A Dose of Reality on GDP Growth

The White House is cheering today’s news that GDP last quarter was up 3.5%. But they’re also cautious not to get too excited. They know they goosed the numbers a bit.

It’s no secret that the government can artificially boost economic activity. Take, for example, the cash-for-clunkers program. Auto sales (contributing 1.66 percentage points of the 3.5% GDP growth) jumped in July and August in large part due to the fact that the government handed out $4,500 to people to buy new cars. It looks like auto dealers had some false hope of a turnaround since September auto sales are down 10%. It seems a lot of people who were going to purchase a new car anyway, simply did so during the cash-for-clunkers time period. Those who couldn’t afford a new car then still can’t. The net effect is that government artificially boosted demand for new cars for two months, destroyed many usable cars in the process, and cost taxpayers $3 billion for its work.

Another factor that contributed to the GDP increase (about .5%) is home building. Part of the significant 23% jump in new home building last quarter comes from the federal homebuyer’s tax credit. We really don’t know for sure if the sector is going to turn around or not because government artificially inflated this sector as well.

These programs don’t do anyone any favors. If auto dealerships or home builders need to close or consolidate, the sooner that happens, the better. Federal programs like these only prolong the pain.