September 5, 2018

The first readjustment of second-quarter GDP came out Thursday at 4.2%, up a notch from the initial estimate of 4.1%, so naturally Congressmen of both Parties are celebrating this good news, right?

Wrong!  Several prominent Democrats are actually trying to redefine the GDP number down – officially. They’re getting desperate. The mid-term elections will come November 8, just two weeks after the initial third-quarter GDP estimate emerges from the Bureau of Economic Analysis (BEA). Knowing that most elections are based on “the economy, stupid,” several Democratic politicians and their lapdog economists are bending over backward to redefine growth statistics down to the dismal world they hope to sell to us.

Last week, Senators Chuck Schumer (D-NY) and Martin Heinrich (D-NM) introduced a bill that would direct the BEA (which produces the GDP) to become a micro-manager and tell us who benefits from any growth. Their big beef, according to Paul Krugman, who reviewed this bill in last Thursday’s New York Times (“For Whom the Economy Grows”) is that wages are stagnant and wealth inequality is growing.

Making statistics into Play Dough for politicians cuts both ways, since raw wages don’t include benefits, and income stats don’t include government benefits, like food stamps, disability, and various tax credits.

In “The Myth of American Inequality” (Wall Street Journal, August 10), John F. Early, former assistant commissioner at the Bureau of Labor Statistics, and Phil Gramm, former chairman of the Senate Banking Committee, take apart the Organization for Economic Cooperation and Development (OECD) “Gini Coefficient” (the proportion of all income that would have to be redistributed to achieve perfect equality).

As the first chart (below) shows, the U.S. has a relatively high (bad) Gini Coefficient at 0.39. But the OECD ignores the $1.6 trillion in annual redistributions to low-income Americans (right chart) – which brings the U.S.’ Gini number to 0.32, right in the middle of the pack of the seven largest OECD nations.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If the Republicans maintain control of Congress, the Schumer/Heinrich bill probably won’t pass, but the Democrats have more tricks up their sleeves. The day after the GDP number came out last week, Bloomberg reported (in “Don’t Believe that GDP Number” by Justin Fox, August 30, 2018), that Jason Furman, President Obama’s last Chairman of Economic Advisors, is now questioning the validity of the GDP. No surprise there. Currently a professor at Harvard’s Kennedy School of Government, Furman advocates using Gross Domestic Income (GDI) instead of GDP. (GDI grew by just 2.1% last quarter.)

This is really a tempest in a teapot, since both GDP and GDI grow by the same amount over a long period of time, but they vary widely quarter to quarter. Picking one over the other is a short-term political game.

A third, almost laughable idea came from Sen. Elizabeth Warren (D-MA), who proposed the Accountable Capitalism Act on August 14. Under her proposed law, corporations with more than $1 billion in annual revenues would be forced to apply for a federal corporate charter, which would require the directors to consider the interests of all major corporate stakeholders in all company decisions. Stakeholders could sue if they believed directors weren’t fulfilling those obligations, and the federal government would then be free to enter the corporate tent to dictate to these businesses the composition of their boards, the details of their governance, compensation, and personnel policies, giving fodder to stakeholders to sue corporations.

Warren also proposes that business owners cede at least 40% of corporate ownership rights to employees, even though those employees already have access to company shares through their 401(k) programs.

Parts of her bill are so vague as to be meaningless, but each sentence clearly exhibits both hostility to, and ignorance of, what capitalism stands for. Her desire for government agents to define or dictate acceptable corporate goals would effectively close up capital investment like a clamshell. No sane company would take risks when any outsider could sue to steal their success. Corporations, by definition, are already very responsive to their stakeholders – their shareholders and customers first and foremost, then their suppliers, their employees, and their community. If they were not responsive to these many stakeholders, they would lose customers, suppliers, shareholders, and workers. All these stakeholders are voluntary stakeholders.

One Wall Street Journal reader accurately called Warren’s plan “Venezuela 2.0.” May it disappear soon.

America’s Savings Rate Has Mysteriously Doubled!

While the gloomy doomsday crowd wants to convince the BEA to minimize GDP growth for the average American (Schumer and Heinrich’s bill), lower the number by using a different measure (Jason Furman), or cripple future growth (Elizabeth Warren), the non-partisan bean counters at the BEA have undertaken a comprehensive long-term revision to national income and savings statistics in all the years since 2010.

According to Barron’s (“Americans are Saving More Than We Thought,” July 31), “The old data showed the savings rate collapsing to just 3% by the middle of 2017” while new figures show savings consistently holding at 7% of disposable personal income since 2010. For the latest quarter studied (1st quarter, 2018), the BEA revised the savings rate from an originally-reported 3.3% to a revised 7.2%, more than double.

Small revisions are normal, but this one is like missing the 800-pound gorilla in the room. As Barron’s put it, that’s 34% more money saved since 2010 than previously thought, or roughly $2 trillion. That much missing money is enough to buy 10 million homes at an average $200,000, or 100 million vehicles at $20,000 each. This tells me that there is room for more consumer spending in the months ahead.

For June and July, the U.S. savings rate was officially released at 6.7% and 6.8%. Part of that rise reflects the higher interest rates now available on bank savings after the Fed’s first rate increases, and part of it comes from the tax law which delivers more take-home pay. Americans are clearly saving about 7%.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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