A Lesson in Economics 101 for Mr. Cam

During my radio show on Friday, “Mr. Cam” as he refers to himself, called the show and made a number of inaccurate statements about the economy and several listeners called in to ask that I cut him off which I declined to do. I wanted to see how far he would go.
During the show Mr. Cam called in and made a number of inaccurate statements about the economy and several listeners called in to ask that I cut him off which I declined to do. I wanted to see how far he would go.

There was a good deal of uninformed economic discussion during the latter half of the show so let me clarify a few errors.

Matthew said “the economy did not boom under Bush”. You would have to define “boom” but the economic did grow under Bush until the final months of his second term. Frank said “during the Bush years tax revenues went up”, that under Bush there was 3-5 GDP growth, that unemployment was at historical lows, 4.5-5% levels. Except for a couple of hiccups along the way, direct revenue to the Federal Treasury has gone up at a steady pace since 1950 so while Frank is right, there is nothing special about the Bush years. Federal tax revenue has gone up under every administration in the Post-WWII era. Mr. Cam said quite a bit, some of which was correct but most of which was wrong.

Mr. Cam said that the Unemployment Rate under Clinton was 3.5%.

As data from the Bureau of Labor Statistics shows, the Unemployment Rate never reached 3.5% under Clinton. The range was between 3.75% and 7.25% with median being about 6.00%.

Mr. Cam said that the GDP Growth Rate under Clinton was 4-5%.

As data from the Bureau of Economic Analysis shows, the GDP Growth Rate under Clinton jumped around quite a bit but the average of those 32 quarters under Clinton, by my math, came out to be 3.8125% so let’s call it 3.8% not 4% to 5% as claimed by Mr. Cam.

Mr. Cam said Bush43 created a depression and, after a tax cut, a second depression. He said that in 2001-02 interest rate were high, about 5% to 6%, and if we had lower interest rates there would not have been a depression under Bush 43. Mr. Cam said that Bush raised interest rates in 2001-02, because the GOP always raises interest rates as a way to attack unions, attack private labor, attack pensions, redistribute wealth by making money “tight” by always raising interest rates that there is a depression every time a Republican has been President of the United States.

First, there were no “depressions” under Bush (or Clinton or any other President since the 1930’s). An “Economic Depression” is considered 4 uninterrupted quarters of negative GDP growth or, in plain English, the economic output of the nation becoming smaller or “contracting”. A recession is considered 2 uninterrupted quarters of negative GDP growth. While the data required to accurately track this information was not being counted until late in the 19th century, economic historians have recreated the data and cite five such events in the history of the United States:

The Depression of 1807-1814 was caused primarily by a trade embargo against the British imposed by President Thomas Jefferson.

The Depression of 1837-1844 was caused primarily by President Andrew Jackson requiring that all purchase of lands sold by the United States being paid for in gold or silver causing the devaluation of bank notes which, in turn, caused businesses to fail.

The Depression of 1873-1879 was caused primarily by deflation during the second term of President Ulysses S. Grant. The deflation was caused by the inability of the money supply to keep up with the rapid growth of the economy after the Civil War, in particular the unsustainable growth of railroads which spurred high levels of demand for the iron and steel industries. Jay Cooke and Co. was the first of about ninety railroads that went bankrupt.

The Depression of 1893-1898 was caused primarily by a second collapse of railroads, during the second term of President Grover Cleveland. The failure of the Philadelphia and Reading Railroad set of a series of railroad failures. 500 banks and 16,000 businesses declared bankruptcy.

The Great Depression of 1929-1939 was a complex global event which had many causes not all of them based in the United States. A major factor, however, was a collapse in investment as industrial capacity grew beyond demand. Deflation was the immediate cause of the Depression but just one of many factors.

Since the 1930’s there has not been an economic depression. There have been four recessions (1974-75, 1980-82, 2001, 2008-09).

Second, as data from the Federal Reserve shows, Discount Window Borrowing (i.e., overnight rates to banks) under Bush43 declined in 2001-2002…

…when you take into account the Inflation Rate during that time period…

…you can see that during Bush43’s first term, the “real” inflation rate steadily declined to near zero in 2004.

Mr. Cam said the 9/11 attacks had no impact on the economy and to say so is a “red herring” because “low interest rates” are the biggest driver of economic activity, and that that consumer confidence and consumer spending has no impact on GDP.

Let’s start by noting that, as I said on the radio, Consumer Confidence dropped dramatically following the 9/11 attacks:

Now for a little MacroEconomics 101:

GDP is the sum of Consumption, Investment, Government Spending and Net Exports. “Consumption” is the largest GDP component in the economy — household final consumption expenditures — which include durable goods, non-durable goods, and services (e.g, food, rent, jewelry, gasoline, and medical expenses, etc.). “Investment” is business investment in equipment such as the purchase of machinery and equipment for a factory, purchase of software, and drilling new oil wells or digging mines as well as new home sales. Investment does not mean, in this instance, financial savings or purchase of shares in the stock market. The other three components are self-explanatory.

It’s a little hard to see on this table from the U.S. Bureau of Economic Analysis but, as is typically the case, Consumer Spending accounts for about 70% of GDP:

This chart shows it a bit more clearly..

When Consumer Confidence declines as dramatically as it did, Consumer Spending declines, this also impacts Investment as businesses, anticipating a decline in demand, stop buying new equipment.

It is worth noting that nowhere in the formula to calculate GDP will you find “interest rates”. The primary driver of the GDP growth rate cannot be “interest rates” because they are not part of the equation at all.

Of course, the level of REAL interest rates does have an impact on economic activity but, as we can see today, low rates do not necessarily mean increased borrowing by consumers or business when credit restrictions placed on borrowers are high or consumer and business confidence is low. Rates are very low but fewer people can qualify for loans than 5 years ago. Lower rates also lower the value of the dollar which has a large impact on the cost of exports. As our economy is importing a large amount of durable goods (cars, appliances, computers, TVs, etc.) a lower U.S. interest rate and thus lower dollar means these items cost more, as is borne out in looking at the trade deficit the United States is are currently running which is, in turn, negatively impacting the growth of GDP.

Mr. Cam said a lot of other stuff about how Ronald Reagan orchestrated the S&L scandal and caused a terrible depression and that under Reagan the U.S. had the greatest increase in poverty barring the Great Depression. This is nonsense is as untrue as most of what he said.

Ironically, given his obsession with interest rates, Mr. Cam seems unaware that the President does not set interest rates. They are set by the market.

Finally, my favorite Mr. Cam-ism of the show…

That we need to get back to “the real prosperity” (based on lower interest rates) the United States had under President Clinton.

By way of comparison and reminder, the Bush43 data is below:

As is obvious, Interest Rates under Clinton were MUCH higher than under Bush43.

Mr. Cam speaks with great conviction. He tosses around all sorts of data and the sort of pseudo-economic clap-trap that might baffle some listeners. Most know he is full of hot air but might not be able to explain the technical reasons why. Hopefully this response to Mr. Cam puts some meat on the bones of the ways in which his claims are spectacularly wrong.