Greg Selfors
Economic data can be used in a variety of ways to prove a variety of standpoints; just like you might learn in a statistics class, data can be provided in different ways that seem to show opposite trends, leading to differing conclusions. This skewing of the presentation of data also relates to economics; it is very easy to through a statistic about a drop in unemployment and use that to justify predictions for growth. However, when people read these articles without having an understanding of macroeconomics, they won’t keep in mind the business cycle and how it will always shift.
The business cycle is a series of periods of economic increases and decreases; economies will naturally fluctuate as they expand and contract. After a long period of expansion, the economy will naturally flex back towards a contraction, and after a period of contraction, the economy will trend towards a recovery. This is important to keep in mind when analyzing economic trends; it is very intuitive to think that if economic growth in increasing then it will continue to increase, but there will always be contractions between periods of growth.
Economist Paul Krugman addresses this concept in his article “What the Economic Data Don’t Tell us” on the New York Times. His main argument is that the “wildly optimistic growth projections” made by the Trump administration are not consistent with this basic concept of macroeconomics, but rather are simply a means of boasting about the administration's success at helping the economy. In reality, the current expansion is just a continuation of the expansion that began in 2010. Additionally, Krugman emphasizes that “quarter-to-quarter and even year-to-year growth rates are very variable” with the following graph:
Link: https://static01.nyt.com/images/2018/01/28/opinion/012818krugman1/012818krugman1-master675.png
He explains that while the economy’s production possibilities curve expands at a fairly steady rate, the business cycle causes “recessions [that] leave some of that capacity idle, and the economy can temporarily grow fast as that capacity is put back to use.” This “idle capacity” can be described by Okun’s Law: a relationship between changes in unemployment and changes in GDP. The following is a graph of Okun’s Law for the United States economy from 2007 to 2017:
Link: https://static01.nyt.com/images/2018/01/28/opinion/012818krugman2/012818krugman2-jumbo.png
This graph predicts GDP growth based on the way unemployment is changing. This is possible because in the business cycle, whenever GDP decreases, unemployment increases, so there is a direct relationship that can be used to predict each other. Therefore, at the United States’ current unchanged unemployment rate, GDP should only be able to grow around 1.5%, not the 3% that the Trump administration claims.
Sources:
Krugman, Paul. “What the Economic Data Don't Tell Us.” Nytimes.com, The New York Times, 28 Jan. 2018, www.nytimes.com/2018/01/28/opinion/what-the-economic-data-dont-tell- us.html?rref=collection%2Fsectioncollection%2Fopinion-columnists.
It is very interesting that economies will naturally contract, and that lasting effects from 2010 are still being shown. Furthermore, that Trump's growth projections are not even feasible to basic macroeconomics. The direct correlation to GDP size and unemployment is something I did not know. But, can an economy travel outside the boundaries of Okun’s law, and reach the 3% growth?
ReplyDeleteIt makes sense that GDP and unemployment rates fluctuate throughout time, but the fact that some people don’t understand the concept of increasing and decreasing economic periods is amazing to me. For people that seem to “know” so much about the government and economy, they don’t seem to understand the basics of statistics and how not everything remains constant. Trump claiming that GDP should be able to grow by 3% instead of a calculated 1.5% proves that even he doesn’t understand some of the basic concepts of the economic system when it comes to increasing and decreasing GDP and unemployment rates.
ReplyDeleteI think it is very important for people to realize that it is okay to see fluctuations in trends and data, and that economies will not always stay the same or be perfectly stable. It was also interesting to see the misrepresentations and how if you are not educated on economies and understand the fluctuations, you will be more influenced and skewed in your view of our economy.
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