Friday, October 28, 2005

Is The Economy Alive Or Undead?

by Tom Bozzo

While the advance estimate of GDP growth for the third quarter came in this morning at a more than respectable 3.8% (subject to significant revision), AP-Ipsos poll results reported yesterday suggest that a large fraction of the public nevertheless thinks that the economy stinks.

The Greenspan tenure is viewed by a majority (56%) as "mostly a time of prosperity" against 29% opting for "time of decline." But current conditions are regarded as "only fair" or "poor" by 75% of respondents; only 3% call current conditions "excellent." George W. Bush gets credit, such as it is, for current conditions from 55%, vs. 29% assigning credit or blame to Greenspan. The wag in me wants to know what fraction of respondents actually knew who Alan Greenspan was and what his job entails.

High fuel prices surely don't help, though since this poll was conducted 10/24-26, it could have been worse vis-à-vis the the storm-related gasoline price spikes Few of the upcoming season's whopping heating bills have yet been presented, either.

The still-high levels dovetail with a couple bigger issues that could easily drive the negative public perceptions, though; these have notably been hammered over at Barry Ritholtz's The Big Picture blog. There have been lots of signs of strains on individual finances even for the wealthy (who I'd normally say have generally done as well as anyone over the last few years), and inflation is considerably worse than the "core" inflation indexes most closely tracked by policymakers (and even the broader official inflation measures) indicate (*). The last is particularly significant because wage growth after measured inflation has been poor.

I'd add that the distribution of income matters for whether macroeconomic statistics such as GDP growth can be taken as indicators of general well-being. It's not uncommon in economics to evaluate the policies positively if their results theoretically allow the gainers to compensate the losers, whether or not they actually do (this is usually called the Kaldor-Hicks criterion). If the gains accrue narrowly enough, and systematically fail to "trickle down," then it shouldn't be so much of a surprise that the theoretical beneficiaries aren't so grateful.

(*) Some commenters, including Ritholtz, criticize the implementation of "hedonic" adjustments for product quality in the inflation measures, which I think is off-base for some technical reasons I touched on here. However, there are other methodological issues behind the price indexes that are problematic, for instance the methods used to impute inflation for owned housing.
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