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PeakTrader said...

The U.S. had unprecedented job losses in manufacturing beginning around 2000, and yet the U.S. unemployment rate fell below 5% in the mid-2000s, while living standards rose at a steeper rate.

Over the past 10 years, the U.S. lost over 5 million manufacturing jobs (or about 30%):

http://metricmash.com/jobs.aspx?code=30000000

And the real value of U.S. manufacturing output increased between 2000 and 2011.

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Also, China had an export boom over this period, because the U.S. offshored low-end manufacturing and shifted resources into high-end manufacturing.

So, the U.S. imported goods at higher profits and lower prices, while exporting goods with more market power.

The 2001-07 U.S. economic expansion raised U.S. living standards at one of the fastest rates in history, and yet it was largely unreported by the media.

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Morganovich, you need to look at the other half of the data too.

U.S. assets increased faster than U.S. liabilities.

U.S. real GDP growth was about 3% per year with annual trade deficits up to 6% of GDP, which subtract from GDP.

The recession initally began when the Bernanke Fed maintained a restrictive stance too long.

U.S. real consumption and real assets increased at faster rates in 2002-07 than in 1995-00.

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Morganovich, and you keep supporting the fact inflation was increasingly overstated at the height of the Information Revolution, from 1982-07, using the old method.

It makes no sense U.S. real GDP growth would be zero or negative in periods of full employment.

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Moreover, it should be noted, the 80 million U.S. Baby Boomers (born between 1946-64) began entering their peak productive years (35-54) around 1982, and the second most productive group (based on education, experience, and training) is the 55-64 age group.

A higher level of labor productivity reduces inflation, i.e. Y = t(l, k, r, e...x), or real output is a function of technology or productivity on labor, capital, raw materials, energy, etc.

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The U.S. had a quick and massive creative-destruction process mostly in 2000-02, and in a mild recession in 2001.

The expansion that followed reflected the most efficient economy the world ever saw, i.e. it took the U.S. less effort to achieve a higher standard of living.

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Morganovich, it makes no sense real GDP growth would slow at full employment with a massive increase in labor productivity and a massive increase in technological improvements.

Even if you assume the data are correct, the U.S. consumed up to $800 billion a year more than produced in the 2000s, which in itself boosted U.S. living standards.

However, it's likely any adjustments to the data, to better reflect the real U.S. economy at the height of the Information Revolution, from 1982-07, were late and incomplete.

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Morganovich, I find it amazing you continue to cling to the same old static method to measure a large, diversified, and dynamic economy:

Part I

Why the Economy Is a Lot Stronger Than You Think
FEBRUARY 13, 2006

In a knowledge-based world, the traditional measures don't tell the story. Intangibles like R&D are tracked poorly, if at all. Factor them in and everything changes.

What if we told you that businesses are investing about $1 trillion a year more than the official numbers show? Or that the savings rate, far from being negative, is actually positive? Or, for that matter, that our deficit with the rest of the world is much smaller than advertised, and that gross domestic product may be growing faster than the latest gloomy numbers show? You'd be pretty surprised, wouldn't you?

Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation.

What you may not realize is that the government's decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas.

"As we've become a more knowledge-based economy," says University of Maryland economist Charles R. Hulten, "our statistics have not shifted to capture the effects."

The statistical wizards at the Bureau of Economic Analysis in Washington can whip up a spreadsheet showing how much the railroads spend on furniture ($39 million in 2004, to be exact). But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today's global economy.

That means that the resources put into creating such world-beating innovations as the anticancer drug Avastin, inhaled insulin, Starbuck's, exchange-traded funds, and yes, even the iPod, don't show up in the official numbers.

As Greenspan would be the first to tell you, it's a lot easier counting how many widgets the nation produces in a year than quantifying the creation and marketing of knowledge. After all, we're talking about intangibles: brand equity, the development of talent, the export of best practices.

By the early '90s, Greenspan was becoming increasingly frustrated by the official numbers' inability to explain a rapidly evolving economy.

In 1996 and 1997 he refused to accept conventional data telling him that productivity growth was falling in much of the service sector, noting -- correctly, as it turns out -- that "this pattern is highly unlikely." He also pointed out that the official numbers for consumer inflation were too high.

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Part II

At the Washington offices of the BEA, J. Steven Landefeld, who became director in 1995, felt pressure to include numbers that better reflected the knowledge economy. Landefeld isn't a rash fellow, and the pace of change at the BEA, while quick for a statistical agency, would be called deliberate by most.

But in 1999 -- six decades after Kuznets laid the groundwork for calculating GDP -- Landefeld and the BEA decided to break with the past.

The BEA started treating business spending on software as a long-lived investment. The decision was overdue. Companies were spending more than $150 billion annually on software, far more than the $100 billion for computer hardware. And the software often stayed in use longer than the hardware.

Silly as it may seem now, it was a revolutionary change at the time. But over the past seven years the economy has continued to evolve while the numbers we use to capture it have remained the same.

Globalization, outsourcing, and the emphasis on innovation and creativity are forcing businesses to shift at a dramatic rate from tangible to intangible investments.

Want to see how this works? Grab your iPod, flip it over, and read the script at the bottom. It says: "Designed by Apple in California. Assembled in China."

Where the gizmo is made is immaterial to its popularity. It is great design, technical innovation, and savvy marketing that have helped Apple Computer sell more than 40 million iPods.

Yet the folks at the BEA don't count what Apple spends on R&D and brand development, which totaled at least $800 million in 2005.

Rather, they count each iPod twice: when it arrives from China, and when it sells. That, in effect, reduces Apple -- one of the world's greatest innovators -- to a reseller of imported goods.

But look at how our perception of the economy changes once you add in things like R&D and brand-building.

The published data show that total investment -- business, residential, and government -- has been falling over the past three decades as a share of national spending, while consumption has been rising. Add in the intangible investments provided by our three economists, and the picture changes completely.

Total investment rises, going from 23.8% of national spending in the 1970s to 25.1% in the early 2000s -- much higher than the 18.3% the conventional numbers show.

That helps explain why the economy has sustained strong productivity growth, and why foreign investors continue to pour money into the U.S.

Ricardo Hausmann, director of Harvard's Center for International Development, believes it should be. He describes these cross-border flows of knowhow as "dark matter."

Hausmann notes that U.S. multinationals consistently earn higher rates of return than their foreign counterparts -- an average of 6% on foreign operations since 2000, vs. the 1.2% foreign multinationals earn in the U.S., according to the latest BEA figures.

From that, he infers that the multinationals are benefiting, in part, from knowledge exported from the U.S., a country with faster productivity growth than the rest of the industrialized world.

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Morganovich, U.S. intangible assets are understated.

For example, the U.S. can offshore low-end manufacturing to produce more high-end manufacturing (from intangible assets).

So, although U.S. real GDP can expand 3% a year (or more, since quality improvements are understated), the U.S. can also consume more than produce (up to 6% of GDP) in the global economy (from intangible assets).

That additional consumption doesn't show up in U.S. GDP.

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Morganovich, rather than understanding interrelationships in economics, you remain in denial.

Perhaps, you can explain why U.S. trade deficits became increasingly larger when the U.S. Information Revolution began to accelerate after 1982, and why large U.S. trade deficits will persist in the future.

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Morganovich, you seem to be in denial how the U.S. can consume more than produce in the global economy and in the long-run, which understates U.S. GDP.

So, let's look at outsourcing.

When a firm can perform a service in-house at $100, and then outsources that service at $90, the firm receives the same value, but GDP falls $10.

Of course, that $10 saving could go to bonuses for top management, overseas investment, buying Treasury bonds, etc..

Nonetheless, the real value is more than what's reflected in GDP.

Normally, productivity and income both rise. However, outsourcing is a "game-changer," because you get the same service with a drop in income.

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Moreover, do you really believe the full value of personal computers, for example, which replaced typewriters, was captured in U.S. GDP?:

Typewriter Museum

"Brother Cassette Correction L10 Plus 3 Correction Typewriter (circa 1981) a portable electric traditional typebar typewriter with cassette correction tape and ribbons for easy correcting. Date is from an August 20, 1981 ad by The Crescent Store in the Spokane Spokesman-Review newspaper. "Features cassette correction ribbon, 13" carriage, variable line spacing, full tabulation and smooth quiet operation." Regular price was $275. The sale price was $249.99 which has the same buying power as $590.01 in 2009. In 2010 you can get a nice laptop and printer for $590."

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Morganovich, It's amazing your comments about me fit you perfectly.

I explained in detail before how the U.S. consumes more than produces in the long-run through changes in currency exchange rates, interest rates, and inflation.

Obviously, you completely ignored those mechanisms, and went back to your "really basic stuff."

I can spend the time to explain them again, except I'll most likely get your same ridiculous comments.

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Seth, normally, with offshoring, the consumer gets a lower price and the firm gets a higher profit.

Normally, with outsourcing, the firm gets the same service with a drop in expense.

I agree, there are instances when offshored and outsourced goods & services don't meet standards (set in contracts), e.g. are lower quality.

Also, I may add, when goods are sold too cheaply and money is lent too cheaply, then people will spend and borrow.

And when the debt falls in real and relative terms, over time, then people can consume more than produce forever.

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Morganovich, obviously, you never had any international trade classes at the undergraduate level, the graduate level, nor passed the comp exams in that field (like I did).

To say mechanisms in economics aren't possible is a ridiculous statement.

Export-led economies sold their goods too cheaply and lent their dollars too cheaply, which generated a virtuous U.S. cycle of consumption-investment to maintain their employment levels.

Those economies lost investing in the U.S., because a weaker dollar means they had to exchange more dollars for their currencies, and from relatively low interest rates (U.S. T-bonds are the safest investment in the world).

They exchanged their goods for dollars instead of exchanging their goods for U.S. goods, which means if they bought U.S. goods in the future, prices would be higher from inflation, i.e. they'd receive fewer U.S. goods.

Also, about your comment on personal computers (PCs).

How much better is a PC in 2010 compared to a typewriter in 1980 after inflation?

Do you really believe the increase in real value between a 1980 typewriter and a 2010 PC was captured in real GDP?

You said U.S. real GDP growth slowed in the '80s, slowed even more in the '90s, and slowed even more in the '00s, although there was a major structural break (rather than the minor technology shocks you cited before 1980) when the Information Revolution began to accelerate after 1982.

Obviously, U.S. real GDP growth was increasingly understated after 1982, along with the other variables you cited.

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Full Debate (Morganovich comments):

http://www.blogger.com/comment.g?blogID=28997633&postID=8885506426321745500