.org/p/pra/mprapa/2738.html
or
http://ikitov.blogspot.com/2006/05/real-gdp-per-capita-in-developed.html
Emerging countries are in beginning of the 20th century in term of GDP per capita and accordingly demonstrate higher rates, as was in 1900s in the US.
Effectively, real GDP per capita (PPP) growing at a rate of 1% per year in the USA (say $400 per year per person) corresponds to approximately 5% (in China) and 10% (India) growth rate. This shows that emerging countries are not catching up the US and other developed countries in absolute terms – the gap is growing with time in real GDP per capita. Also, when China, India, Brazil, Russia will reach the current (2000s) level of real GDP per capita in developed countries they will have same growth rate (about 2% per year). It will happen in about 70 years, when the current developed countries will be growing at rates below 1% per year (real GDP per capita).
Due to additional tractions and imperfectness in economic systems of emerging countries one can expect a growing gap (real GDP per capita) behind developed countries.
This is what worldwide observations show.
Just anecedotal, but I am mid-50s and this is the worst economy of my lifetime.
Me,
You have got to be kidding!!! If you are in you 50s you lived through the chronic inflation of the 1970s where real wages and growth were negative. You lived through double digit inflation, interest rates, and unemployment of the Carter years. You lived through the deflationary recession of 1981-2. You lived through the recession of 2000. Did you sleep through these?
Menzie,
Thanks for the post and for pointing this out. The US growth rate is mediocre at best. Congress is driving business out of the US with such regs as Sarbanes-Oxley. Corporate taxes are the highest in the world. Restrictive interest rates hinder expansion and repair. Congressional meddling with monetary policy is causing greater uncertainty. The list could go on and on.
The world is growing above 5% and the US is growing at 3% on a good day. If it were not for the tax cuts we would be seeing even lower growth, perhaps negative, yet the Democrats are still talking higher taxes and letting existing tax reductions expire while the Republicans are sitting in the corner sucking their thumbs. Our politicians need to open their eyes, stop playing political games and begin to act like they actually care about our country.
” If it were not for the tax cuts we would be seeing even lower growth, ”
Apparently it is you that is kidding. That has been debunked so many times now.
“Corporate taxes are the highest in the world.”
Except that no corporation pays those high rates. As the OECD says “Higher Corporate Income Tax Rates Don’t Guarantee Higher Revenue
Many people would expect high tax rates to yield high tax revenues, but the reverse is often the case.”
Or this “After IBM uses tax loophole, IRS moves to close it
Dow Jones News Service
The Internal Revenue Service moved to shut a corporate tax loophole last week, two days after IBM Corp. used it to save an estimated $1.6 billion, according to a person familiar with the transaction.
On May 29, IBM said it had structured a $12.5 billion stock repurchase to take advantage of funds it earned overseas without making them subject to U.S. corporate tax rates. Tax attorneys call such deals “Killer B” transactions because they are designed to circumvent IRS section 367 B covering U.S. taxes on repatriated earnings.”
While we used to have inflation, we also used to get raises and find jobs.
I am sorry, I almost forgot. You blame the dems but the republicans have been in charge since Newt and 1994. It is your guys that have ruined the country, not to mention 2 BILLION a month wasted in Iraq.
You blame the dems but the republicans have been in charge since Newt and 1994
Um, the Republicans aren’t in charge now, and its the Democrats that want to raise taxes and eliminate the fiscal stimulus, which is the only thing keeping this economy going.
God knows why they want to raise taxes. The deficit is slowly decreasing, and tax revenues are above trend. And the economy is, if not weak, not exactly vigorous. Not in a recession, but not growing at the rate we have all come to expect.
I don’t think that this is the worst economy ever, Dick is right about that. Far from it. Carter was waaaaaay worse. But on the other hand, it isn’t 1999 either. We could do a lot better.
“We have the strongest global economy I’ve seen in my business lifetime,”
“We have a healthy economy in the U.S. So what is going on in my judgment is a reassessment of risk.”
‘Strongest’ and ‘healthy’ are meaningless characterizations. ‘Risk’ is something that should always be reevaluated. In short, Paulson said nothing. This is propaganda. Pure and simple. Pol Pot, Stalin, and Goebbels would admire his work.
Doesn’t it make you worry that the administration is pulling out all its top guns to try and talk the economy up. Especially when the best new economic policy they can come up with is to devalue the currency — the flip side of the Chinese appreciating.
kio: Sorry, but I think we’re addressing a different issue here — not standard of living but rather overall aggregate economic activity. For that, one might reasonably be concerned with output not normalized by population.
DickF: There is no empirical (read econometric) study I know of that verifies that the implementation of SarBox has induced the reduction in IPOs and other financial activities in the U.S. The lackluster growth in U.S. GDP, and employment growth, predates the advent of the Democratic congress. Me is also right that CBO recently debunked the idea that the US was a high corporate tax rate regime relative to the rest of the OECD. Regarding tax cuts and output, I think you missed this Treasury report on medium term effects of tax cuts and the associated (discussion on this website).
buzzcut: Another recent CBO report argues that the fiscal stimulus from the tax cut has likely all dissipated by now.
Spencer,
Yes, it does bother me. I don’t think that the administration has done a good job with the economy. The only reason we have a thriving economy is because of the Thomas tax cut. Bush had to be pulled to that kicking and screaming. He favors Keynesian demand side cuts. He thinks he is a supply sider but he doesn’t understand supply side.
That said, the primary driver of the fiscal is congress and right now that is Democrats, then right behind congress is the FED. If the economy goes in the tank it will be their fault. The Republicans brought us through massive hurricanes and 9-11, unprecedented disasters, yet the economy stayed strong.
We have a great economy, and it only cost us ca, $8 Trillion in debt to accomplish it.
C’mon, Dick and buzzcut.
The deficit is still large, and we’re at the peak of the economic cycle. Guess what happens when growth drops?
The Democrats may be in charge, but they haven’t passed one budget yet. Even when they do, they have to get it past Bush. Part of the reason for the stedy decline of the deficit into the surplus of 2000/1 was the steady refusal of the Clinton Administration to let Republicans pack the sort of pork into bills that we’ve seen in the last six years.
Productivity is being revised downward, so that even the anemic growth of the Bush years may be less than presently believed.
And, as I said, it only required ca. $8 Trillion in debt to accomplish all these wonderful things.
“If the economy goes in the tank it will be their fault.”
Sorry Dick, I am still waiting for the economy to pull out of the bush recession.
“The Republicans brought us through massive hurricanes”
Are you kidding? Two years after Katrina and some rich white folks did alright and the poor and minorities are still homeless. Of course Neil Bush sold computers, ha, and the core has screwed us again on the levies that won’t protect against anything.
You really need to put up some facts instead of hate-radio talking pints.
“God knows why they want to raise taxes.”
I am not sure what god is, but someone has got to pay for the $12 BILLION a month wasted on this war. Ever hear of guns and butter? I know, another tax cut will pay for the war, just like Iraq oil revenues.
Wait, I know, cut the tax rate to zero and we will all be Laffer billionaires.
Menzie,
I did not mean standard of living, which is very hard to define and discuss. My point is simple. Growth rate, g, in developed economies is inversely proportional to the attained level of real GDP, G, (ok, per capita):
g=A/G
where A between $400 and $600 (2002 dollars)for various countries.
This is observation with reliable statistics, not guess.
So, when you comparing growth rates you have to take countries with the same G. Otherwise, you compare US growth rate in the 1910s with the US growth rate in the 2010s.
In other words, emerging countries are not growing fast enough compared to the growth rate observed in developed countries, when they had the same G.
The best way in this situation to compare average annual increments in G, not g. China and India apparently grow fast because they are poor countries.
Developed countries will never reach the growth rates of their past. It will be decaying inversely proportional to the growth in G.
Another recent CBO report argues that the fiscal stimulus from the tax cut has likely all dissipated by now.
So you’re implying that raising taxes will be costless to the economy? I’m not on that page.
I think that the continuing growth in tax revenues, despite slower growth, show that the 2003 tax cuts are working in the Laffer Curve sense.
The deficit is still large, and we’re at the peak of the economic cycle. Guess what happens when growth drops?
The deficit is not large. 1.5% of GDP is not large.
Growth has dropped, but the tax revenues keep rolling in. You’ll need to see a drop in employment before tax revenues drop.
hate-radio talking pints
Mmmm. Hate-radio talking pints. What’s the alcohol content of those?
Brilliant!
Menzie wrote:
DickF: There is no empirical (read econometric) study I know of that verifies that the implementation of SarBox has induced the reduction in IPOs and other financial activities in the U.S. The lackluster growth in U.S. GDP, and employment growth, predates the advent of the Democratic congress. Me is also right that CBO recently debunked the idea that the US was a high corporate tax rate regime relative to the rest of the OECD. Regarding tax cuts and output, I think you missed this Treasury report on medium term effects of tax cuts and the associated (discussion on this website).
Menzie wrote:
DickF: There is no empirical (read econometric) study I know of that verifies that the implementation of SarBox has induced the reduction in IPOs and other financial activities in the U.S. The lackluster growth in U.S. GDP, and employment growth, predates the advent of the Democratic congress. Me is also right that CBO recently debunked the idea that the US was a high corporate tax rate regime relative to the rest of the OECD. Regarding tax cuts and output, I think you missed this Treasury report on medium term effects of tax cuts and the associated (discussion on this website).
Menzie,
Thanks for the links. These are great examples of my concern with econometrics. I assume that I am looking at the correct CBO study, but this study is in the aggregate, a two country theoretical study rather than an actual comparative study of corporate tax rates. It also compares personal taxes with corporate taxes in the aggregate. It may come as a surprise but corporations do not make decisions in the aggregate nor do the concern themselves with the mix of taxes producing tax revenue. They simply look at their cost and if it is cheaper to move production to another country they do that.
If you actually listen to the corporation leaders there is no doubt that Sarb-Ox has a significant inpact on their decisions. There may not be an econometric analysis to show that IPOs have moved off shore but listen to corporate CEOs and the culture is definitely to move away from Sarb-Ox if possible. Sarb-Ox does not only influence US IPOs. It influences foreign IPOs that might have come to the US and it effects corporate decisions for existing companies. Sarb-Ox is probably the most significant direct increase in production cost the government has ever forced on corporations and the sad thing is that not one element would have made a difference with ENRON or any of the other corporate problems.
Enough.
Me wrote:
Two years after Katrina and some rich white folks did alright and the poor and minorities are still homeless.
Me,
I am sure it will come as a surprise to you but there are a lot of “poor black folks” who did alright after Katrina, and most of them don’t want to move back.
Those people, people you degrade because of their race, were withering away on the New Orleans welfare rolls. Now they realize they have worth and they are out in the real world with productive jobs. They are no longer helpless wards of the socialist state with no hope for the future; they are living the future.
You are right about one thing. The crooks who were stealing the money appropriated to repair the levies before the huricanes are back with their hands firmly stuck in the pockets of the people of America.
buzzcut — you seem to have forgotten that the tax increases in 2010 were enacted on strictly a partisan basis by a republican congress and signed by a republican president.
So if you do not want the 2010 tax increases blame the republicans, they enacted it.
Do not blame the democrats, they voted against it.
The CBO publishes a cyclically adjusted federal deficit series.
Maybe we should use that to discuss the budget
rather than the raw numbers.
“Those people, people you degrade because of their race,”
Can you read? I am defending them not degrading. Bush and your buddies were playing air guitar when New Orleans washed away, but boy didn’t he jump his butt to lily white Minn. for a bridge collapse?
If you think minorities are better off after Katrina you probably still think Brownie did a hecka of job.
Buzzcut says “The deficit is not large. 1.5% of GDP is not large.”
We have heard this refrain that “deficits don’t matter” before. That irresponsible attitude came very close to causing economic meltdown in the Bush 1 recession. Deficits always matter.
At present, social security surpluses are masking the true size of the deficit. The relatively good economy and one-time events like the tax forgiveness for repatriation of profits have masked the true size of the deficit.
This country has been running its finances like Enron, and the auditors– the repricing of risk attendant to the subprime mess, dollar adjustment, recession, post-war inflation– are about to come through the door.
“The lackluster growth in U.S. GDP”
Are you kidding? On an absolute scale and on a per capita scale, the US economy is doing great and has been if time-smoothened since Reagan.
Looking at in on a percentage basis makes the rapidly developing Third Worlders look better but if the US had China’s or India’s percentage growth, it would create more problems and dislocations than it would be worth to the average citizen.
Irresponsible pork and earmarks by congressmen of BOTH parties remains a concern but I haven’t seen any estimates of how that is big enough to seriously affect the overall economy.
Bravo, anonymous!
I just finished teaching my students about the difference between the cash budget and the cyclically-adjusted version.
It’s really too bad that I gave them their final exam this morning — having them apply economic reasoning to some of these comments would’ve been a great exercise!
PS
Charles,
On deficits you cannot say that they are either good or bad. It depends on circumstances.
Hoover and the Republican congress were more concerned about balancing the budget than they were about deflation as they drove us over the economic cliff.
You wrote:
The relatively good economy and one-time events like the tax forgiveness for repatriation of profits have masked the true size of the deficit.
This is actually funny. It is like saying tax receipts make the deficit.
Joseph Somsel says, “Are you kidding? On an absolute scale and on a per capita scale, the US economy is doing great and has been if time-smoothened since Reagan.”
Joseph, this is simply not correct. GDP tables are available right here (http://www.bea.gov/national/xls/gdpchg.xls). One can easily calculate averages, chain-deflated.
Bush 43: 2.4%
Clinton: 3.7
Bush 41: 2.1%
Reagan: 3.4%
Carter: 3.3%
Nixon-Ford: 2.8%
Kennedy-Johnson: 4.9%
If you’re going to make stuff up, it’s probably wiser not to do it on a board where people know where to look things up.
DickF says, “On deficits you cannot say that they are either good or bad. It depends on circumstances.”
This is true.
The circumstances now are that the economy was in relatively good shape from 2002-2006. Why were we running large deficits when the economy was the strongest.
DickF says, “This [stating that Social Security surpluses mask the deficit] is actually funny. It is like saying tax receipts make the deficit.”
This claim, of course, is nonsense. If a bank converted the valuables that patrons had placed in the safety deposit boxes for its own purposes, it would be called “theft.” When Republicans use Social Security money to fund senseless wars and pork barrel spending, it is called “fiscal responsibility.”
That’s what’s funny, just not in a ha-ha way.
Charles,
I guess we have to agree on what our definition of “great.”
Solid, steady growth with mild, corrective recessions seems like the proper policy goal. Growing the US economy at at 5% to 10% pa is unsubstainable and would be highly inflationary. I know that we can NOT grow the electric supply at that rate. Electric consumption growth is 1.0 to 1.5 X GNP growth.
The numbers you quote seem like fine performance to me. The US standard of living has risen – that should be plain to see. The the numbers of the poor have fallen and the depths of their poverty has lessened.
The Kennedy-Johnson years were the “Go Go” years and lead to very painful corrections in the 70’s.
Didn’t make that up.
The deficit has been falling for quite some time now. I don’t think that it can be attributed to any one-time factor.
And, if anything, you should have talked about the 2003 tax cuts. We cut rates, yet tax revenue is growing. What’s up with that?
The answer is that economic growth, even relatively weak economic growth, drives up wages and pushes people into higher tax brackets. Revenue grows quite naturally.
All bets are off if there is a recession, of course. But considering that we’ve passed the leading edge of Baby Boomer retirements, and we’ve got an expensive war going on, and economic growth is slow but steady, things aren’t bad, deficit wise. A small and shrinking deficit is appropriate at this time.
Joseph says, “The Kennedy-Johnson years were the “Go Go” years and lead to very painful corrections in the 70’s. Didn’t make that up.”
Yes, ::sigh:: actually you did. You inserted causation between good growth in the 1960s and poor growth in the 1970s. Poor growth in the 1970s was in large part the result of oil going from something like 2% of GDP to 10% of GDP, an increasing amount of it imported from OPEC. The failure of Nixon to actually have a plan to end the war in Vietnam was also contributory.
As for US growth rates, they have been obtained only at the cost of over ten trillion dollars of debt, most of it incurred during Reagan-Bush41-Bush43. If you call that acceptable, then that is your privilege, but please don’t expect anyone who understands the gravity of the situation the nation is in to take your opinion seriously.
Buzzcut says, “The deficit has been falling for quite some time now.”
You forget that as of January, 2001, we were projecting a $5 Trillion dollar surplus. Even with the ridiculously mismanaged “war on terror,” we would have achieved very roughly a $3T surplus.
Supply side effects are much smaller than rightwing mythology imagines them to be. Deficit spending only increases growth over time is if the money is spent in ways that improve productivity. The Bush tax cuts were done in such a reckless fashion that that was not achieved.
Indeed, many of the supply side effects are growth negative, as we see with the meltdown of the credit markets. Too much money, like too much chocolate, can be a bad thing.
Charles…
The Nixon problem was that once in office he thought ‘hey, maybe I can actually win this thing.’
The Bush problem is that he keeps hearing that pesky voice of the Lord tellling him ‘you can win this thing.’
Nixon made an error. Bush is an error.