Friday, August 26, 2011

Getting back to the problems with GDP...

A lot of people think “steady growth” is “best”. Not with GDP. If you have steady growth all the time that would be fine. It won't ever happen. At the very least natural disasters will occur that will cause a reduction in GDP. Hurricane Katrina for example.

If we look at the GDP through the 1990's to about 2005 we have an average GDP growth of about 6.5%. Sounds good? Not really. In 2005 the United States experienced a tremendous natural disaster and a sharp decline in GDP growth.

If we look at the straight economic data from Louisiana didn't have a bad year in 2005. State GDP in 2004 was 171 billion and in 2005 the Louisiana state GDP was 197 billion. Great to know that the major urban area in a state can be wiped out and it won't have any influence on the state GDP, in fact, state GDP increased.

Yeah, like I believe that.

Surf into
scroll down to “DATA”
Select “Gross Domestic Product by State”
As of August 26 2011, This will take you into a wizard that will display the desired data and allow you to download it in Excel, CVS or PDF format.

You can check the numbers yourself. I imagine the government in its never ending quest to reduce to increase openness in government and spend a lot of money on web design will change this around and make it impossible to follow the links and instructions I have provided. I have found that government agencies like to change rules in such a way that it “improves efficiency” and just by happenstance reduces accessibility until people figure it out and then it is time to change it again.

In my opinion the never ending “improving websites” is just a new millennium way to introduce bureaucratic red tape and cloud the doings of our government.

So we can believe our eyes or the economic data. I don't think we can believe both.

Looking at the drop in national GDP I can relate quite a bit of it to the destruction and rebuilding of Louisiana. If you check out Wikipedia the cost is about 82 billion. If you read
the money spent by the US government as of 2007 was about 95 billion and that does not count the money spent by individuals and state governments. I think we can at least double the amount spent by the US government and still be way below the total cost.

I figure total spending to recover from Katrina will be around a trillion dollars and it will take 15-20 years to spend that. This is just an estimate I make based on my research.

The Oil Spill in the Gulf of Mexico by the Deep Water Horizon, an off-shore oil drilling platform owned and operated by Transocean under a leasing contract by BP.

Sound confusing? Yep, I'll leave it there. If you want you can study the complex business relationships in oil. So we have the South Eastern region of the United States undergoing two major disasters within 5 years.

We can include some other hurricanes, earthquakes, terrorist attacks, and other issues in this but I think people can figure out the problem here.

Suppose the GDP has very stable growth at 6% even and then the occasional national disaster the causes the GDP to drop. Lets imagine that we have one major national disaster which causes a national GDP issue every 10 years. The GDP average has to be less than 6% and depending on the number of times the GDP drops and how far the GDP drops the national economy average growth can even end up being negative.

The biggest problem with GDP in the United States is that since 1985 there have been no years where GDP growth has been over 10%. Between 1970 and 1985 there were 7 times when GDP growth was over 10%.

So what does this mean?

In statistical analysis a normal distribution is a curve. Pour out a bottle of salt or dump a pile of dirt out of a truck and you will get a pile. Take a two dimensional cross section through the center of that pile and you will have the outline of a normal curve.

Here is the kicker. Most people think “normal” is average, the stuff in the middle. That isn't true. “Normal” encompasses the entire curve, from one end to the other. You can't have a middle or average without having a high and a low.

The high is just as important as the low.

Between 1961 and 1985 the low GDP growth was 4.0% and the high was13.0%. Average was 8.7%.

Between 1986 and 2010 the low GDP growth was -1.8%, the high was 7.7%, the average was 5.1%.

The range between the high and the low shrank 1% which indicates a more tightly controlled economy. The standard deviation went from 2.3% to 2.0%.

So what happens if we “stabilize” the economy so that it is tightly controlled with a GDP growth of about 6%?

Eventually a disaster occurs, Katrina, the Deep Water Horizon spill or something else.

When the disaster occurs the economy is influenced and the GDP is reduced.

If only economic disasters occur and growth is otherwise stable the economy must eventually flounder.

In other words, to balance the normal curve you need economic triumphs to occur as well as economic disasters to balance out the curve. Without economic triumphs the disasters eventually destroy the economy.

In a world where unpredictable natural disasters influence the economy in a disastrous way those managing the economy must create economic triumphs which balance the unpredictable disasters.

Sorry, no economic triumphs since 1985. Hasn't happened. Won't happen unless economic management in the United States does something to address the issue.

People think consistency exists. It does, it is called stagnation.

In life you will always have big losses. If there are no big wins to balance the big losses you will ultimately stagnate and die.

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