Thanks to media that have absolutely no understanding of the economic-related news they are attempting to cover, it is commonly believed that the U.S. is no longer in a recession. The Bureau of Economic Analysis' advance report for fourth-quarter Gross Domestic Product, usually known as GDP, increased at a rate equivalent to 5.7 percent growth on an annual basis, more than twice the average GDP growth since 1950. This would be astonishing if there were any chance whatsoever that it were real.
Even those who believe in the reality of the economic recovery readily admit that the GDP number has very little practical significance. In practical terms, 3.4 percent is attributed to business inventory adjustments. So in other words, more than half of this so-called "growth" is not even thought to be indicative of actual economic activity, but merely represents accounting modifications. And, of course, GDP is reported in three scheduled reports, and since the third quarter report was whittled down from 3.5 percent to 2.2 percent from advance to final, most observers expect to see similarly negative revisions that will all but eliminate the non-inventory growth.
However, to engage in technical analysis of the reported numbers is to make the mistake of looking at the map rather than the territory which it is supposed to represent. But while this econometric approach to economics is usually considered to be utilized as mainstream Neo-Keynesian economics, the reality is that John Maynard Keynes never once contemplated the economy in terms of GDP except as an ad hoc measure. One will search "The General Theory of Employment, Interest, and Money" in vain for any reference to gross domestic product. Even Simon Kuznets, who played a leading role in developing the concept, rejected its use as a measure of societal well-being.
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It was Paul Samuelson of MIT whose influential economics textbook turned Keynes' five variables – the propensity to consume, the schedule of the marginal efficiency of capital, the rate of interest, the volume of employment and the national dividend, and concocted the statistical formula C+I+G+(X-M) that is now used to calculate GDP. He did so on the basis of a 1939 essay by Keynes in which the macroeconomist was attempting to discover "the maximum current output we are capable of organizing from our resources" and transformed what was designed as a measure for estimating the maximum theoretical output of an economy into a metric for reporting the actual output.
But this leaves an obvious and necessary distinction between theoretical economic estimates and actual economic performance even in Keynesian terms, a distinction which bears a suspicious resemblance to the present gap between reported economic growth and observable unemployment. The media attempts to account for this inexplicable contradiction by claiming that the unemployment rate is a lagging indicator. But Keynes himself offers a better key to understanding what is occurring in Chapter 18, "The General Theory of Employment Restated," when he writes: "Our present object is to discover what determines at any time the national income of a given economic system and (which is almost the same thing) the amount of its employment."
As any non-economist instinctively understands, it is the level of unemployment across a society that is the correct measure of the state of the economy, not the statistical estimates, even if one limits oneself to a Keynesian perspective. And this would be true even if the government-reported statistics were static and reliable, which a detailed examination will show they quite clearly are not.
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The fact of the matter is that despite reports of one of the best quarterly GDP growths since the 8.0 percent growth in the second quarter of 2000 (stock-market investors may wish to note what happened after that white-hot report), the U.S. economy is not growing, it is contracting. And the increasingly positive numerical reports indicate little more than the growing divergence between the statistical map and the actual economy.