To Adjust Or Not To Adjust… (Calling Economists)

May 26, 2009

Sadly, not all problems can be solved by the careful application of mathematics.

I’m currently trying to figure out how to appropriately calculate the yearly increases in the GDP over the past 100 years. The reason is because, according to President Obama’s budget estimates, after we get out of the recession, we will have four consecutive years of +5% growth. I’m trying to compare that growth to economic growth we’ve had in the past.

What I need to know is that, when we calculate past growth, is it properly calculated using inflation adjusted dollars or with unadjusted dollars? I seems to me that adjusted is the only way to go, but if there is an economist out there somewhere who can help me answer that question, it would be helpful in getting the statistics right. 

Of course, it makes all the difference in the calculations. If we don’t adjust for inflation, then the biggest sustained growth we’ve had in the last 50 years was 1971 – 1981 in which we had 10 years in a row of +8% growth. But  inflation was so bad that for a couple of those years, it actually outpaced that growth and then some, turning 8.8% growth in Carter’s last year into -4.2%.

Ultimately, if we take Obama’s numbers as adjusted for inflation, he is predicting that his policies will bring the largest sustained growth this nation has seen since the Baby Boomers started entering the workforce in the early-to-mid sixties. This would be quite a trick, since it would be happening while the Baby Boomers are leaving the work force. 

If we don’t adjust for inflation, he is predicting about the same kind of economic recovery we saw from 2003 – 2006.

I’d like to know which one it is.

7 Responses to “To Adjust Or Not To Adjust… (Calling Economists)”

  1. Paul Fisher Says:

    I’d be surprised if these budget estimates didn’t make it CLEAR that they were talking about Real (adjusted) GDP. There’s no reason to talk about nominal (unadjusted) GDP growth at all.

    This seems interesting, because when I see 5%+ growth, my instinct is to think that they’ve GOT to be talking about nominal GDP since, as you point out, 5% real growth is pretty impressive.

    On the other hand, most economists (me included) are predicting pretty wild inflation after we recover from this recession. I mean, there’s almost a trillion dollars in reserves piling up and a money multiplier of what–2?–that spells big inflation. Therefore, true UN-adjusted estimates ought to AT LEAST be in the double-digits. (I’ve even talked to some folks that are anticipating triple-digit inflation. I’m not one of those; but they are out there.)

    On balance, I’d have to guess that the administration is once again over-reaching and over-promising, and that 5% is supposed to be inflation-adjusted.

    That’s my two cents. Keep up the good work. My students next semester are going to benefit from your YouTube videos.


  2. Matt,
    I noticed you had some great videos and commentary here and on Youtube. I am writing to you on behalf of the Commonwealth Foundation. We are a public policy think tank located in Harrisburg, PA. We work to develop and advance public policies based on limited constitutional government, economic freedom, and personal responsibility.

    Anyway, we are having a video contest at one of our websites “Please No More Taxes”. First place is $2,500. I encourage you to enter a video in our contest. A link to the site can be found here http://pleasenomoretaxes.org/contest/

    Thanks!
    Jason Statler

  3. dblaker1 Says:

    I have just found your site today, after viewing your youtube videos. Smart, entertaining and more importantly easy enough for everyone to understand. I know I speak for allot of Americans when I say thank you for doing what you do. Keep up the great work, hopefully we can get enough people aware of whats going on and get some of these clowns out of Washington.

  4. Phil Brooks Says:

    Try skimming two great books that I used in my international economics studies when I was in Mexico. “The Elusive Quest for Growth” by William Easterly. The second is more in depth with very detailed data that was perfect for PROVEN factual research into economics but does require some patience and paper if needed to graph out some details…”In Defense of Global Capitalism” by Johan Norberg. The latter may prove very effective in many of your different subjects that you dive into. On another note, maybe you should consider using both real and nominal GDP, take the craziest data you can crank out, and report on it as if it were the truth…Isn’t that what our fearless leader would do?

  5. Phil Brooks Says:

    Also, just as extra info, very interesting data here… http://www.businesscycle.com . Check out the Proffesional Report Excerpt, pretty good stuff.

  6. zip Says:

    For years I’ve been doing calculations for major capital investment. These are done for capital corporations that engage in projects extending for long periods, some as long as a century or two. Over that time frame, and now even shorter ones it is ridiculous to count on stability of currency. This is particularly true since the establishment of non-commodity based currencies(federal reserve notes). To get around this problem, many years ago utilities developed the concept of energy based project economics.

    This approach requires a basic physically defined unit (generally a BTU) which is invariant. The currency can then be smoothed and compared on the cost basis of this physically defined commodity. Technology changes drive commodity costs up and down but over time these changes are incorporated through and parallel similar technological changes in society. This results in some very interesting ratios. For example, a comparison of the make-up of the adjusted PPI to the cost of a BTU, with the exception of a slow devaluation of currency due to expansion of M3(or now what should make up M3), is nearly constant except for spikes in an 18 month period in 1973 and another in 2008. Incidentally, the slow devaluation is observably accelerating in the last four years. In both of the periods of spikes, energy costs were drive up by artificial, non-free-market and temporary, constraints of supply. (It only requires control of less than 3% of energy in transit anywhere along the ‘pipeline’ to control the global commodity price for a short period.)

    Real currency devaluation for the last 100 years, based on several physical references, has been about 6%+/-, until last year. While it is too early to tell it looks like the real number will be at least 12% this year. The consequences of this are yet to be felt due to market delays. One rapidly approaching consequence is that food prices will go up significantly. This is because it has gone unreported, and so unnoticed, that the US has become a net dollar importer of food while being a net tonnage exporter. And, other currencies are not devaluing that the same rate.

  7. Ivin R Says:

    As an economist, let me say that this one is simple – always show GDP as adjusted for inflation, or “real” GDP. The reason for this is precisely the situation you pointed out where the National Income Accounting system showed huge gains in spending, but those gains were completely swallowed by increases in the price of goods. This means that in real terms, GDP actually shrunk.

    I may be late to this discussion, but I hope it helps!

    ~ Ivin


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