Tuesday, September 22, 2015

Using Nomimal GDP to Mislead: A Bogus Reagan Wikipedia Sentence

by Bill McBride on 9/22/2015 04:15:00 PM

Numbers are numbers.  They aren't political, but sometimes people misuse numbers to mislead.

After hearing that Joe Biden might consider running for President, I looked up how old Ronald Reagan was when he was first took office (in January 1981). The first article that came up was on Wikipedia (Reagan was 69 when he took office and turned 70 a few weeks later - Biden is currently 72).

Sadly I noticed this misleading sentence in the Wikipedia article:

"[Reagan's] economic policies saw a reduction of inflation from 12.5% to 4.4%, and an average annual growth of GDP of 7.91%; while Reagan did enact cuts in domestic spending, military spending increased federal outlays overall, even after adjustment for inflation."
There are several problems with this sentence.

First, it was mostly Fed Chairman Paul Volcker's monetary policies that reduced inflation from 11.8% year-over-year (SA, current base) in January 1981, when Reagan entered office, to 4.5% in January 1989, when Reagan left office. (not sure why the numbers are incorrect in the article).  Note: Volcker left the Fed in 1987 and was replaced by Greenspan.

Second, and more important, a casual reader will see the "even after adjustment for inflation" after the semi-colon, and think the author is reporting real GDP growth.   The 7.91% is annualized nominal GDP growth.  (Actually 7.4% from Q1 1981 to Q1 1989, another error).

For comparison, annualized nominal GDP growth under President Carter was 12.0%! (Q1 1977 to Q1 1981).  Of course there was more inflation under Carter.

Of course all analysts, economists and journalists report real GDP growth (inflation adjusted).  If someone mentions nominal GDP growth, they make it very clear why they are discussing "nominal" growth.

Real GDP increased at an annualized rate of 3.4% from Q1 1981 to Q1 1989, under President Reagan, and at a 3.4% rate under President Carter from Q1 1977 to Q1 1981.

Maybe we should shift the timing, but here are the numbers I used (from the BEA):

  Nominal GDP1Real GDP2
Q1 1977$1,992.5$5,799.2
Q1 1981$3,131.8$6,635.7
Q1 1989$5,527.4$8,697.7
  Annualized
Growth
Annualized
Real Growth
Carter (4 Years)12.0%3.4%
Reagan (8 Years)7.4%3.4%
1[Billions of dollars] Seasonally adjusted at annual rates
2[Billions of chained (2009) dollars] Seasonally adjusted at annual rates

Third, the second half of the sentence is wrong too.  While Reagan did enact SOME cuts in domestic spending, domestic spending increased faster than inflation under Reagan.  Discretionary domestic spending increased under Reagan too, but less than inflation (probably the point the author was trying to make).

The bottom line: The entire sentence should be removed from the Wikipedia article.

Note: To compare GDP across periods, not only do we need to adjust for inflation, but we should also adjust for changes in the labor force.  See: Demographics and GDP: 2% is the new 4%