whyroots

The Bureau of Economic Analysis released an advance estimate of Q4 GDP. It's not good. But compare these two headlines: 

Steep Slide in U.S. Economy, but Not as Dire as Forecast, from the New York Times. Phew, dodged a bullet. Sure, GDP shrank 3.8%, but think of how much worse it could have been!

GDP Drops 3.8% as Spending Falls, from the Wall Street Journal. Factual, includes nothing about expectations or forecasts. And the first sentence adds some much needed context: "The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter but the decline would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth." (Emphasis mine.) 

So the Times front-loads its reporting with an optimistic-sounding comparison to the forecasts of economists. But that headline ignores the source of the deviation from expectations -- inventory buildup. Due to accounting convention, the US classifies inventories as investment, though no firm wants to accumulate inventories, and the more there is in inventory, the less the economy has to produce in the future to meet demand. Inventories are bad for firms and an indicator that even if consumer demand picks up, it will not immediately translate into increased production (need to draw down inventories first). So the GDP figure might not have been bad as forecast, but not because things are turning around, but because they haven't hit bottom yet. 

Helpfully, the Journal provides a more sophisticated analysis of the situation, and points out that buildup. Indeed, according to the Journal, GDP contraction was 5.1% excluding accumulation of inventories. That figure is probably closer to what most economists were expecting. Intrade markets had a contract on GDP advance figures at 5% or worse trading at ~60, indicating people expected a 60% chance of that outcome. 

Unfortunately for the dystopians that bought that contract at 60, an accounting convention stood in the way of their payday. This whole episode demonstrates how important it is that a reporter have a solid understanding of his or her subject matter. Otherwise, you might get a happy headline obscuring dire economic news.

***

Meanwhile, some conservative economists have repeatedly made nonsensical objections to the stimulus package. Eugene Fama might be the worst offender, and here's Brad DeLong, Berkeley economist, providing an initial smackdown. 

Fama uses this accounting identity (PI = PS + CS + GS) to argue that government debt spending will crowd out private sector investment and nullify the impact of Obama's stimulus plans. You see, if government savings (GS) go down (deficit spending) and private savings (PS) and corporate savings (CS) remain unchanged, private investment (PI) must decrease. However, as DeLong points out, the private investment figure includes unwanted inventories. Therefore, the accounting identity could hold even while the stimulus does its job and sparks economic activity; as government savings (GS) decrease to spur consumer spending and infrastructure projects, inventories (PI) decrease, but their decline forces companies to restart or expand production to meet demand.

So jump back up to the Journal article up top -- unwanted inventories are expanding and, as accounting rules dictate, it was recorded as an increase in private investment. When the stimulus kicks in and firms sell through inventories, private investment will decline. This is exactly DeLong's point. Fama will win a Nobel Prize some day, and I will never earn a PhD in economics. But I think I can figure this out.

Congratulations to "bailout," 2008's word of the year. Probably the most deserved award handed out this year, despite my joy in watching the right squirm when Paul Krugman received the Nobel.

Unfortunately, the actual bailout seems to be just about the most hated thing on the planet. Conservatives hate it because it's the government doing something useful and expensive. Liberals hate it because bankers benefit, and bankers are evil.

The conservative hatred I can understand. We're nationalizing the banking sector because the conservatives are so incredibly wrong about how to run an economy. The liberal hatred, however, is like some perverse rewriting of the rule of double effect. The rule of double effect has also gotten a lot of attention lately, mostly in the justification for Israel's shelling of Gaza; it's that rule that allows Israel to claim that the deaths of Palestinian civilian's are Hamas's fault, not Israel's (count me highly dubious). You see, if a great harm comes to someone because you do something good, that's okay, because the good outcome came concomitant with the bad one. Well, in the case of the bailout, it's more like, if a good outcome comes to investment bankers, then all the good you do is nullified because you helped the banker.

Take David Sirota's column in the Sun Journal. Generally, I find it difficult to type while hyperventilating, but I'm not a professional, so I'm impressed by the craftsmanship. (My ability to ply in snark is coming along, however.) I want to focus here on two claims Sirota makes because they're common complaints.

1. He cites the second report filed by the bailout's Congressional oversite committee and repeats its claim that the bailout has had no demonstrable effect on lending. The Treasury does not dispute that claim. Rather, the Treasury points to the fact that the economy has taken a huge turn for the worse and that people don't have many good lending opportunities. In turn, the oversite committee agrees that the economy is bad. Their gripe is not that the program hasn't improved lending, but that it hasn't saved the economy from a tailspin. There is not a single economist I have heard defend the bailout by claiming it would prevent a recession; the shock to the financial system that occurred pre-bailout, that necessitated the bailout, was enough to cause the recession we see. Economists have argued that the bailout was needed to prevent a systemic collapse of the financial system. It worked. The TED spread, the go-to metric for the level of counterparty risk, is well off its historic highs, and there is money out there to be had. Unfortunately, there are not many peoople asking for or receiving loans. If and when the stimulus package is enacted, we will have the financial system and the bailout to thank for any economic stimulus that actually arrives because it will be banks saved by the bailout that will provide working capital for paychecks, inventories, and leases as the nation undertakes infrastructure projects galore.

2. Sirota asks, "Is the bank bailout the best way to stimulate the economy." No. No. No. And it wasn't sold that way. The bank bailout was the best way to save the economy. So why does Obama want a stimulus and the bailout? Doesn't the stimulus make the bailout obsolete? Again, no -- take a look at recent reports that Bank of America and Citigroup are still having big balance sheet problems. The stimulus and bailout are two halves of the same coin. The bailout is necessary to keep banks solvent and healthy enough to lend; the stimulus is necessary to start the economic engine started again. Credit is often described as the oil that allows the country's economy to function; Sirota is complaining that adding oil to a dry engine isn't starting it. No kidding. But try starting the engine sans oil and ... kerplunk.

I'm all for calling Obama out when he's straying (see my last post). But asking for bailout  money so it can be used when necessary is simply good policy, not the maintenance of a kleptocracy, as Sirota writes. Problems at Bank of America and Citigroup suggest that the financial sector still needs a government crutch -- probably a more significant one. I agree with Sirota and other critics that there needs to be more transparency, and that the government should push for untenable mortgages to be renegotiated, not foreclosed. But I remain a fan of a bailout because it has so far delivered, despite a lack of transparency and a frustrating absence of strategic coherence. I want to stand with those on the left that call for greater transparency and good governance. But I want allies who are intellectually honest, not as bankrupt as our banks.