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GDP as a false measure of a country economic output

The cult of GDP growth under neoliberalism

News Secular Stagnation under Neoliberalism Bookshelf Recommended books Recommended Links Casino Capitalism Numbers racket and "Potemkin numbers"
Rational Fools vs. Efficient Crooks: The efficient markets hypothesis Neoclassical Pseudo Theories and Crooked and Bought Economists as Fifth Column of Financial Oligarchy Fake Employment Statistics Slightly skeptical view on core CPI Productivity Myth and "Rising labor costs" hypocrisy Mathiness Financial Sector Induced Systemic Instability of Economy
Grey Cardinal of Washington Financial Quotes Corruption of FED Famous quotes of John Kenneth Galbraith Financial Humor Humor Etc
I take note that the 'indicators' are usually based in numbers which, upon further inspection, are rosy at the very least. Indicators for main street activity is particularly bad and skewed. Greenspan was the genius behind this going back sometime ago, with beautiful headline numbers but when one took a look (if one could) you would find that much was left out.

So we are left, as the government is basically lying or misleading us, to try and figure it out. We speculate, we find others who have analytical skills to do what others of us cannot. We listen to the 'on the street views' of others. The faith in the methods behind decades of increasingly distorted headline numbers, particularly in the '90s, was like watching Jim Jones give a speech to his faithful, fully accepting for support of their own selfish motivations and endorphin-laden highs.

Nanoo-Nanoo in

Feldstein- House Prices to Fall Further

If you read “Barbarians at the Gate” what was most striking is that companies that get destroyed are PROFITABLE – but it is MORE profitable for a few to strip mine them. In the religion of economics, God has forgotten them… We use certain metrics that says this increases GDP, and therefore it MUST be done – like the character in Harry Potter whose name can never be uttered, we can never, ever speak of the distribution of the vaunted GDP. As I’ve said many times, inequality is a political choice. I fear our system has been so thoroughly infiltrated by the self absorbed that it is now impossible for any meaningful reform.

Above the law demi-god banksters (I call them financial terrorists) are re-creating the world in their own image. Thank Obama and Holder for placing them above the law.


Introduction

There are two distinct types of GDP: nominal and real

If a country becomes increasingly in debt, and spends large amounts of income servicing this debt this is not reflected in a decreased GDP. GDP does not take into account change in country population iether, but per-capita GDP accounts for population growth.

Citing Wikipedia

In economics, gross domestic product (GDP) is a measure of the value of economic production of a particular territory in financial capital terms during a specified period. It is one of the measures of national income and output. It is often seen as an indicator of the standard of living in a country, but there may be problems with this view. GDP is often abbreviated as Y.

GDP is defined as the total value of final goods and services produced within a territory during a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's annual product). GDP differs from gross national product (GNP) in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it.

Whereas nominal GDP refers to the total amount of money spent on GDP, real GDP adjusts this value for the effects of inflation in order to estimate the actual quantity of goods and services making up GDP. The former is sometimes called "money GDP," while the latter is termed "constant-price" or "inflation-corrected" GDP -- or "GDP in base-year prices" (where the base year is the reference year of the index used). See real vs. nominal in economics.

GDP measures only final goods and services, that is those goods and services that are consumed by their final user, and not used as an input into other goods.

Measuring intermediate goods and services would lead to double counting of economic activity within a country. This distinction also removes transfers between individuals and companies from GDP. For instance, buying a Renoir doesn't boost GDP by $20m. (If it did, buying and selling the same painting repeatedly to a gallery would imply great wealth rather than penury.)

Note that the Renoir purchase would affect the GDP figure, but not as a $20m receipt, the auctioneer's fees would appear in GDP as consumption expenditure, because this is a final service.

The most common approach to measuring and understanding GDP is the expenditure method:

GDP = consumption + investment + exportsimports

Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation (often called net exports) then adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic production not consumed at home (the exports).

Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:

Therefore GDP can be expressed as:

GDP = private consumption + government + investment + net exports
(or simply GDP = C + G + I + NX)

The components of GDP

Each of the variables C, I, G, and NX :

It is important to understand the meaning of each variable precisely in order to:

... ... ...

The GDP Income account

Another way of measuring GDP is to measure the total income payable in the GDP income accounts. This should provide the same figure as the expenditure method described above.

The formula for GDP measured using the income approach, called GDP(I), is:

GDP = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports

The sum of COE, GOS and GMI is called total factor income, and measures the value of GDP at factor (basic) prices.The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the Government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP(I).

Kuznets warning

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

In 1962, Kuznets stated:

Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

Continuing progress should not lead  to ever-escalating levels of consumption, but to a society where improving productivity and technology would provide higher quality goods, better health and more leisure. GDP never measured economic efficiency of the country; it measures the level of economic activity. Healthcare is a classic example. The USA spends 20% to subsidize maladaptive behavior between producers and consumers in the medical food chain.

In GDP the quantity is substituted for quality

The other problem with GDP, which the USA actually shares with the USSR is that quantity is substituted for quality. In other word GDP does not measure the quality of products sold or services provided (actually some country now include income from prostitution in GDP).

As Paul Krugman has pointed out, generally Europeans has better understanding of this problem with GDP then Americans and thus less susceptible to the "cult of GDP" which dominated the USA economic discourse. There are also other areas where Americans place too high priority on quantity sometimes in detriment to quality. For example, proliferation of "House slaves" is a classic  example of overconsumption. In this case overconsumption of housing as measured by size. It is highly negative phenomena, but it does increase GDP. 

Consumption as a status symbol is another similar phenomenon. The term Conspicuous consumption was coined by the US economist for a reason. This idea was further investigated by John Kenneth Galbraith in his famous book The Affluent Society

In GDP, the quantity is substituted for quality. Also calculation has political dimension and as a result American GDP figures are wildly distorted (hedonic adjustments, etc).

Also many components of GDP (especially FIRE -- finance, insurance and real estate) might be partially anti-social and their fast growth (which as services is reflected in GDP) might be detrimental for the health and prosperity of society. Jesus attitude toward bankers is well known and probably was not without the reason ;-)

Another example is sales of high sugar context flavored water called Coca Cola and Pepsi Cola. It is negatively affect children health leading to obesity and early diabetes, but it is positively reflected in GDP.

The same, even more drastic example is production of arms.

Well known problems with GDP

There are several well-known problem with GDP:

The cult of GDP

In a way the calculation of GDP became just a complex (and by-and-large counterproductive) ritual not unlike some religious rituals like calculation of certain dates. That's why we can talk about "Cult of GDP" as a religious phenomena.

This cult has mirror image in large corporate behavior. Both on the level of society and the level of large corporation if the metric is wrong, then the policy based on it is destructive.

It looks like "cult of GDP" which definitely represent dominant economic religion in the USA is very similar to the cult of GDP which existed in the USSR. And like in the USSR GDP is very misleading, politically distorted metric of economic well-being of the country. As Yves Smith observed in comments to Krugman on the Need for Jobs Policies

American GDP figures are wildly distorted, this has never gotten the press it deserves. The US is the ONLY economy that uses hedonic adjustments to GDP. That means it increases GDP to allow for the fact that computers have become more productive over time (this is completely different than the hedonic adjustments for inflation, BTW).

A modern desktop computer is about as powerful as a mainframe as of late 1980s. So I kid you not, these adjustments started in 1987, and they count your desktop in GDP as the same value what the equivalent big iron computer would have cost in 1987. Mish managed to get the BEA to send him a spreadsheet in 2005, and it showed the cumulative impact was 22% of GDP. This is far and away the most dubious of the official statistical adjustments, and gets far and away the least commentary.

The Bundesbank has also complained a few years ago that if German calculated GDP the way the US did, it’s growth rate would be a half a percent higher. If you take the Bundesbank figure instead, and calculate GDP growth over 22 years, using 2.5% versus 3.0% growth, you get an 11% cumulative difference.

Tail wags the dog: effects of GDP calculation

There is other, more dangerous aspect of GDP is that tail wags the dog -- it implicitly stimulated counter-productive behavior of government and its major economic agents in order to boost GDP. In a recent article by Samuel Brittan (Financial Times) put it very well:

A typical talk on BBC’s Radio Three might start by bemoaning the consumer society, with its passion for shopping and the rush to make pointless purchases. It might then bemoan the nervous strain in the quest for economic growth and the lack of time or energy for more worthwhile activities.

But then comes a more interesting twist. All this frenzy of pointless activity is required, it is said, to keep the economy going. Without it, the implication is, production would dry up and jobs disappear, and we would wallow in semi-permanent depression.

The contention is that the economy would collapse if we ceased to demand more and more, a belief sometimes called the saturation bogey. Many practical businessmen, who have no time or inclination for political economy, suppose that we must go on churning out more and more to survive, whether or not we enjoy the process. The US president Calvin Coolidge remarked in 1926: “The chief business of the American people is business.” UK politicians used to ask what would happen when every family in the country had two cars.

The clue to the whole matter is provided, as so often, by a dictum from Adam Smith: “Consumption is the sole end and purpose of production; and the interests of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” To demonstrate the falsity of the belief that we must continue to feed the productive machine with ever more ridiculous demands, let me indulge in a brief thought experiment.

Let us take a medium-sized, western economy with no major population change and negligible net migration or other problems. What might then happen if a majority of people were to turn their backs on further improvements in their real spending? The basic answer is that, in this no-growth new world, people could enjoy the fruits of technological progress with a mixture of increased leisure and a more congenial and relaxed working life. The reduction in labor input would be voluntary and completely different from what happens in an economic slump.

Some political economists have looked forward to this state of affairs. John Stuart Mill regarded what he called the “stationary state” as a delight rather than a disaster. He could not believe that the perpetual struggle to get on and elbow other people out of the way was other than a temporary phase in humanity’s progress. Keynes also looked forward to such a world (in his essay “Economic Possibilities for our Grandchildren”) when “we shall honor the delightful people who are capable of taking direct enjoyment in things: the lilies of the field who toil not, neither do they spin.” He allowed for the persistence of a minority of people who would feel satisfaction only if their behavior made them feel superior to their fellows, “but the rest of us would no longer feel under any obligation to applaud”.

There is another view, stated most eloquently by Joseph Schumpeter. As he put it: “Capitalism is by nature a form or method of economic change and not only never is, but never can be, stationary.”

Let us concede at once that the resulting system would not look much like capitalism as we know it. But even in such a society there would be great advantages in retaining competitive markets based on private ownership. Those who have now, belatedly, discovered Schumpeter and quote him out of context do not realise that, writing in the 1940s, he expected entrepreneurial capitalism to have died out long ago and be replaced by some variant of state socialism. He failed to see how unworkable the latter would be. Like many other seers he was an excellent analyst, but a poor prophet.

As soon as we add more realistic conditions, the saturation bogey becomes more and more remote. Even if demand for conventional consumer goods were to peak, there might still be demand for more public services and more expenditure to relieve poverty at home and abroad. Most western countries are likely to see net immigration for the foreseeable future, which would bring with it opportunities for new investment without any need for whipping up artificial needs and anxieties. This is not to speak of devoting a margin of extra production to dealing with environmental threats, whether or not of a global warming variety.

GDI vs GDP: usage of GDI to check if GDP is fudged

But there’s a second way to count how much we produced -- GDI, or Gross Domestic Income. It’s what we got paid to produce the GDP. We break-up GDI according to the type of income being paid and to whom. Roughly it’s wages, profits, interest, and taxes.

If we assume that income = spending then GDI should be equal to GDP. It’s an after-the-fact necessity of the accounting framework by definition. But it’s also a useful concept for analysis of disequilibrium and dynamics. After all, think of what happens in the following scenario. Suppose every month we spend $1000 and we get paid $1000. Income = spending.

But suppose some month, income declines unexpectedly to $900. In the month the income declines, we either cut our spending short to adjust to the new lower income, or we borrow (or spend from accumulated financial assets) to make up for the shortfall and adjust our spending the following month. In this scenario, we can identify that when income from productive sources = spending we have an equilibrium in the economy and no changes are expected. But if income is less, then we are at a disequilibrium and can expect changes.

Here are two articles that discuss this subject further, but the idea is that GDI can be used for checking GDP number produced for fudging.

GDP and GDI two sides of the same inevitably-flawed coin FT Alphaville
Cardiff Garcia

A couple of years ago, we did a long Q&A with Fed staff economist Jeremy Nalewaik about his work on the differences between Gross Domestic Product and Gross Domestic Income.

The two indicators, as you would expect given their theoretical sameness, tend to be nearly identical over a long enough stretch of time. GDI is interesting mainly because Nalewaik had found that its early estimates tend to be revised less over time than are initial estimates of GDP.

In English, this suggests that GDI is a more accurate early measure.

And it was worth noting because in the burgeoning stages of the Great Recession, the early GDP estimates dramatically understated the severity of the US economy’s decline. Had more people been paying attention to GDI, which was flashing warning signs earlier, the policy response might have come sooner and been more aggressive.

On Thursday morning, GDI for the fourth quarter of last year was revised from an annualised 2.6 per cent to a whopping 5.5 per cent, while GDP growth for the same quarter stayed at 0.4 per cent. Quite a divergence.

Yet both GDP and GDI now report the exact same growth rate for the full-years 2011 and 2012 — 1.8 per cent and 2.2 per cent respectively.

And if you look closely at Thursday’s release (Appendix Table A), during those two years you’ll notice bigger quarterly swings in GDI, swings that have corresponded roughly with the winter booms and spring swoons that some other economic indicators have also shown. If you further look at the excel spreadsheet that pops up when clicking on this BEA link, you’ll see that GDI itself since that time has been no stranger to large revisions later.

Nalewaik himself emphasised that some weighted average of GDP and GDI is preferable to using only GDI. And reporting wider swings also seems to apply for GDI over longer stretches of time — ie after plenty of revisions — as you can see in this chart from Tim Duy:

The trends essentially smoothen out to show the same thing.

We in the blogosphere make a lot of hay about the likelihood that early releases of any given indicator are likely to be revised over time. Certainly we do this with the employment reports. But to change our tune a bit on the matter of GDP vs GDI, over a long enough period of time the difference isn’t that big a deal — and over shorter periods of time, neither is all that reliable. As such, an average of the two really is probably best.

A lot of attention has been given to methodological issues with the inputs that generate growth statistics these past couple of years; for instance the difficulty of properly accounting for services in an economy that is increasingly dominated by them (try page 52 of last year’s Economic Report of the President).

It’s great news, of course, that the individual components of GDP are getting increased attention, and indeed GDP itself is getting a fairly big makeover this summer when R&D will be capitalised and certain other intangible assets will be counted differently.

The added attention and changes should also remind us that, as Karl Smith has been playfully harrassing us to acknowledge for a while now, GDP and GDI are just the outputs of methodological processes. They’re numbers, sums.

But in an economy with relatively transparent indicators like those in the US, there’s no reason that commentators can’t just go straight to the individual components to look for underlying trends — especially since these components are of varying relevance at different times. For one example, consider the decline in defense spending of the kind that is predictable and normal when winding down a war; it contributes to GDP but might say less about fundamental economic strength than, say, changes in consumer behaviour.

This isn’t an argument that the final number should be ignored. It shouldn’t: for people who don’t spend their lives reading economics blogs, it is still an easily accessible way to discuss what’s happening, even if the media should always include the caveat about future revisions. (We’re also a paid-up member of NGDPLTargeting, and we’re gonna need something to target!)

But for purposes of discussing in detail the health of the economy, it’s better to pick things apart. That’s not as easy as pointing to a single number, but nobody said real-time economy-watching was supposed to be easy.

This entry was posted by Cardiff Garcia on Thursday May 30th, 2013 21:36. Tagged with GDI, GDP.

A more accurate measure of economic output by Mark Thoma

"...GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's income in one way or another. But GDI differs in practice due to the way the national income and product accounts are constructed."
"...The first new measure, called gross domestic output (GDO), is now published by the Bureau of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how it compares to GDP:"
"..."the simple average -- what we have called GDO -- of the initial estimates historically has been a better gauge of the latest and presumably most accurate estimates of GDP growth than either GDP or GDI individually as well as a more stable predictor of future economic growth. Moreover, using GDO helps at least partially to resolve some recent economic anomalies. As a result, GDO offers a valuable new source of information for households, businesses, researchers, and policymakers seeking to understand economic issues in real time.""
"...However, while both GDO and GDPplus improve on using GDP or GDI alone, neither alternative overcomes all the problems with GDP and GDI, particularly the lag of several months before data on GDP and GDI first become available. In addition, it can be as long as several years before all the important data revisions are completed, and forecasts beyond a quarter or two ahead are unreliable"
CBS News
How well is the U.S. economy doing, and where might it be heading in the future?

To answer these questions, we need a way to assess the total amount of goods and services the economy is producing in a given time period. One measure of this quantity, gross domestic product (GDP) is well known. It estimates the total value of new goods and services produced in the U.S. over a given period, usually a quarter or a year. (Also, the goods must pass through organized markets, so black market activity and goods produced in homes aren't counted.)

However, there's another way to arrive at this estimate of total economic activity: gross domestic income (GDI).

GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's income in one way or another. But GDI differs in practice due to the way the national income and product accounts are constructed.

Thus, because neither measure is perfect on its own, and the errors in GDP and GDI are largely independent, it should be possible to combine the two measures to improve our estimate of how well the economy is performing in a given time period. That's what two recent strands of research are attempting to do.

The first new measure, called gross domestic output (GDO), is now published by the Bureau of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how it compares to GDP:

GDO

The graph is from a recent Issue Brief published by the Council of Economic Advisors. It discusses this new measure and notes that

"the simple average -- what we have called GDO -- of the initial estimates historically has been a better gauge of the latest and presumably most accurate estimates of GDP growth than either GDP or GDI individually as well as a more stable predictor of future economic growth. Moreover, using GDO helps at least partially to resolve some recent economic anomalies. As a result, GDO offers a valuable new source of information for households, businesses, researchers, and policymakers seeking to understand economic issues in real time."

The second new measure, called GDPplus, is an optimally weighted combination of GDP and GDI, with weights that are allowed to evolve over time.

This measure, which is available from the Philadelphia Fed, has some technical advantages over the simple average discussed above. However, while both GDO and GDPplus improve on using GDP or GDI alone, neither alternative overcomes all the problems with GDP and GDI, particularly the lag of several months before data on GDP and GDI first become available. In addition, it can be as long as several years before all the important data revisions are completed, and forecasts beyond a quarter or two ahead are unreliable. However, GDPplus, unlike GDO, can be calculated even if only one of GDP or GDI is available.

Thus, the best approach to characterizing how well the economy is performing at a moment in time, and how well it's likely to do in the future, is to use a measure such as GDPplus in combination with other windows into the state of the economy such as the unemployment rate, industrial production, consumption, investment and so on.

Conclusions

This preliminary observations suggest that GDP is a too broad and thus questionable measure of economic growth. As such it should not be absolutized as the sole metric of the economy growth. Such usage in many respects simply contradict common sense. In a way the calculation of GDP became just a complex (and by-and-large counterproductive) ritual not unlike some religious rituals like calculation of certain dates. That's why we can talk about "Cult of GDP" as a religious phenomena.

It does not necessary correlates with well-being of the people as the term "jobless recovery" implies: for most working people any period of slow growth is not that different from recession. See Olivier Vaury, Is GDP a good measure of economic progress, Post-Autistic Economics Review, issue 20 . Recently there was an interesting new evidence that suggests that shifting production overseas has inflicted additional damage on the U.S. economy by creating "phantom GDP"

BusinessWeek's analysis of the import price data reveals offshoring to low-cost countries is in fact creating "phantom GDP" -- reported gains in GDP that don't correspond to any actual domestic production. The only question is the magnitude of the disconnect. "There's something real here, but we don't know how much," says J. Steven Landefeld, director of the Bureau of Economic Analysis (BEA), which puts together the GDP figures. Adds Matthew J. Slaughter, an economist at the Amos Tuck School of Business at Dartmouth College who until last February was on President George W. Bush's Council of Economic Advisers: "There are potentially big implications. I worry about how pervasive this is."

By BusinessWeek's admittedly rough estimate, offshoring may have created about $66 billion in phantom GDP gains since 2003 (page 31). That would lower real GDP today by about half of 1%, which is substantial but not huge. But put another way, $66 billion would wipe out as much as 40% of the gains in manufacturing output over the same period.

It's important to emphasize the tenuousness of this calculation. In particular, it required BusinessWeek to make assumptions about the size of the cost savings from offshoring, information the government doesn't even collect.

GETTING WORSE

As a result, the actual size of phantom GDP could be a lot larger, or perhaps smaller. This estimate mainly focuses on the shift of manufacturing overseas. But phantom GDP can be created by the introduction of innovative new imported products or by the offshoring of research and development, design, and services as well--and there aren't enough data in those areas to take a stab at a calculation. "As these [low-cost] countries move up the value chain, the problem becomes worse and worse," says Jerry A. Hausman, a top economist at Massachusetts Institute of Technology. "You've put your finger on a real problem."

Alternatively, as Landefeld notes, the size of the overstatement could be smaller. One possible offset: Machinery and high-tech equipment shipped directly to businesses from foreign suppliers may generate less phantom GDP, just because of the way the numbers are constructed.

... ... ...

Phantom GDP can also be created in import-dependent industries with fast product cycles, because the import price statistics can't keep up with the rapid pace of change. And it can happen when foreign suppliers take on tasks such as product design without raising the price. That's an effective cost cut for the American purchaser, but the folks at the BLS have no way of picking it up.

The effects of phantom GDP seem to be mostly concentrated in the past three years, when offshoring has accelerated. Indeed, the first time the term appeared in BusinessWeek was in 2003. Before then, China and India in particular were much smaller exporters to the U.S.

The one area where phantom GDP may have made an earlier appearance is information technology. Outsourcing of production to Asia really took hold in the late 1990s, after the Information Technology Agreement of 1997 sharply cut the duties on IT equipment. "At least a portion of the productivity improvement in the late 1990s ought to be attributed to falling import prices," says Feenstra of UC Davis, who along with Slaughter and two other co-authors has been examining this question.

What does phantom GDP mean for policymakers? For one thing, it calls into question the economic statistics that the Federal Reserve uses to guide monetary policy. If domestic productivity growth has been overstated for the past few years, that suggests the nation's long-term sustainable growth rate may be lower than thought, and the Fed may have less leeway to cut rates.

In terms of trade policy, the new perspective suggests the U.S. may have a worse competitiveness problem than most people realized. It was easy to downplay the huge trade deficit as long as it seemed as though domestic growth was strong. But if the import boom is actually creating only a facade of growth, that's a different story. This lends more credence to corporate leaders such as CEO John Chambers of Cisco Systems Inc. (CSCO ) who have publicly worried about U.S. competitiveness--and who perhaps coincidentally have been the ones leading the charge offshore.

In a broader sense, though, the problem with the statistics reveals that the conventional nation-centric view of the U.S. economy is completely obsolete. Nowadays we live in a world where tightly integrated supply chains are a reality.

For that reason, Landefeld of the BEA suggests perhaps part of the cost cuts from offshoring are being appropriately picked up in GDP. In some cases, intangible activities such as R&D and design of a new product or service take place in the U.S. even though the production work is done overseas. Then it may make sense for the gains in productivity in the supply chain to be booked to this country. Says Landefeld: "The companies do own those profits." Still, counters Houseman, "it doesn't represent a more efficient production of things made in this country."

What Landefeld and Houseman can agree on is that the rush of globalization has brought about a fundamental change in the U.S. economy. This is why the methods for measuring the economy need to change, too.

The arguments presented above cast doubt on the usefulness of GDP as the main “pilot” of economic policy. If the thermometer is wrong, then the policy based on it should be wrong too. Also people are very adaptable and if some numeric scale became an official goal. people demonstrate tremendous ability to abuse any numeric scales of measurement both by fraud and by corruption of the initial goals and purpose of the measurement.

But even if we assume the GDP is a useful metric there are some concerns about the validity of the official figures: Ronald R. Cooke in his editorial American GDP published 01-17-2008 at Financial Sense noted:

In another life (circa 1962), I was an auditor for AT&T. Nothing spectacular. Mostly cash and property reviews. Then some business process analysis. It was my good fortune to have two older gentlemen as partners. They graciously decided to teach this green college kid how to be a good auditor. It was a great learning experience. One of the tricks they taught me was called the “reasonable test”. If the data under audit was within the parameters of like data from other audits, then it was reasonable to assume there were no problems of procedure or management. If, on the other hand, the data did not seem to make sense versus circumstantial criteria, then it would be reasonable to assume further audit investigation was warranted. This technique of measuring the quality of information has become a cornerstone of my work ever since.

In early November, 2007, the Commerce Department’s Bureau of Economic Analysis (BEA) announced the United States had achieved a third quarter Gross Domestic Product (GDP) of 3.9 percent. That number was later updated to 4.9 percent. Those numbers set off my “reasonable test” alarm. How, I wondered, with an accelerating rate of inflation and declining economic activity, could the United States turn in such a stellar performance?

The BEA’s report flunked the reasonable test.

GDP

The BEA reported American GDP in billions of Current Dollars (the money we actually spent for goods and services) for Q3 2006 and Q3 2007. It also reported this same data adjusted for inflation using “chained” 2000 dollars. As of December 20, 2007, the quarterly data, using seasonally adjusted annual rates for the National Domestic accounts, yields the Current-Dollar and “Real” Gross Domestic Product data shown in the following Table. It shows that annual GDP growth in current dollars grew from 4.53% in Q1 2007 to 5.30% in Q3 2007. Using inflation adjusted chained 2000 dollars, economic growth grew from 1.55% in Q1 2007 to 2.84% in Q3. Not bad.

But wait. Does this imply an inflation differential of only 2.46% for Q3? And do we really believe the inflation differential actually declined from 2.98% in Q1 to 2.46% in Q3? Didn’t the value of the dollar decline over these three quarters?

GDP in billions of current dollars

% Change from year ago quarter

GDP in billions of chained 2000 dollars

% Change from year ago quarter

Inflation Differential

2007q1

13,551.9

4.53%

11,412.6

1.55%

2.98%

2007q2

13,768.8

4.67%

11,520.1

1.89%

2.78%

2007q3

13,970.5

2.84%

2.46%

The BEA’s Price Index for Gross Domestic Purchases (which measured prices paid by U S. residents) increased by just 1.8% in Q3. By contrast, the Labor Department’s Bureau of Labor Statistics (BLS) CPI-U inflation index was 2.36% for this same period. Which number is a better measure of inflation? Can we trust either number?

And to further compound the confusion, the BEA has reported a current dollar gain of 6.0% for Q3. BUT this is against average GDP for all of 2006, rather than a comparison of Q3 2006 vs. Q3 2007.

Collecting the copious amounts of data used to compute GDP has to be a tedious and sometimes frustrating job. Unfortunately, sophisticated analysis and hard work does not guarantee credible results. The BEA’s conclusions appear to be a bit optimistic.

Simple Net GDP Calculation

Pundits frequently ignore current dollar GDP (the total production of goods and services priced as though they were purchased with current dollars). Instead they use a number that has been adjusted downward called “Real” GDP that deducts the rate of inflation and makes other adjustments to current dollar GDP in an attempt to compare GDP from one period, with the GDP for a subsequent period, using dollars of a constant value .

I dislike the term “Real” GDP. There is nothing sacred about using inflation adjusted dollars as a measure of economic performance. Current dollar GDP is just as “real” as any other measure of value and provides a useful way to compare multiple sets of data from period to period. We should remember. Consumers can not spend inflation adjusted dollars to purchase goods and services. They can only pay their bills with the money that is actually in their pocket – current dollars. So .. if we want to adjust current dollar GDP for inflation, then let us do just that … and call it “Net” GDP. In other words, Net GDP is the percentage increase (or decrease) in current dollar GDP for a specified period vs. the current dollar GDP of a like prior period, less the rate of inflation from the prior period to the specified period. In the following example, seasonally adjusted current dollar GDP increased from $13,266.9 billion in Q3 2006, to 13,970.5 billion in Q3 2007 – an increase of 5.30%. The BLS reported a seasonally adjusted price index increase of 2.36% for these same two periods. If we subtract the BLS CPI from BEA current dollar GDP, that gives us a net increase in GDP of 2.94% from Q3 2006 to Q3 2007, - far less than the GDP gain of 4.9% reported by the BEA.

BEA Q3 2007 GDP Growth in Current Dollars from Q3 2006

5.30%

Increase of Q3 2007 GDP vs. Q3 2006 GDP

BLS CPI-U Q3 2006 vs. Q3 2007

2.36%

Deduct Q3 2007 Rate of Inflation

Net GDP

2.94%

Net GDP

If we take the BEA seasonally adjusted quarterly current dollar Gross Domestic Product percent change for Q3 2007, and compare it with this same data adjusted for chained 2000 dollars, the “inflation” differential is only 1.1 % even though the BEA price index was 1.8. In addition, note that while real world food and fuel prices have been going up, the inflation differential has been going down.

How is this possible?

BEA GDP Data

10/29/2007

GDP percent change based on current dollars

GDP percent change based on chained 2000 dollars

Inflation Differential

2007q1

4.9

0.6

4.3

2007q2

6.6

3.8

2.8

2007q3

6.0

4.9

1.1

If you go to www.tce.name and click on the Cultural Economics tab, you will see my essay of the rate of inflation: “CPI: Sophisticated Economic Theory, Terrible Ethics”. To quote from that essay: “If we use the weighting and data points from the above factoids to calculate an alternative estimate of CPI (the Consumer Price Index), we get a very different picture of American inflation from Q3 2006 to Q3 2007. There is a dramatic increase in food and housing costs. …... Granted.

Accuracy would require the acquisition and analysis of a lot more data than assembled for this effort. But the large discrepancy suggests something is wrong with either the survey methodology or the process of analysis. Whereas the BLS reported a CPI increase of 2.36% for this period, the actual rate of inflation was more like 4.02%.”

Ok. I like my economics simple, uncluttered, and straight. Assuming the credibility of the BEA current dollar estimates, let’s deduct my alternative CPI from the BEA data to estimate economic performance.

BEA Q3 2007 vs. Q3 2006 GDP in Current Dollars

5.30%

TCE CPI-U Q3 2007 vs. Q3 2006 Dollar value inflation

4.02%

“Net” increase in Q3 2007 GDP

1.28%

Using this methodology, could one conclude America’s economy posted a modest performance in Q3 2007? And by the way:

which number reflects contemporaneous comments on the economy:
the 4.9% gain in GDP reported by the BEA, or the above estimate of 1.26%?

... ... ...

Conclusion

GDP is one of the most closely watched economic statistics: It is used by the White House and Congress to prepare the Federal budget, by the Federal Reserve to formulate monetary policy, by Wall Street and the media as an indicator of economic activity, and by the business community to prepare forecasts of production, investment, and employment. Because of its extremely sensitive business and political ramifications, reported GDP (current or chained) needs to be accurate, unambiguous, and trustworthy.

And this brings up an interesting point. One of the issues in this election cycle is trust. Can we trust the information we receive from the Federal Government? Congress? The Administration? Federal agencies? Aside from outright falsification, and intentional or intrinsic bias, data and information can be rendered untrustworthy by establishing a misdirected premise for the methodology or by overly sophisticated manipulation.

Hopefully, we will elect a management team in November that has the ability to review our measurement objectives and the analytical processes used to achieve them. In other words:

In God We Trust. All others need an occasional audit.

The USSR example suggests that the most dangerous aspect of GDP is "tail wags the dog" effect -- it implicitly stimulated maladaptive, counter-productive behavior of government and its major economic agents. The term for the USSR was "phantom GDP" and now it applies to the USA to the full extent possible. For example offshoring may have created about $66 billion in phantom GDP gains since 2003 . A lot of phantom GDP was also created in import-dependent industries. Accounting at large multinationals is as distorted as in the USSR to the extent that some parts of profits are completely fictional (writing down as research many non-research activities is a one popular trick). The danger amplifies when individual firms adopt questionable metrics like "maximizing shareholder value" as capitalism is by nature a dynamic economic force what seeks change and became destructive if corporate goals for such a change are misaligned with the larger society. In other words "maximizing shareholder value" implicitly presuppose minimizing societal value and responsibility. One telling example is the emergence of "blockbuster" drags, like all those cholesterol lowering drags, painkillers and recreational drugs like Viagra in big pharma.

There is also a more generic problem with one dimensional metrics of economic performance that USSR was first to demonstrate to the world. People are very adaptable and if some numeric scale became an official goal they demonstrate tremendous ability to abuse this metric both by fraud and by corruption of controlling organizations defeating the initial goals and purpose of the measurement. So "maximizing shareholder value" paradoxically might be the best way to destroy any traces of honest accounting and honest auditors :-).

This interesting phenomena when numbers are bended to provide justification to particular ideology, which is the USSR was called Lysenkoism, was independently rediscovered in the USA by the name of "numbers racket".


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[Sep 14, 2016] Yes, Donald Trump is wrong about unemployment. But hes not the only one

Spirited defense of the establishment from one of financial oligarchy members. " The economy overall is doing just fine." Does this include QE? If the Fed is pouring billions of new money into the economy, how accurate is it to say that the economy is doing just fine?
Notable quotes:
"... "That was a number that was devised, statistically devised, to make politicians - and in particular, presidents - look good. And I wouldn't be getting the kind of massive crowds that I'm getting if the number was a real number." ..."
"... In the 1950s and 1960s, for instance, organized labor was fairly convinced that the government was purposely underestimating inflation and the cost of living to keep Social Security payments low and wages from rising. George Meany, the powerful head of the American Federation of Labor at the time, claimed that the Bureau of Labor Statistics, which compiled both employment and inflation numbers, had "become identified with an effort to freeze wages and is not longer a free agency of statistical research." ..."
"... Employment figures are sometimes seen as equally suspect. Jack Welch, the once-legendary former CEO of GE, blithely accused the Obama administration of manipulating the final employment report before the 2012 election to make the economic recovery look better than it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't debate so change numbers," he tweeted ..."
"... His arguments were later fleshed out by New York Post columnist John Crudele , who went on to charge the Census Bureau (which works with BLS to create the samples for the unemployment rate) with faking and fabricating the numbers to help Obama win reelection. ..."
"... The chairman of the Gallup organization, Jim Clifton, sees so many flaws with the way unemployment is measured that he has called the official rate a "Big Lie." In the Democratic presidential campaign, Bernie Sanders has also weighed in, saying the real unemployment rate is at best above 10 percent. ..."
"... What a useless article. The author explains precisely nothing about what the official statistics do and do not measure, what they miss and what they capture. ..."
"... I had the same impression as well. Notice he does not mention that the Gallop number is over 10% and is based on their polling data. ..."
"... But never mentioned that Reagan changed how Unemployment was figured in the early 80's. He included all people in the military service, as employed. Before that, they was counted neither way. He also intentionally left out that when Obama, had the unemployed numbers dropped one month before the election, from 8.1% to 7.8% --because it was believed that no one could be reelected if it was above 8%. ..."
"... U6 is 9.8% for March 2016. We still have 94 million unemployed and you want to say its 5 % what journalistic malpractice. ..."
"... Trump has emphasized that he is looking at the percent of the population that is participating in the workforce - and that this participation rate is currently at historical lows -- and Trump has been clear that his approach to paying down the national debt is based on getting the participation rates back to historical levels ..."
"... "The government can't lie about a hundred billion dollars of Social Security money stolen for the Clinton 'balanced budget', that would be a crime against the citizens, they would revolt. John, come one now. " ..."
"... I didn't say it first, Senator Ernest Hollings did, on the Senate floor. ..."
"... And here is how they did it: http://www.craigsteiner.us/articles/16 ..."
"... There is plenty of evidence the figures are cooked, folks, enough to fill a book: Atlas Shouts. Don't believe trash like this article claims. GDP, unemployment and inflation are all manipulated numbers, as Campbell's Law predicts. ..."
"... I can't believe the Washington Post prints propaganda like this. ..."
"... I do remember when the officially-announced unemployment rate stopped including those who were no longer looking for work. That *was* a significant shift, and there's no doubt it made politicians (Reagan, I think it was) look better; of course, no President since then has reversed it, as it would instantly make themselves look worse. ..."
"... Working one hour a week, at minimum wage, is 'employed', according to the government. No wonder unemployment is at 5%. ..."
"... Add in people who are working, but want and need full time jobs, add in people who have dropped out of the labor market and/or retired earlier than they wanted to, and unemployment is at least 10%. Ten seconds on Google will show you that. ..."
"... The writer should be sacked for taking a very serious issue and turning it into a piece of non-informative fluff. Bad mouthing Trump and Sanders is the same as endorsing Hilly. ..."
Apr 08, 2016 | The Washington Post
Yes, Donald Trump is wrong about unemployment. But he's not the only one. - The Washington Post

Listen to President Obama, and you'll hear that job growth is stronger than at any point in the past 20 years, and - as he said in his final State of the Union address - "anyone claiming that America's economy is in decline is peddling fiction."

Listen to Donald Trump and you'll hear something completely different. The billionaire Republican candidate for president told The Washington Post last week that the economy is one big Federal Reserve bubble waiting to burst, and that as for job growth, "we're not at 5 percent unemployment. We're at a number that's probably into the 20s if you look at the real number." Not only that, Trump said, but the numbers are juiced: "That was a number that was devised, statistically devised, to make politicians - and in particular, presidents - look good. And I wouldn't be getting the kind of massive crowds that I'm getting if the number was a real number."

It's easy enough to dismiss - as a phalanx of economists and analysts did - Trump's claims as yet another one of his all-too-frequent campaign lines that have little to do with reality. But with this one, at least, Trump is tapping into a deep and mostly overlooked well of popular suspicion of government numbers and a deeply held belief that what "we the people" are told about the economy by the government is lies, damn lies and statistics designed to benefit the elite at the expense of the working class. The stubborn persistence of these beliefs should be a reminder that just because the United States is doing well in general, that doesn't mean everyone in the country is. It's also a warning to experts and policymakers that in the real world, there is no "the economy," there are many, and generalizations have a way of glossing over some very rough patches.

Since the mid-20th century, when the U.S. government began keeping and compiling our modern suite of economic numbers, there has been constant skepticism of the reports, coming from different corners depending on economic trends and the broader political climate. In the 1950s and 1960s, for instance, organized labor was fairly convinced that the government was purposely underestimating inflation and the cost of living to keep Social Security payments low and wages from rising. George Meany, the powerful head of the American Federation of Labor at the time, claimed that the Bureau of Labor Statistics, which compiled both employment and inflation numbers, had "become identified with an effort to freeze wages and is not longer a free agency of statistical research."

Over the decades, those views hardened. Throughout the 1970s, as workers struggled with unemployment and stagflation, the government continually tweaked its formulas for measuring prices. By and large, these changes and new formulas were designed to make the figures more accurate in a fast-changing world. But for those who were already convinced the government was trying to paint a deliberately false picture, the tweaks and innovations were interpreted as a devious way to avoid spending money to help the ailing middle class, not trying to measure what was actually happening to design policies to help address it. The commissioner of BLS at the time, Janet Norwood, dismissed those concerns in testimony to Congress in the late 1970s, saying that when people don't get the number they want, "they feel there must be something wrong with the indicator itself."

Employment figures are sometimes seen as equally suspect. Jack Welch, the once-legendary former CEO of GE, blithely accused the Obama administration of manipulating the final employment report before the 2012 election to make the economic recovery look better than it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't debate so change numbers," he tweeted after that last October report showed better-than-expected job growth and lower-than-anticipated unemployment rate. His arguments were later fleshed out by New York Post columnist John Crudele, who went on to charge the Census Bureau (which works with BLS to create the samples for the unemployment rate) with faking and fabricating the numbers to help Obama win reelection.

These views are not fringe. Type the search terms "inflation is false" into Google, and you will get reams of articles and analysis from mainstream outlets and voices, including investment guru Bill Gross (who referred to inflation numbers as a "haute con job"). Similar results pop up with the terms "real unemployment rate," and given how many ways there are to count employment, there are legitimate issues with the headline number.

The cohort that responds to Trump reads those numbers in a starkly different light from the cohort laughing at him for it. Whenever the unemployment rate comes out showing improvement and hiring, those who are experiencing dwindling wages and shrinking opportunities might see a meticulously constructed web of lies meant to paint a positive picture so that the plight of tens of millions who have dropped out of the workforce can be ignored. The chairman of the Gallup organization, Jim Clifton, sees so many flaws with the way unemployment is measured that he has called the official rate a "Big Lie." In the Democratic presidential campaign, Bernie Sanders has also weighed in, saying the real unemployment rate is at best above 10 percent.

Beneath the anger and the distrust - which extend to a booming stock market that helps the wealthy and banks flush with profit even after the financial crisis - there lies a very real problem with how economists, the media and policymakers discuss economics. No, the bureaucrats in the Labor and Commerce departments who compile these numbers aren't a cabal engaged in a cover-up. And no, the Fed is not an Illuminati conspiracy. But the idea that a few simple big numbers that are at best averages to describe a large system we call "the economy" can adequately capture the stories of 320 million people is a fiction, one that we tell ourselves regularly, and which millions of people know to be false to their own experience.

It may be true that there is a national unemployment rate measured at 5 percent. But it is also true that for white men without a college degree, or white men who had worked factory jobs until the mid-2000s with no more than a high school education, the unemployment reality is much worse (though it's even worse for black and Hispanic men, who don't seem to be responding by flocking to Trump in large numbers). Even when those with these skill sets can get a job, the pay is woefully below a living wage. Jobs that don't pay well still count, in the stats, as jobs. Telling people who are barely getting by that the economy is just fine must appear much more than insensitive. It is insulting, and it feels like a denial of what they are experiencing.

The chords Trump strikes when he makes these claims, therefore, should be taken more seriously than the claims themselves. We need to be much more diligent in understanding what our national numbers do and do not tell us, and how much they obscure. In trying to hang our sense of what's what on a few big numbers, we risk glossing over the tens of millions whose lives don't fit those numbers and don't fit the story. "The economy" may be doing just fine, but that doesn't mean that everyone is. Inflation might be low, but millions can be struggling to meet basic costs just the same.

So yes, Trump is wrong, and he's the culmination of decades of paranoia and distrust of government reports. The economy overall is doing just fine. But people are still struggling. We don't have to share the paranoia or buy into the conspiratorial narrative to acknowledge that. A great nation, the one Trump promises to restore, can embrace more than one story, and can afford to speak to those left out of our rosy national numbers along with those whose experience reflect them.

the3sattlers, 4/8/2016 1:05 PM EDT

" The economy overall is doing just fine." Does this include QE? If the Fed is pouring billions of new money into the economy, how accurate is it to say that the economy is doing just fine?

james_harrigan, 4/8/2016 10:14 AM EDT

What a useless article. The author explains precisely nothing about what the official statistics do and do not measure, what they miss and what they capture.

Derbigdog, 4/8/2016 11:40 AM EDT

I had the same impression as well. Notice he does not mention that the Gallop number is over 10% and is based on their polling data.

captdon1, 4/8/2016 5:51 AM EDT

Not reported by WP
The first two years of Obama's presidency Democrats controlled the house and Senate. The second two years, Republicans controlled the Senate. The last two years of Obama's term, the Republicans controlled house and Senate. During this six years the national debt increase $10 TRILLION and the Government collected $9 TRILLION in taxes and borrowed $10 TRILLION. ($19 Trillion In Six Years!!!) (Where did our lovely politicians spend this enormous amount of money??? (Republicans and Democrats!)

reussere, 4/8/2016 1:43 AM EDT

Reading the comments below it strikes me again and again how far out of whack most people are with reality. It's absolutely true that using a single number for the employment rate reflects the overall average of the economy certainly doesn't measure how every person is doing, anymore than an average global temperature doesn't measure any local temperatures.

One thing not emphasized in the article is that there is a number of different statistics. The 5% figure refers to the U-3 statistic. Nearly all of the rest of the employment statistics are higher, some considerably so because they include different groups of people. But when you compare U-3 from different years, you are comparing apples and apples. The rest of the numbers very closely track with U-3. That is when U-3 goes up and down, U-6 go up and down pretty much in lockstep.

It is unfortunate that subpopulations of Americans are doing far worse (and some doing far better) than average. But that is the nature of averages after all. It is simply impossible for a single number (or even a group of a dozen different employment measurements) to accurately reflect a complex reality.

Smoothcountryside, 4/8/2016 12:04 PM EDT

The alternative measures of labor underutilization are defined as U-1 through U-6 with U-6 being the broadest measure and probably the closes to the "true" level of unemployment. Otherwise, all the rest of your commentary is correct.

southernbaked, 4/7/2016 11:02 PM EDT

Because this highly educated writer is totally bias, he left out some key parts, I personally lived though. He referred back to the late 70's twice. But never mentioned that Reagan changed how Unemployment was figured in the early 80's. He included all people in the military service, as employed. Before that, they was counted neither way. He also intentionally left out that when Obama, had the unemployed numbers dropped one month before the election, from 8.1% to 7.8% --because it was believed that no one could be reelected if it was above 8%.

Then after he was sworn in--- in January, they had to readjust the numbers back up. They blamed it on one employees mistakes-- PS. no one was fired or disciplined for fudging. Bottom line is, for every 1.8 manufacturing job, there are 2 government jobs, that is disaster. Because this writer is to young to have lived in America when it was great. When for every 1 government job, you had 3 manufacturing jobs.

I will enlighten him. I joined the workforce -- With no higher education -- when you merely walked down the road, and picked out a job. Because jobs hang on trees like apples. By 35 I COMPLETELY owned my first 3 bedroom brick house, and the 2 newer cars parked in the driveway. Anyone care to try that now ??

As for all this talk about education-- I have a bit of knowledge about that subject-- because I paid in full to send all under my roof through it. Without one dime of aide from anyone. The above writer is proof-- you can be heavily educated, and DEAD WRONG. There is nothing good about this economy. Signed, UN-affiliated to either corrupted party

Bluhorizons, 4/7/2016 9:43 PM EDT

"we're not at 5 percent unemployment. We're at a number that's probably into the 20s if you look at the real number." Trump is correct. The unemployment data is contrived from data about people receiving unemployment compensation but the people who's unemployment has ended and people who have just given up is invisible.

"It may be true that there is a national unemployment rate measured at 5 percent. But it is also true that for white men without a college degree, or white men who had worked factory jobs until the mid-2000s with no more than a high school education, the unemployment reality is much worse "

The author goes on and on about the legitimate distrust of government unemployment data and then tells us Trump is wrong. But the article convinces us Trump is right! So, this article its not really about the legitimate distrust of government data is is about the author's not liking Trump. Typical New Left bs

Aushax, 4/7/2016 8:24 PM EDT

Last jobs report before the 2012 election the number unusually dropped then was readjusted up after the election. Coincidentally?

George Mason, 4/7/2016 8:15 PM EDT

U6 is 9.8% for March 2016. We still have 94 million unemployed and you want to say its 5 % what journalistic malpractice.

F mackey, 4/7/2016 7:57 PM EDT

hey reporter,Todays WSJ, More than 40% of the student borrowers aren't making payments? WHY? easy,they owe big $ money$ & cant get a job or a well paying job to pay back the loans,hey reporter,i'd send you $10 bucks to buy a clue,but you'd probably get lost going to the store,what a %@%@%@,another reporter,who doesn't have a clue on whats going on,jmo

SimpleCountryActuary, 4/7/2016 7:57 PM EDT

This reporter is a Hillary tool. Even the Los Angeles Times on March 6th had to admit:

"Trump is partly right in saying that trade has cost the U.S. economy jobs and held down wages. He may also be correct - to a degree - in saying that low-skilled immigrants have depressed salaries for certain jobs or industries..."

If this is the quality of reporting the WaPo is going to provide, namely even worse than the Los Angeles Times, then Bezos had better fire the editorial staff and buy a new one.

Clyde4, 4/7/2016 7:34 PM EDT [Edited]

This article dismissing Trump is exactly what is wrong with journalism today - all about creating a false reality for people instead of investigating and reporting

Trump has emphasized that he is looking at the percent of the population that is participating in the workforce - and that this participation rate is currently at historical lows -- and Trump has been clear that his approach to paying down the national debt is based on getting the participation rates back to historical levels

The author completely ignored the big elephant in the room -- that is irresponsible journalism

The author may want to look into how the unemployment rate shot up in 2008 when the government extended benefits and then the unemployment rate plummeted again when unemployment benefits were decrease (around 2011, I believe) - if I were the author I would do a little research into whether the unemployment rate correlates with how much is paid out in benefits or with unemployment determined through some other approach (like surveys

dangerbird1225, 4/7/2016 7:25 PM EDT

Bunch of crap. If you stop counting those that stop looking for a job, your numbers are wrong. Period. Why didn't this apologist for statistics mention that?

watchkeptoverthewatcher, 4/7/2016 6:27 PM EDT

Ya with a labor participation rate of 63%

http://data.bls.gov/timeseries/LNS11300000

AtlasRocked, 4/7/2016 5:12 PM EDT

"The government can't lie about a hundred billion dollars of Social Security money stolen for the Clinton 'balanced budget', that would be a crime against the citizens, they would revolt. John, come one now. "

I didn't say it first, Senator Ernest Hollings did, on the Senate floor.

"Both Democrats and Republicans are all running this year and next and saying surplus, surplus. Look what we have done. It is false. The actual figures show that from the beginning of the fiscal year until now we had to borrow $127,800,000,000." - Senate speech, Democratic Senator Ernest Hollings, October 28, 1999

http://www.c-span.org/video/?c3319676 at 5:30

And here is how they did it: http://www.craigsteiner.us/articles/16

rgengel, 4/7/2016 5:03 PM EDT

Go to New Orleans Chicago Atlanta Los Angeles Detroit stop anybody on the street and ask if unemployment is 5% and that there is a 95% chance a guy can get a job.

Then you will have a statistic reference point. Its not a Democratic or republican issue because both of them have manipulated the system for so long its meaningless. Go Trump 2016 and get this crap sorted out with common sense plain English

AtlasRocked, 4/7/2016 4:37 PM EDT

There is plenty of evidence the figures are cooked, folks, enough to fill a book: Atlas Shouts. Don't believe trash like this article claims. GDP, unemployment and inflation are all manipulated numbers, as Campbell's Law predicts.

I can't believe the Washington Post prints propaganda like this.

TimberDave, 4/7/2016 2:23 PM EDT

I do remember when the officially-announced unemployment rate stopped including those who were no longer looking for work. That *was* a significant shift, and there's no doubt it made politicians (Reagan, I think it was) look better; of course, no President since then has reversed it, as it would instantly make themselves look worse.

astroboy_2000, 4/7/2016 1:28 PM EDT

This would be a much more intelligent article if the writer actually said what the government considers as 'employed'.

Working one hour a week, at minimum wage, is 'employed', according to the government. No wonder unemployment is at 5%.

Add in people who are working, but want and need full time jobs, add in people who have dropped out of the labor market and/or retired earlier than they wanted to, and unemployment is at least 10%. Ten seconds on Google will show you that.

The writer should be sacked for taking a very serious issue and turning it into a piece of non-informative fluff. Bad mouthing Trump and Sanders is the same as endorsing Hilly.

Manchester0913, 4/7/2016 2:12 PM EDT

The number you're referencing is captured under U6. However, U3 is the traditional measure.

Son House, 4/7/2016 2:24 PM EDT

The government doesn't claim that working one hour a week is employed. Google U 3 unemployment. Then google U 6 unemployment. You can be enlightened.

Liz in AL, 4/7/2016 7:21 PM EDT

I've found this compilation of all 6 of the "U-rates" very useful. It encompasses the most restrictive (and thus smallest) U-1 rate, though the most expansive U-6. It provides brief descriptions of what gets counted for each rate, and (at least for more recent years) provides the ability to compare at the monthly level of detail. U6 Unemployment Rate Portal Seven

[Mar 16, 2016] GDP never measures economic efficiency of the country

Notable quotes:
"... Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service economy." ..."
peakoilbarrel.com

Dennis Coyne , 03/15/2016 at 6:56 pm

Energy intensity of the World economy has decreased from 1970 to 2014. Energy intensity is energy consumed by the economy divided by the real GDP produced.
In 1970 314 tonnes of oil equivalent(toe) were needed for each million 2005$ of GDP produced and by 2014 energy intensity had fallen to 225 toe per million 2005$ of GDP.

SRSrocco , 03/15/2016 at 9:46 pm
Dennis,

While you produce some fine charts, I hope you don't believe GDP and energy consumption will continue higher indefinitely. Also I hope you realize GDP figures are overstated due to understated inflation rates.

For example the policy of substitution says if top sirloin beef is too expensive, then we switch to eating ground chuck. If chuck becomes too high, then its plain ole ground beef. Once ground beef becomes too costly, then we switch to ground rat.

Lastly, why don't you add the debt into your equations and see what the trend lines look like.

Steve

Dennis Coyne , 03/16/2016 at 8:16 am
Hi Steve,

No inflation is not understated, the Shadowstats stuff is not believable. If you believe the Shadowstats CPI adjustment and us those numbers to find the real oil price from 1970 to 2012 and do the same using the BLS CPI we get the following chart. Does the Shadowstats estimate for the real oil price in 1980 look reasonable?

You cannot be serious. :-)

likbez , 03/16/2016 at 12:01 am
Dennis,

Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service economy."

Ulenspiegel , 03/16/2016 at 2:26 am
"This is probably due to deindustrialization of the Western countries. Aka "growth of service economy.""

The GLOBAL industrial production did not decrease, therefore, your argument does not make sense. It is only useful in a national e.g. US-centric discussion.

Or if you actually check data for developed countries with quite different share of industry to their GDP you do not see the correlation of low share of industry = low energy intensity!

Dennis Coyne , 03/16/2016 at 8:20 am
Hi likbez,

As Ulenspiegel says correctly, for the World your point does not apply. The World Energy intensity has fallen as I have used Global GDP and Global energy consumption.

As long as we don't do a lot of interplanetary trade, this estimate will be close enough. :-)

likbez , 03/16/2016 at 7:21 pm
Ulenspiegel ,

GDP does not reflect only production (compare with GNI). It is completely different metric which takes into account the "value" produced by financial services, prostitution (yes in some countries income from prostitution is included into GDP; GB (3-4% or ~£10 billion) and Italy (2% of national GDP) are two examples: https://www.rt.com/news/161140-italy-drugs-prostitution-economy/ ) and like.

GDP is defined as the total value of final goods and services produced within a territory during a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's annual product). GDP differs from gross national product (GNP) in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it.

So the country with zero production in which people just wash dirty linen for each for remuneration or trade on stock market has a positive GDP. Other classic example: if somebody marries his secretary and she stays home to look after children GDP drops.

GDP never measures economic efficiency of the country; it measures the level of economic activity. Healthcare is a classic example. The USA spends 20% to subsidize maladaptive behavior between producers and consumers in the medical food chain. Another example is sales of high sugar context flavored water called Coca Cola and Pepsi Cola. It is negatively affect children health leading to obesity and early diabetes, but it is positively reflected in GDP. And then medical expenses for treating diabetes further increase GDP. That brings us to the problem of conspicuous consumption or consumption for the sake of status. Which in the USA is a real national epidemics (Keeping up with Jones). Many other components of GDP (especially FIRE - finance, insurance and real estate) are partially anti-social and their fast growth is a sign of the problems inherent in neoliberal societies rather then social progress of the particular country. This is especially true for the USA, which in this sense is the most wicked (aka neoliberal) country in the world.

This voodoo cult of GDP that dominates US economic discourse since 1991 is just a sign of the level of degradation of economic science under neoliberalism.

See http://www.bloomberg.com/news/articles/2014-05-23/counting-drugs-and-prostitution-in-gdp-makes-a-mockery-of-budget-rules

[Dec 17, 2015] GDP Forecasts Have Consistently Been Too High

cepr.net

December 17, 2015

GDP Forecasts Have Consistently Been Too High

In an article * on the Federal Reserve Board's decision to raise interest rates, the Washington Post referred to the 2.4 percent median growth forecast of the Fed's Open Market Committee. For example, last December their median forecast for growth in 2015 was 2.8 percent. It now appears growth will be around 2.2 percent for the year. The Fed was not out of line with other forecasts. For example the Congressional Budget Office, which quite explicitly tries to be near the middle of major forecasts, forecast 2.9 percent growth for 2015.

* https://www.washingtonpost.com/news/wonk/wp/2015/12/16/federal-reserve-launches-campaign-to-raise-interest-rates-and-return-u-s-economy-to-normal/

-- Dean Baker

[Dec 08, 2015] GDP often is not a good measure of a society's wellbeing

Notable quotes:
"... The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society's wellbeing. These new data on white Americans' declining health status confirms this conclusion. The world's quintessential middle-class society is on the way to becoming its first former middle-class society. ..."
Project Syndicate

When Inequality Kills by Joseph E. Stiglitz - Project Syndicate

The basic perquisites of a middle-class life were increasingly beyond the reach of a growing share of Americans. The Great Recession had shown their vulnerability. Those who had invested in the stock market saw much of their wealth wiped out; those who had put their money in safe government bonds saw retirement income diminish to near zero, as the Fed relentlessly drove down both short- and long-term interest rates. With college tuition soaring, the only way their children could get the education that would provide a modicum of hope was to borrow; but, with education loans virtually never dischargeable, student debt seemed even worse than other forms of debt.

... ... ...

The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society's wellbeing. These new data on white Americans' declining health status confirms this conclusion. The world's quintessential middle-class society is on the way to becoming its first former middle-class society.

[Dec 05, 2015] The Real Stuff Economy Is Falling Apart Zero Hedge

www.zerohedge.com
What is the service sector? Mostly software, restaurants, banks, construction companies, retailers, doctors and hospitals.

Can an economy thrive if it doesn't make or move physical things? Intuitively the answer is no, because most of the services mentioned above either maintain the status quo (like healthcare and restaurants) or (like houses) consume rather than build capital. As for banking, in its current incarnation it's almost certainly a net negative, draining capital from productive uses and funneling it to trading desks and political action committees.

The US, in short, is engaged in an experiment to see how long an economy can function with services growing and manufacturing contracting. As with so many of today's monetary and fiscal experiments, no one knows when definitive results will come in. But the data so far aren't encouraging.


Noplebian

History shows when the fiat currency system reaches it's end cycle, there is always a call for war. This one however, will wipe out billions!

http://beforeitsnews.com/conspiracy-theories/2015/12/road-to-ww3-time-to...

Eyeroller

"The US, in short, is engaged in an experiment to see how long an economy can function with services growing and manufacturing contracting."

Should read:

"The US, in short, is engaged in an experiment to see how long an economy can function with services growing and manufacturing contracting while the MSM tells us how awesome everything is."

toady

Another "oldy-but-a-goody". This "transition from a manufacturing to a services economy" has been going on since before NAFTA, and it's now almost finished we'll finally get to see what the Reagan-Bush1 voodoo economics hath wrought.

Good times!

Amish Hacker

In politics, "definitive results" do not exist. Causes and effects can be, and are, argued and denied ad infinitum , in spite of overwhelming evidence to the contrary. For example, Cheney & the neocons still claim they did the right thing in Iraq & Afghanistan, and proudly boast that they would do the same thing again today. Keynesian economists will argue that they made no mistakes over the last 8 years, we just didn't apply their prescriptions aggressively enough. And so on.

In politics, confirmation bias is the leading cause of blindness.

[Dec 04, 2015] The alleged 'decoupling' of GDP from energy

peakoilbarrel.com
Don Stewart, 12/01/2015 at 12:25 pm

Dear Ron and Others
Relative to the alleged 'decoupling' of GDP from energy. Please see:
http://www.pnas.org/content/112/20/6271.full
The material footprint of nations

The apparent decoupling turns out to be mostly a mirage. It is true that rich countries outsource some of the more energy and materials intensive operations to poor countries, but if you count back from consumption, the rich countries are essentially as energy and materials dependent as they ever were. For fossil fuels, the coefficient is 90 percent…a 90 point increase in fossil fuels is needed for a 100 point increase in GDP.

Part of what happens can perhaps be understood by thinking about beef imports. If England imports beef from Africa, then there is a great deal of materials and energy consumed in Africa to produce the beef. Only a small percentage of the resource used gets exported to England. If you start with the steak in England and look back at the supply chain, you find that the consumption of the pound of steak in England was responsible for the consumption of lots of energy and materials in Africa.

I think that 'decoupling' is not the same as energy efficiency. Suppose, for example, that we look at the efficiency with which firewood is burned in an ordinary house. Back in the olden days, the wood was burned in a fireplace, which is inefficient. Then Franklin invented the Franklin stove and heating became more efficient in terms of calories of usable heat per cord of wood. But the stove wasn't necessarily any less or more expensive than the fireplace. Since GDP essentially measures cash outlay, the increased efficiency doesn't necessary have any direct impact on GDP.

Recently, we have begun to adjust GDP for 'hedonic factors'. Suppose, for example, that one has an old radio with lots of static and poor sound quality. Then one buys a new radio with better sound quality. But suppose that the price you pay for the new radio is the same as it was for the old radio. GDP would be the same for both radios. But, recently, the US government has begun to make adjustments for the quality of the sound.

Whether the hedonic adjustments make any sense depends on what sort of question you are trying to answer. If you are asking 'will my radio company be able to pay our debts?', then all that matters is your actual income. The fact that you had to improve the sound quality in order to remain competitive is an ancillary fact. If you are not getting any more income, then paying your debts doesn't get any easier.

Don Stewart

Fred Magyar, 12/01/2015 at 1:41 pm
Why the GDP Is Not An Good Measure of A Nation's Well Being
https://goo.gl/xKKHZx

In their book, The Spirit Level: Why Greater Equality Makes Societies Stronger (link is external), Professors Richard Wilkinson and Kate Pickett, present data taken from multiple credible sources that show the gap between the poor and rich the greatest in the U.S. among all developed nations; child well being is the worst in the U.S. among all developed nations; and levels of trust among people in the U.S. among the worst of all developed nations.

The Subcommittee on International Organizations, Human Rights and Oversight of the U.S. Congress' House Committee on Foreign Affairs stated, after examining the issue of the U.S.'s declining image abroad, "the decline in international approval of U.S. leadership is caused largely by opposition to the invasion of Iraq, U.S. support for dictators, and practices such as torture and rendition. They testified that this opposition is strengthened by the perception that our decisions are made unilaterally and without constraint by international law or standards-and that our rhetoric about democracy and human rights is hypocritical."

The US ranks 114th out of 125 countries in international peace and security.

http://www.goodcountry.org/

To those in power who believe that only strength counts, and that people are always self-interested, I say "We tried it your way, and it didn't work. Let's try something new."

Simon Anholt

Ves, 12/02/2015 at 8:49 am
Hi Dennis,
I see up there little discussion about GDP and what it means.
Let's say:
Country A: use washable rags to clean kitchen counter-tops.
Country B: use paper towels to clean same kitchen counter-tops.

As result they both have clean kitchen counter-tops but Country B has higher GDP due to use of paper towels.

So GDP means absolutely nothing or anything depending what you want to present.

GDP is like looking at the sunset and your mind is thinking that you are actually looking at the sunset. But it takes 8 minutes for sunlight to reach the earth and that sun that we think we are looking at is already gone. (Since this site is loaded with scientist they can correct me with if that 8 minutes is more or less correct )

Anyway, mostly GDP is used by some "smart" people we call economist to tell us some "story". For example they tell us: "You see sunny boy that GDP is big number this year, bigger than one from last year. So you should be content and happy. Not convinced? Don't worry we will "super size" that GDP for you next year. Isn't your tummy already feeling full and content?"

This kind of storytelling is usually printed as financial news about GDP. Meaningless if you ask me from the point of average citizen.

I have to go now because I have whole day of work planned for me by this economy and I will catch you later tonight to see your thoughts. Another thing that crosses my mind is how come that we work more or at least the same now when oil is at $40 compared to when oil was $100 last year? Wasn't the official meme that use of oil as our biggest invention beside sliced bread, made our life easier so we actually work less and spent more time with family & friends and doing odd staff like canoeing How come I don't feel that I did not get 60% discount due to price of oil in terms of work load from the last year Who is pocketing that 60%
How about employed folks who bought kiwi Leaf? Do they work less and have more time with family and friends or they are paddling in the same hamster wheel we call economy?

Dennis Coyne, 12/02/2015 at 12:39 pm
Hi Ves,

I agree GDP is a poor measure of well being. Another example would be World War 2 where a lot of output was created to destroy stuff (tanks, bombs, planes, ships, guns, etc), then stuff was destroyed, cities and other infrastructure in Europe and Asia and then it was rebuilt leading to a lot of economic growth. Were we better off? Probably not, especially the millions who died and their families.

GDP has many problems, beyond paper towels and paper plates and other wasteful (in my opinion) uses of resources.

I did a different chart using the human development index (HDI) from 1980 to 2013 which shows World primary energy use per unit of HDI(a dimensionless number) has been increasing roughly linearly, not decreasing as is the case for energy intensity.

The HDI is also far from perfect as a measure of human welfare, but probably better than GDP.

[Dec 03, 2015] GDP and energy

Notable quotes:
"... A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. ..."
"... GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass. ..."
"... I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling. ..."
"... Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP. ..."
peakoilbarrel.com

VK, 11/30/2015 at 4:10 pm

So much for decoupling…

http://www.theguardian.com/commentisfree/2015/nov/24/consume-conserve-economic-growth-sustainability

"A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. It points out that governments and economists have measured our impacts in a way that seems irrational.

Here's how the false accounting works. It takes the raw materials we extract in our own countries, adds them to our imports of stuff from other countries, then subtracts our exports, to end up with something called "domestic material consumption". But by measuring only the products shifted from one nation to another, rather than the raw materials needed to create those products, it greatly underestimates the total use of resources by the rich nations.

For instance, if ores are mined and processed at home, these raw materials, as well as the machinery and infrastructure used to make finished metal, are included in the domestic material consumption accounts. But if we buy a metal product from abroad, only the weight of the metal is counted. So as mining and manufacturing shift from countries such as the UK and the US to countries like China and India, the rich nations appear to be using fewer resources. A more rational measure, called the material footprint, includes all the raw materials an economy uses, wherever they happen to be extracted. When these are taken into account, the apparent improvements in efficiency disappear."

BC, 11/30/2015 at 4:37 pm
VK, precisely. The US has been in a net-exergetic deficit in debt-money-based terms per capita since the mid- to late 1960s to mid-1970s to mid-1980s, having compensated by increasing to an unprecedented level to date debt to wages and GDP.

Moreover, the BEA-determined industry requirement costs as the basis of estimated gross and real value-added output (what we refer to as GDP), adjusted for our net-exergetic deficit in debt-money terms, the US has been in recession/"slow-motion depression" since Q4 2000-Q1 2001, and the world since 2005-08.

Senior BEA, BLS, Commerce, White House economic advisors, CIA, NSA, military intelligence, and Pentagon planners all know this in varying degrees as it relates to their imperatives and prerogatives.

However, the mass public and most political leaders are utterly unaware, or in the case of the latter, have no incentive to know or to share with the public what they know because they will not be able to raise a nickel thereafter for reelection if they do share.

And so it goes . . .

Ron Patterson, 11/30/2015 at 5:02 pm
Thanks VK, I suspected as much.

He told me that he and his colleagues had conducted a similar analysis, in this case of the UK's energy use and greenhouse gas emissions, "and we find a similar pattern". One of his papers reveals that while the UK's carbon dioxide emissions officially fell by 194m tonnes between 1990 and 2012, this apparent reduction is more than cancelled out by the CO2 we commission through buying stuff from abroad. This rose by 280m tonnes in the same period.

GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass.

Jimmy, 12/02/2015 at 11:38 am
I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling.

Only a divergence due to more units of GDP produced per unit of energy consumed. When somebody can create units of GDP and consume no energy at all then we will have decoupling. Coupling and decoupling are all or none terms/states of being. You're either coupled or your decoupled. Any arguments to the contrary are pedantic and uninformed.

Ron Patterson, 12/02/2015 at 11:58 am
Thanks Jimmy, with all the Pollyannas on this site I need all the support I can get.
Dennis Coyne, 12/02/2015 at 1:56 pm
Hi Jimmy,

Look up the meaning of decouple it is reduce or eliminate the effect of one part of a circuit on another. In this context the appropriate meaning is reduce.

Doesn't really matter, nobody thinks that energy inputs can be eliminated, that would be absurd.

Dennis Coyne, 12/01/2015 at 8:07 am
Hi VK,

The problem is solved by looking at World output and World primary energy use.

Energy intensity for the World has improved, though during the Chinese rapid expansion from 2000-2010, the progress stopped for a decade as energy was not used very efficiently in China over that period, since 2010 the progress has continued. Energy intensity is energy per unit of GDP produced.
Chart below for 1965 to 2014 using World Bank(from FRED), UN, and BP data.

Left vertical axis is in metric tons of oil equivalent (toe) per millions of 2005$ of real GDP (M2005$).

Javier, 12/01/2015 at 9:23 am
Hi Dennis,

That graph shows several things mixed that have co-evolved independently, so not many conclusions can be extracted.

We don't know the contribution of each to that graph (at least I don't), but given the magnitudes involved I would guess that the real efficiency improvement is small. This is supported by how the graph reacts to recessions (not the Chinese expansion as you claim), indicating that the main factor is economic, not energetic.

Now we know that debt has a limit, and once debt saturation is reached the economy, and specially the tertiary sector would be very badly affected. If that happens we might very well see that graph turn around and energy intensity increase.

Dennis Coyne, 12/01/2015 at 1:56 pm
Hi Javier,

GDP only increases if your money is spent on goods or services. It is output of goods and services. On a World level the debts and liabilities balance, so if I save my money and lend it to you, I spend less and you spend more. You should review your economics. At a World level, the debt has no effect, assuming we don't have ant interstellar debts. There was a World recession from 2000 to 2010? I hadn't heard about that.

Yes services might have increased, if that is what people want to spend their money on, then the share of services in the economy will increase. I don't have figures on the "non-service economy". Part of this increase reflects women entering the labor pool in greater numbers, some of the work cleaning the house or taking care of the garden are now part of GDP when before they were taken care of by the family. We may not have good data for the World on this effect.

Javier, 12/01/2015 at 2:21 pm
Dennis,

I think I do understand. If I go to the bank and ask for a 200,000 $ mortgage loan, that money is created from thin air, and when I go and pay for the house, GDP jumps by 200,000 $, so yes, increasing debt increases GDP as soon as the debt money is used. Since no oil was used to create the money, it counts as a reduction in oil intensity. Of course if I return the money to the bank the operation is reversed (they do keep the interests), but since on average debt is always expanding, except during crisis periods, oil intensity is always decreasing, except during crisis periods. Debt that is used to buy stocks or companies or to extract oil from the ground is the same.

Dennis Coyne, 12/01/2015 at 3:16 pm
Hi Javier,

The point is that you purchased a $200,000 house. That house was not created from thin air, not my house anyway. :)

It is not the debt, it is building a house that creates the GDP.

Rune Likvern, 12/01/2015 at 3:26 pm
So what comes first; The debt that allows for building the house, or first building the house and then creating the debt?
Dennis Coyne , 12/01/2015 at 3:47 pm
Hi Rune,

In most cases the debt will come first if the home is purchased with financing. It is possible to build a home using savings, in which case there would be no debt.

So the debt is not a requirement for GDP, just creating a new house, car, or other good or service.

Would GDP be lower if there were no debt, of course!

As long as debt grows at reasonable rates (similar to GDP growth at full employment), when there is a recession debt will initially grow faster than GDP and then will slow down until GDP growth catches up and surpasses the debt rate of growth.

Dennis Coyne, 12/01/2015 at 4:25 pm
Hi Rune,

I am curious. Do you think what Javier is saying is correct? Energy intensity has decreased because Debt to GDP ratios have increased? I am pretty sure Javier is not right, but you are very knowledgeable about economics. Perhaps you can explain it to me, if I am mistaken.

If all GDP was created with no debt (all of it was based on savings and income with no new borrowing) in year 1. And in year 2 50% of income was borrowed from banks to create the same level of GDP, would that mean in year 2 we have 150% of the first year because of the debt?

I don't think so, but I may be missing something.

Nick G, 12/02/2015 at 2:14 pm
Dennis,

Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP.

Let's say there two houses on an island, and 2 residents, 1 in each house. One owns both houses, the other rents from the 1st. Then the renter borrows from the owner, and buys the house he/she lives in. Their monthly payment was rent, now it's a mortgage payment. The renter is now leveraged.

But, has anything "real" changed? No. Same amount of wealth, same amount of income, with different kinds of ownership, and different obligations (the renter now has to fix his own roof!).

Dennis Coyne, 12/01/2015 at 4:16 pm
Hi Javier,

You should read up on national income accounting. Debt does not really come into play, and more or less debt says absolutely nothing about the energy intensity of GDP. The chart I created is primary energy in metric tons of oil equivalent divided by real GDP in millions of 2005$. Debt plays no role.

Try the following link for a detailed introduction to national income accounting:

http://grizzly.la.psu.edu/~bickes/nia.pdf

Javier, 12/01/2015 at 7:06 pm
Dennis,

I still disagree. It is well known that the increase in debt has a positive effect on GDP, while the total outstanding debt can become a drag on GDP if too high. It is difficult to sustain that debt plays no role in GDP in light of the evidence.

For example China has had a phenomenal rate of growth accompanied by the highest rate of debt growth that the world has seen.

I think it is easy to understand.

Both countries use the same oil so both report the same oil intensity. However country B has brought half of the wealth used to increase the GDP from the future without bringing any future oil. That wealth will have to be repaid eventually, detracting from future GDP but at that point no oil will be recovered.

So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

Net effect is that debt reduces oil intensity when it is created and it increases oil intensity when it is payed. We have not seen that yet because we have not paid any debt yet. Debt is always increasing.

Dennis Coyne, 12/01/2015 at 10:17 pm
Hi Javier,

Many problems with your example.

First we need the GDP level of countries A and B, not just their growth rate. If we only talk about the incremental increases in GDP and energy use for each country it makes a little more sense.

So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

What you say above is incorrect.

For simplicity I will assume if output grows by 2%, that energy use also grows by 2%, I will further assume each country has the same GDP, we will say it is $100 million before the 2% growth in your example.

If country B does not take on any debt and its GDP grows by 1%, then its energy use will also grow by 1% (not by 2%) as the energy use is proportional to GDP. So the energy intensity would remain the same. There is no reason for it to change, it depends on technology and the structural features of the economy (proportion of agriculture, manufacturing, and services).

Another basic fact of economics is that the loans taken out by a business are to take advantage of a business opportunity and they will tend to lead to higher growth, so your example is flawed.

If countries A and B are of similar size and similar levels of development (twins as it were), then if country A and country B both shunned any borrowing they will both grow at the same rate, say 2% and have the same energy intensity (energy use also grows by 2%). Let's now assume both countries are the same except that country A's culture is such that they think debt is bad, but country B does not have the same aversion to debt.
Country B borrows at 2% interest to take advantage of an investment opportunity which will have a rate of return of 4%, so country B grows faster than country A at 3% and its energy use also grows at 3% (energy intensity remains the same). The extra income earned is used to pay back the debt and the individual businesses come out ahead earning a net profit of 2% after paying back the interest. This is how rational businesses operate, they borrow money to make money.

Javier, 12/02/2015 at 8:54 am
Dennis,

I also have lots of problems with your example, so let's take a step back to look at the big picture.

That an increase on debt increases GDP is not in doubt. It is not only supported by evidence, but the basis for an entire economic theory that supports fighting recessions with debt-based stimulus.

So the question is if an increase in debt increases also GDP without oil consumption as to reduce oil-intensity. The answer is a resounding yes. Financial services are proportional to debt increase. Net interest expenses in the financial sector are seen as production and value added and are added to GDP. Any service charged by financial companies also increases GDP, and none of this economic activities uses oil, and very little energy.

I believe that a significant part of oil intensity reduction has come from the financialization of the economy linked to debt-increase, and therefore oil intensity is a fake measure of oil decoupling. If you look at energy-intensity you see the same phenomenon as with oil. It seems that we are decoupling from energy because we are moving towards a fake economy based on financial instruments. Finanzialization also appears linked to raising inequality as it effect is to increase the wealth only of owners of financial instruments.

I do not doubt that some oil and energy efficiency is real, after all it is a process that has been going on forever since the first oven was built to cook. But I seriously doubt that it is a process significant enough to solve an energy deficit problem which is what peak oil is going to bring. And to me oil intensity is a fake measure of increases in oil efficiency, that I do not doubt are real but much overstated.

Gail Tverberg has a lot more to say about decoupling GDP growth from energy growth in her article at TOD for anybody interested in the matter:

http://www.theoildrum.com/node/8615

Javier, 12/02/2015 at 9:23 am
Or to put it more clearly:

Dennis Coyne, 12/02/2015 at 10:43 am
Hi Javier,

Yes the financial sector has increased to a small degree from 4% of GDP to 8% based on the chart you posted (which is only for the United States rather than the World).

This has probably increased to some degree (more or less than the US is unknown) at the World level as well. This might explain a very small slice of the decrease in energy intensity, but I doubt it accounts for most of the change.

I agree with you that changes in the structure of the World economy (higher proportion of services) has probably decreased energy intensity, but I doubt that accounts for all of the change. The bottom line is that the World economic system is becoming more service oriented with services accounting for a larger share of GDP. At some point, services may reach some maximum level, in percentage terms, beyond which they cannot go. I don't know where that level is, debt levels will also reach some maximum level (in percentage terms) beyond which they cannot rise (maybe total debt of 300% to 350% of GDP at a World level as a potential maximum).

When those points are reached growth may be limited by how much more efficiently we can use energy and how quickly we can ramp up alternative energy as fossil fuel output declines. There is much that is unknown about the future.

Dennis Coyne, 12/02/2015 at 10:51 am
Hi Javier,

Note that you keep talking about oil, the chart shows primary energy (all forms of energy used by the economic system.)

Can you explain why country B in your example uses the same amount of energy whether it grows at 1% or 2%. One would expect that the energy use would be proportional to GDP, as that is what the World data shows.

Javier, 12/02/2015 at 11:55 am
Dennis,

That is not what I said or meant. Country B by increasing GDP 1% through an increase in debt is in essence bringing GDP from the future to the present. That borrowed GDP is using present energy.

The financial sector has increased from 2% to 8%, a 4x increase. This is not small peanuts. Specially considering that only a minor part of the financial transactions are considered towards GDP. Probably only Luxembourg and perhaps Switzerland and other banking paradises have a bigger share.

Dennis Coyne, 12/02/2015 at 2:01 pm
Hi Javier,

You said:

So in reality country B is reporting half of its real oil intensity. With present wealth it would have grown GDP by only 1% yet it has spent the same amount of oil than A.

You say above without the borrowing country B would grow by 1% (why does it grow less than country A?) but it uses the same amount of oil as country A, why if it grows more slowly?

Dennis Coyne, 12/02/2015 at 5:57 pm
Hi Javier,

Look closely at your chart in 1970 (when energy intensity started to decline) it was 4% and the most recent points on the chart are about 8.4%. I used the data from your chart (even though it is for the US rather than the World) and did an exponential trend from 1970 to 2010 for 4% to 8% and then extended to 2014 (8.5%) for financial GDP of World economy (probably not correct, but this is an illustration). Then I found the Energy intensity of the non-financial sector by assuming the financial sector has zero energy inputs (I expect they are low, this is an approximation). The Non-Financial Energy intensity is in the chart below.

Finally, Aggregate Demand is increased when there is more debt, but consider the Aggregate supply of goods produced to meet that demand. Whether the aggregate demand is because of private or public debt or not does not change the amount of energy needed to produce the supply of goods and services, it only changes how much demand there will be for those goods and services. I really cannot make it any simpler than that. Oh one more thing, do you think the energy needed to build a car (total energy embodied in all processes used to create the car and its components) changes if someone pays cash for the car vs financing the car?

Rune Likvern, 12/01/2015 at 2:23 pm
Dennis,

Bank of England has a different take on this;

" This article explains how the majority of money in the modern economy is created by commercial banks making loans.

Money creation in practice differs from some popular misconceptions - banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they 'multiply up' central bank money to create new loans and deposits."

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Dennis Coyne, 12/01/2015 at 3:37 pm
Hi Rune,

Yes that is correct. The banks create money by lending and borrowers destroy money as they pay back their loans. The money supply is controlled by the Central Bank buying and selling bonds.

The debt is only a problem if it grows too quickly. If the rate of debt growth slows or the rate of GDP growth increases there will not be a problem. There are differing views on how much debt is too much.

For public debt there is:

http://www.economist.com/blogs/freeexchange/2015/06/public-debt

http://www.forbes.com/sites/michaellingenheld/2015/10/22/the-world-needs-more-debt/

Rune Likvern, 12/01/2015 at 5:45 pm
Dennis,

Did you read the document from Bank of England?

Dennis Coyne, 12/02/2015 at 8:30 am
Hi Rune,

Yes I did. Under normal circumstances the supply of money is primarily influenced by the interest rate that is paid by commercial banks for money borrowed from the central bank. When the economy is in a severe recession and this interest rate falls to the "effective lower bound" (about 0.5%), the central bank loses its ability to increase the supply of money through lower interest rates.

Under these circumstances the central bank will buy assets (government bonds) to increase the money supply, it does not sell assets to reduce the money supply, it simply raises the interest rate it charges the commercial banks.

Dennis Coyne, 12/02/2015 at 8:18 am
Hi Rune,

Thanks for that link, it is a nice review of how central banks influence the supply of money by setting the interest rate which banks must pay on money borrowed from the central bank, which feeds through to interest rates throughout the economy and affects saving and borrowing through market interest rates set by banks.

I would encourage Javier to read that link as it addresses many misconceptions about money.

Glenn Stehle, 12/01/2015 at 10:00 am
Dennis,

You are comparing apples to oranges. GDP is determined using a price, or market, theory of value. So you are comparing a value determined using a market theory of value to a value determined using an intrinsic theory of value - the toe of energy.

If you want to compare apples to apples, then you have to compare GDP to the market value of the energy used.

Dennis Coyne, 12/01/2015 at 1:41 pm
Hi Glenn,

If we are concerned the energy constraints will limit real GDP, then the amount of energy consumed per unit of GDP produced is very relevant in my view.

It is not a comparison, it is a measure of energy intensity and how it has changed over time. See

https://en.wikipedia.org/wiki/Energy_intensity

I have simply charted the World Energy Intensity from 1965 to 2014.

Glenn Stehle, 12/01/2015 at 10:17 pm
Well again, Dennis, a valid comparison is one which compares dollars and cents to dollars and cents, not dollars and cents to toe.

There was a time (1970 to 2010) when the EIA published the total amount spent in the United States on energy. I have plotted the ratio of total spent on energy to total nominal GDP for those years. This is a true measure of "energy intensity," as it compares apples to apples, and does not omit the price of energy as your graph does.

I have added YOY growth in real GDP (calculated using constant 2009 dollars).

I don't want to draw too many conclusions from the graph, but it paints a far bleaker picture than your graph does. When energy intensity goes over .08 - as it did in 1974 and 2008 - then the economy began having convulsions.

The period from 1983 to 2006 is what is known as "the Great Moderation." It is also a period of low and generally declining energy intensity. When energy intensity began increasing again, as it did in 1999, surpassing .08 in 2006, then this marked the end of the Great Moderation. Is this mere coincidence?

Botton line: In my opinion not only is the quantity of energy (measured in toe) important to the performance of the economy, but the price of that energy is also important.

Using your graph, which makes no allowance for the price of energy, it is easy to see how you have come to believe that the economy is decoupling from energy.

Dennis Coyne, 12/02/2015 at 8:52 am
Hi Glenn,

It is not a comparison of money spent, energy intensity is defined as energy consumed per unit of output (measured in dollars) as there are many different goods and services and their monetary value is measured in constant dollars.

The difficulty with using price is that there are many different forms of energy (oil, coal, natural gas, nuclear, hydro, solar, wind, geothermal, and biofuels) which are included in the "primary energy" category. Note that your chart shows only one country not the world. I would present a chart for the World if I had it, I am using the data I have for primary energy divided by real GDP. I think it is useful because it is energy contraints we are concerned about, currently some forms of energy (fossil fuels especially) have very low prices so in monetary terms money spent on Energy divided by real GDP would be quite low.

Energy prices are quite volatile so I like the Energy intensity measure better as it shows energy needed to produce a unit of GDP, which has in fact declined since 1970 by about 30%(or an average annual decrease of about 0.8% per year).

Glenn Stehle, 12/02/2015 at 12:28 pm
Dennis,

I suppose price doesn't matter as long as one can get somebody else to pick up the tab.

For instance, we can compare a new $40,000 Chevy Bolt ev to a new $20,000 Honda HRV. There's no way the Bolt can compete on price. But if you can get somebody else to pick up the tab for the Bolt? Well then, no sweat!

As part of its COP21 coverage, CBS did a puff piece on their Evening News last night about how EVs are sweeping Norway.

http://www.cbsnews.com/videos/how-electric-cars-are-taking-over-norways-roads/

They interviewed one fellow who said he "had done the math" and will be able to drive his new EV "for free."

So I did a little bit more digging, and sure 'nuf, it looks like he's right.

According to the Wall Street Journal, Norway currently has 54,000 EVs on the road. Last year their owners received $540,000 in various forms of rebates, tax breaks and other perks from the Norwegian state. That's a cool $10,000 per car per year. So at that clip, it would only take 4 years to recover the cost of a $40,000 EV. And then after that one can enjoy almost free driving, all on the government's tab.

http://www.wsj.com/articles/electric-car-perks-put-norway-in-a-pinch-1442601936

But it looks like there's trouble in paradise. The WSJ says the government give-a-ways are set to end. The day of reckoning is still up in the air, but the latest date for phasing out the government largess is 2020. So the Norwegian government is taking the punch bowl away. The EV crowd, of course, isn't taking this horrible injustice lying down:

Christina Bu, secretary-general of the lobbying group Norwegian Electric Vehicle Association, said the 25,000-member association has been stalking political parties and government officials to ensure the main incentives remain in place, at least until 2020.

"If you cut all the incentives overnight, sales will plummet," she said.

Weaning buyers from such purchase incentives could add new headwinds to sales of vehicles already undercut by cheap fuel prices in some markets. In the U.S., the state of Georgia halted its $5,000 tax credit on July 1. Electric cars were about 2% of purchases in the state in 2014, estimates Washington-based think tank Keybridge Research LLC. It forecasts a 90% decline, or 8,700 fewer sales annually, as a result of the loss.

Glenn Stehle, 12/02/2015 at 1:06 pm
Edit

Last year their owners received $540 million in various forms of rebates, tax breaks and other perks from the Norwegian state.

Dennis Coyne, 12/02/2015 at 2:06 pm
Hi Glenn,

Do you have the price of primary energy from 1965 to 2014? I would be happy to do the chart you would like, but I don't know the appropriate price of energy, which has many different forms and prices throughout the World.

I agree price matters, as does the amount of energy available to purchase (which is what is in my chart).

Nick G, 12/02/2015 at 2:32 pm
Glenn,

You're looking at something different.

The original study in question was asking about whether an economy can grow without increasing it's inputs of oil, steel, etc.*

That's a very different question than whether an economy will be hurt by a sudden increase in the price of a key commodity, like oil. If the price of oil spikes, that can create a shock for the economy (e.g., people wait to see what happens with prices before they buy their next vehicle, and that delay causes a recession), but an increase in prices doesn't mean energy consumption has gone up.

-----------------
* (it can, of course, but that's separate issue from whether our societies have chosen to do so).

Ralph, 12/02/2015 at 8:46 am
I am far from convinced that GDP growth is a good way of measuring progress in a society. Let's take an example from the UK economy. (btw I am not worried about the genders here, I would happily be a house husband if my wife's earning potential was close to mine).

Today, nearly 70% of women of working age work. Families need both incomes to meet a reasonable standard of living. As a result, a large majority of UK children grow up in families with both parents working. Many parents end up sending young children to child minders and crèches so that they can work. This employs a lot of people, mostly women. More wealthy families then employ house cleaners and gardeners and handymen etc. to clean, garden and repair their homes that they don't have time to do themselves. Poorer people do without. This employs a lot more people. All the working women and the people employed by the working women pay taxes which means that people end up working more hours to afford to pay someone else to do these jobs than it would take to do the jobs themselves. Unless your own rate of pay is significantly higher than the people you pay to do the jobs, you would be financially better off doing it yourself. The government and the economists are delighted because tax take and GDP rise. All these extra people in useful employment driving around from low skilled job to to low skilled job, consuming extra resources, especially fossil fuels, when they would be a lot less stressed, more free time and financially better off, just doing all these activities for themselves.

It is a major mistake to professionalise low skilled domestic work. All it does is free up time for the rich and increases government tax take. Society as a whole is worse off.

Dennis Coyne, 12/02/2015 at 10:14 am
Hi Ralph,

I agree GDP is by no means a perfect measure, just a measure that is available at the World level. There are other measures such as the social progress index, but this is not available at the World level. There is also the United Nations Human Development Index(HDI), but again these measures are not published at the World level (or I couldn't find it). Actually I found some World data for the HDI from 1980 to 2013. The measure is not perfect see link below for data:

http://hdr.undp.org/en/content/table-2-human-development-index-trends-1980-2013
Discussion of HDI at

https://en.wikipedia.org/wiki/Human_Development_Index

Also from UN document:

Human Development Index (HDI): A composite index measuring average achievement in three basic dimensions of human development-a long and healthy life, knowledge and a decent standard of living. See Technical note 1 (http://hdr.undp.org/en) for details on how the HDI is calculated.

Chart below with World Primary energy (ktoe) divided by World HDI from 1980 to 2013. Based on the HDI, more energy is needed to improve well being and GDP is not a good measure of human welfare.

There is also an index for HDI that takes account of inequality, but the index (called IHDI) is only available from 2010 to 2013.

[Nov 01, 2015] A Market Worthy Of The Line Do You Feel Lucky

Notable quotes:
"... Oh, and by the way, it was also this same so-called "smart crowd" who also touted this very monetary policy would bolster GDP prints far higher and consistent than they are now. And let's not forget – 1.5% GDP is now formulated with "double seasonally adjusted accounting." i.e., If the print isn't what you want or need; feel free to fudge the inputs as high or, low as needed without causing any obvious unwanted attention or, outright laughter. ..."
"... Gordon Gekko: The richest one percent of this country owns half our countrys wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. Its bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now youre not naive enough to think were living in a democracy, are you buddy? ..."
"... The way the fragmented market is set up there is no need for fundamentals, or anything really for it to go up or down. Price movement is no longer dependant on the true value of the underlying, but value is assigned to the underlying by the amount of market pieces or liquidity participants it attracts at any point in time. ..."
"... I was thinking about it today and it would be possible to have completely imaginary markets (no underlyings) that rely on the best algo to win, Darwinism for quantitation. I guess it would be like the Kentuky derby for computers, may the biggest and fastest server win. You could dump money into it/invest by betting on your favorite algo. In my mind the whole thing is pretty complicated, but thats the gist of it. Anyway.... ..."
Nov 01, 2015 | Zero Hedge
The now immortal line spoken by Clint Eastwood as "Dirty Harry" (1971 Warner Bros.) has never fit as a descriptor these financial markets more so than it does today. For if you believe you're investing as opposed to gambling? These markets are now poised to show everyone the difference.

From an economic standpoint; not only has the current October surge in market prices been an absolute absurdity. Rather, just look to where the market as a whole has propelled itself right back to: within spitting distance of taking out the never before seen in the history of mankind highs. And why shouldn't it be up here? After all, the economy is absolutely booming right? Right?

So one has to wonder exactly how does an economy in which its latest GDP report prints a blazing 1.5% warrant such a valuation? I know, trick question – it doesn't. However, if one tuned into many (if not all) of the current financial media outlets this question or, reasoning was never addressed in any shape manner or, form.

As a matter of fact, there was praise by many of the next in rotation economists for how it was derived at in the first place, citing the "inventory" figures as a good news catalyst. Only an economist can find "good news" in a GDP print so pathetic it continues to warrant a continuation of extreme monetary policy by this very group.

Oh, and by the way, it was also this same so-called "smart crowd" who also touted this very monetary policy would bolster GDP prints far higher and consistent than they are now. And let's not forget – 1.5% GDP is now formulated with "double seasonally adjusted accounting." i.e., If the print isn't what you want or need; feel free to fudge the inputs as high or, low as needed without causing any obvious unwanted attention or, outright laughter.

What does it say when accounting standards have evolved into a discipline more suited for a massage parlor than anything resembling a house of academic standards – and 1.5% was the best print available? What one should infer from that data point alone is well worth contemplating by anyone truly serious about business or, their wealth. For that little number speaks volumes if one truly cares to dig deeper.

Looking at the markets "its hard to argue with price" is the old saw. And that price is, as iterated earlier, extremely high.

That's just fantastic if you're an "investor" with the tendencies of a river boat gambler. However, if you're someone trying to distinguish the subtleties of when to invest precious resource capital into cap-ex projects for the prospects of future growth, or whether or not to expend that capital in hedging strategies to help smooth out input costs – you're out-a-luck. You have just as good of a chance in flipping a coin for your macro business decisions. For hedging is now "What Fed. official will say what today?" Heaven help you if it's the opposite of what they said the previous day. Like the title implied, "Do you feel lucky?" doesn't seem that out of line.

Boris Alatovkrap

Ignore "invisible hand", but eventually is b*tch-slap those that defy.

Escrava Isaura

Invisible Hand?

How about the rabbit hand.

Gordon Gekko: The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy?

antonina2

The way the fragmented market is set up there is no need for fundamentals, or anything really for it to go up or down. Price movement is no longer dependant on the true value of the underlying, but value is assigned to the underlying by the amount of market pieces or liquidity participants it attracts at any point in time. So, you could say the market or price action has been more or less decoupled from the true state of its underlying. Supply and demand due to fundamentals was true before hft and multiple exchanges, but can now be skewed in any direction for any length of time due to all the new technology and types of order flow that have been introduced. As long as people are getting paid to provide liquidity and other people are there to pay for taking liquidity away you can have a market that reaches the moon and beyond while the world is in a deep recession. So, if you think about it, while the pundits will have you believe that the market is priced at true valuations, it's not your Grandpa's market anymore, that is why the market can go up on relatively small volume and shitty data. It is a whole new game and beside disastrous glitches, the only time positive movement is threatened is when the big fish start placing large sell order blocks.

I was thinking about it today and it would be possible to have completely imaginary markets (no underlyings) that rely on the best algo to win, Darwinism for quantitation. I guess it would be like the Kentuky derby for computers, may the biggest and fastest server win. You could dump money into it/invest by betting on your favorite algo. In my mind the whole thing is pretty complicated, but that's the gist of it. Anyway....

It is my belief that things have developed in this manner to keep big money in the markets. So, I guess the question isn't what is up with the markets, but rather why do large holders continue to hold, my guess would be that they don't have anything else they want/need to do with their money. They say, who cares if Bob, Jen, Greg, and half of America can't find a decent job, we are making more money investing in the market (greater shareholder returns) than by helping to improve the actual economy and investing in more tangible things like people. It's pretty shitty, but that is how I have come to make sense of the whole thing. I mean yeah, the market should be about half of what it is now if it followed fundamentals, but it's not and I think that's why.

Basically, in order for there to be the big market crash that everyone constantly talks about, some pretty big institutions are going to have to fuck up big time and receive no help in getting out of it. As long as there is enough money out there this fiasco can go on as long as people see fit. We all say, oh the FED is dumb and they are doing the wrong thing blah blah blah and while they are destroying the economy they are keeping the TBTF in the clear and being rewarded handsomely for it, completely aware of their actions. And to the public, they say fuck em and feed em cake, so just watch, a Republican with a great tax package will be elected in 2016 to satiate the people for the next four years while they continue to go about their business, increasingly bad data is reported and retail investors are like wtf is up with the markets?

IDK, that's just my humble opinion

[Oct 18, 2015] What Prosperity Is, Where Growth Comes from, Why Markets Work

Notable quotes:
"... In 1959, noted American economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output." ..."
"... In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known issues such as the fact that GDP does not capture changes in the quality of the products (think of mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent in the home). The commission also cited evidence that GDP growth does not always correlate with increases in measures of well-being such as health or self-reported happiness, and concluded that growing GDP can have deleterious effects on the environment. ..."
"... Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures economic activity or output. Rather, our issue is with the nature of that activity itself. Our question is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity of our society. ..."
"... Robert Shiller of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s that stock market prices did not always reflect fundamental value, and sometimes big gaps could open up between the two. ..."
"... And therein lies the difference between a poor society and a prosperous one. It isn't the amount of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it is the availability of the things that create well-being-like antibiotics, air conditioning, safe food, the ability to travel, and even frivolous things like video games. It is the availability of these "solutions" to human problems-things that make life better on a relative basis-that makes us prosperous. ..."
"... This is why prosperity in human societies can't be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems. ..."
December 1, 2014 | Democracy Journal ( also reprinted in Evonomics )

The Price of Everything, the Value of Nothing

The most basic measure we have of economic growth is gross domestic product. GDP was developed from the work in the 1930s of the American economist Simon Kuznets and it became the standard way to measure economic output following the 1944 Bretton Woods conference. But from the beginning, Kuznets and other economists highlighted that GDP was not a measure of prosperity. In 1959, noted American economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output."

In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known issues such as the fact that GDP does not capture changes in the quality of the products (think of mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent in the home). The commission also cited evidence that GDP growth does not always correlate with increases in measures of well-being such as health or self-reported happiness, and concluded that growing GDP can have deleterious effects on the environment. Some countries have experimented with other metrics to augment GDP, such as Bhutan's "gross national happiness index."

Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures economic activity or output. Rather, our issue is with the nature of that activity itself. Our question is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity of our society.

Since the field's beginnings, economists have been concerned with why one thing has more value than another, and what conditions lead to greater prosperity-or social welfare, as economists call it. Adam Smith's famous diamond-water paradox showed that quite often the market price of a thing does not always reflect intuitive notions of its intrinsic value-diamonds, with little intrinsic value, are typically far more expensive than water, which is essential for life. This is of course where markets come into play-in most places, water is more abundant than diamonds, and so the law of supply and demand determines that water is cheaper.

After lots of debate about the nature of economic value in the nineteenth and early twentieth centuries, economists considered the issue largely settled by the mid-twentieth century. The great French economist Gerard Debreu argued in his 1959 Theory of Value that if markets are competitive and people are rational and have good information, then markets will automatically sort everything out, ensuring that prices reflect supply and demand and allocate everything in such a way that everyone's welfare is maximized, and that no one can be made better off without making someone else worse off. In essence, the market price of something reflects a collective judgment of the value of that thing. The idea of intrinsic value was always problematic because it was inherently relative and hard to observe or measure. But market prices are cold hard facts. If market prices provide a collective societal judgment of value and allocate goods to their most efficient and welfare-maximizing uses, then we no longer have to worry about squishy ideas like intrinsic value; we just need to look at the price of something to know its value.

Debreu was apolitical about his theory-in fact, he saw it as an exercise in abstract mathematics and repeatedly warned about over-interpreting its applicability to real-world economies. However, his work, as well as related work in that era by figures such as Kenneth Arrow and Paul Samuelson, laid the foundations for economists such as Milton Friedman and Robert Lucas, who provided a devastating critique of Keynesianism in the 1960s and '70s, and recent Nobel laureate Eugene Fama, who pioneered the theory of efficient markets in finance in the 1970s and '80s. According to the neoclassical theory that emerged from this era, if markets are efficient and thus "welfare-maximizing," then it follows that we should minimize any distortions that move society away from this optimal state, whether it is companies engaging in monopolistic behavior, unions interfering with labor markets, or governments creating distortions through taxes and regulation.

These ideas became the intellectual touchstone of a resurgent conservative movement in the 1980s and led to a wave of financial market deregulation that continued through the 1990s up until the crash of 2008. Under this logic, if financial markets are the most competitive and efficient markets in the world, then they should be minimally regulated. And innovations like complex derivatives must be valuable, not just to the bankers earning big fees from creating them, but to those buying them and to society as a whole. Any interference will reduce the efficiency of the market and reduce the welfare of society. Likewise the enormous pay packets of the hedge-fund managers trading those derivatives must reflect the value they are adding to society - they are making the market more efficient. In efficient markets, if someone is willing to pay for something, it must be valuable. Price and value are effectively the same thing.

Even before the crash, some economists were beginning to question these ideas. Robert Shiller of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s that stock market prices did not always reflect fundamental value, and sometimes big gaps could open up between the two. Likewise, behavioral economists like Daniel Kahneman began showing that real people didn't behave in the hyper-rational way that Debreu's theory assumed. Other researchers in the 1980s and '90s, even Debreu's famous co-author Arrow, began to question the whole notion of the economy naturally moving to a resting point or "equilibrium" where everyone's welfare is optimized.

An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving, highly complex system-more like an ecosystem than a machine. In such a system, markets may be highly innovative and effective, but they can sometimes be far from efficient. And likewise, people may be clever, but they can sometimes be far from rational. So if markets are not always efficient and people are not always rational, then the twentieth century mantra that price equals value may not be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity mean?

Prosperity Isn't Money, It's Solutions

In every society, some people are better off than others. Discerning the differences is simple. When someone has more money than most other people, we call him wealthy. But an important distinction must be drawn between this kind of relative wealth and the societal wealth that we term "prosperity." What it takes to make a society prosperous is far more complex than what it takes to make one individual better off than another.

Most of us intuitively believe that the more money people have in a society, the more prosperous that society must be. America's average household disposable income in 2010 was $38,001 versus $28,194 for Canada; therefore America is more prosperous than Canada.

But the idea that prosperity is simply "having money" can be easily disproved with a simple thought experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker's The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer tribe deep in the Brazilian rainforest. You'd easily be the richest Yanomamian (they don't use money but anthropologists estimate their standard of living at the equivalent of about $90 per year). But you'd still feel a lot poorer than the average American. Even after you'd fixed up your mud hut, bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches still wouldn't get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American typically has access to these crucial elements of well-being.

And therein lies the difference between a poor society and a prosperous one. It isn't the amount of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it is the availability of the things that create well-being-like antibiotics, air conditioning, safe food, the ability to travel, and even frivolous things like video games. It is the availability of these "solutions" to human problems-things that make life better on a relative basis-that makes us prosperous.

This is why prosperity in human societies can't be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.

These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that it has found a way to solve and how available it has made those solutions to its citizens. Every item in the huge retail stores that Americans shop in can be thought of as a solution to a different kind of problem-how to eat, clothe ourselves, make our homes more comfortable, get around, entertain ourselves, and so on. The more and better solutions available to us, the more prosperity we have.

The long arc of human progress can be thought of as an accumulation of such solutions, embodied in the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors 15,000 years ago, has a variety of products and services measured in the hundreds or thousands at most. The variety of modern America's economy can be measured in the tens or even hundreds of billions. Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access to products and services that provide solutions to human problems, we are hundreds of millions of times more prosperous.

[Oct 03, 2015] Reflections on Ten Years Deficits, the Financial Crisis, Textbook Economics and Data Paranoia

Oct 03, 2015 | Econbrowser

"When so many think the numbers are manipulated to some nefarious end, it is no wonder that empirical observations carry so little weight in informing thought on how the economy works."

[Sep 21, 2015] The Mystery Of The Missing Inflation Solved, And Why The US Housing Crisis Is About To Get Much Worse

For the last 20 years, realistic US inflation rate was probably higher then official figures considerably. Some estimate it between 4% to 5% a year. Medical expenses rose probably 200%. Cost of higher education skyrocketed. We can say that rent alone from 1995 to 1996 rose probably 60% (assuming 3% a year official figure). Food prices are highly correlated with oil and they rose more (but they do not represent major expense item in most budgets).
"... Absolute shit one bedroom apartments rent for $800 a month. A decent two bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city of Boston or suburbs like Cambridge, but 40 miles west. A "three" bedroom 1100 sq ft house in a crap city like Fitchburg can rent for $1400. ..."
Sep 21, 2015 | Zero Hedge
We hinted at the key features of this unprecedented conversion in June, when we wrote the following:

... by now everyone knows that the artificially suppressed, "hedonically-modified" and seasonally-adjusted inflationary readings is what has permitted the Fed to not only grow its balance sheet to $4.5 trillion but to keep rates at 0% for 8 years. Because "how will the economy recover if there is no broad inflation", the Keynesian brains in the ivory tower scream, demanding more, more, more easing just to push inflation higher.

There is only one problem with this: it is all a lie - just ask any average American whose cost of living has soared in the past decade.

Still, with reality diverging so massively from the government's official data, reality just had to be wrong somehow.

Turns out reality was right all along, as revealed by the latest "State of the Nation's Housing" report released by the Center for Housing Studies at Harvard, which showed that while inflation among most products and services may indeed be roughly as the Fed and BLS represent it, when it comes to rent - that most fundamental of staple costs - things have never been worse.

According to the report, for American renters 2013 marked another year with a record-high number of cost burdened households - those paying more than 30 percent of income for housing. In the United States, 20.7 million renter households (49.0 percent) were cost burdened in 2013.

It gets worse: a whopping 11.2 million, or more than a quarter of all renter households, had "severe cost burdens, paying more than half of income for housing." The median US renter household earned $32,700 in 2013 and spent $900 per month on housing costs. Renter housing costs are gross rents, which include contract rents and utilities.

... ... ...

And since there is an unprecedented demand for rental units across the US (as the "owning" alternative has become inaccessible), the median asking rent not only soared at an annual rate of over 6%, it has never been higher, with the Census Department recently reporting that the Median US asking just hit an all time high $803.

... ... ...

What is odd is that according to the BLS, rent inflation is far less: at just 3% in the most recent print. One wonders what seasonal adjustments American renters should use to make their monthly paycheck smaller, the way the BLS perceives it. Still, at 3.6% this is the highest annual rent inflation since 2008.

And herein lies the rub: because it is not so much what the real, honest inflation growth rate of rent is, it is what the offsetting income growth. Unfortunately, while the BLS can seasonally adjust rent payments to make them as low as a bunch of bureaucrats want, the bigger problem is that US household income is not only not keeping up with rent inflation, it is far below it. In fact, as reported last week, real income is now back at 1989 levels!

And here is the punchline:

"in the years following 2000, gains in typical monthly rental costs exceeded the overall inflation rate, while median income among renters fell further and further behind (Figure 3). As a result, the share of renter households facing severe cost burdens grew dramatically, reaching a new record high of 28 percent in 2011 before edging down to 26.5 percent in 2013. Adding in those with moderate burdens, just under half of all renters were cost burdened in 2013. These rates are substantially higher than a decade ago and roughly twice what they were in 1960."

... ... ...

Furthermore, rent inflation isn't going anywhere - in fact, it will only get worse: "as of 2013, the median rent of a newly constructed unit of $1,290 was equal to about half the median renter's monthly household income, underscoring the urgent need for policy makers to consider enhanced levels of support for rental housing particularly for lowest income households but across a range of income levels."


Hype Alert

Housing and healthcare are severely under reported on inflation. How healthcare can triple and not set off flashing red lights on inflation is unreal.

Never One Roach

I don't know how seniors who relied on SS benefits to survive are living when their COLA has been 0.01% the past several years despite soaring food, health costs, utinilites, etc.

AGuy

"I don't know how seniors who relied on SS benefits to survive are living when their COLA has been 0.01% "

Simple: many still work while collecting SS. Some have part-time jobs (aka Wallmart) others maintained their full time jobs. If you look at the employment chart, Employment for those 55 and older has risen considerably. I believe employment for the 70+ group has also increased.

However, many 65+ have a lower cost of living. (ie no mortgage payments, no college loans, lower healthcare -on Medicare, etc). They can afford to take on one part time job to meet ends since they have SS.

Consuelo

"The reason for this is a simple, if dramatic one: the U.S. transformation from a homeownership society, to one of renters."

All well & good in the context of officialdom's lies and deceit, but there's just a ~tiny~ bit of clarification needed here...

Home 'ownership' is a misnomer, and just a plain bald-faced Falsehood in reality. You don't 'own' ~anything~ until that last mortgage payment is made - assuming you're not a $cash buyer. And even then, try skipping a property tax payment... And didn't we just find out a few years back, the real meaning of 'home ownership' to the ball & chain tied schlub paying (or not) his mortgage...?

WTF_247

Wage growth has lagged most other costs for at least a decade or more. Inflation and other cost increases are compound functions. The correction will take care of itself. Healthcare and rent are taking more and more of peoples $$ You can only stretch it so far - at some point there is no more money.

Either incomes will rocket up OR housing, including rent, will crash huge. You cannot get renters to pay for something they have no money for. No one is going to rent and choose not to eat or to eat ramen noodles permanently. You cant even get rid of health insurance now or the IRS comes after you - no matter how much it increases each year (estimated 15-20% increase next year). You can get 1 roommate, then 2. But most cities limit the number of renters based upon the number of bedrooms - this only goes so far.

The solution is to stop working or only work a bare minimum - get benefits. Section 8 housing. EBT. Free healthcare. Welfare benefits.

Something is wrong in the US when a working mother making 29k has a better standard of living that someone making 69k per year. If anyone thinks this is not lost on the population as a whole, they would be mistaken. As costs keep going up it is more lucrative to NOT fight anymore. Let the govt pay for it.

novictim

Tyler! "Missing Inflation" is not a mistake or a misunderstanding or an accounting glitch.

Inflation really is low. People have insufficient money.

Do not confuse asset inflation with real inflation. Stock overvaluations and real estate over-evaluations do not create real inflation because prices drop when people sell. Assets are self correcting and non-inflationary.

adr

I shouldn't have to worry about affording somewhere to live with the job I have, yet because of where the job is I have to.

The entire Northeast is fucking insane.

Absolute shit one bedroom apartments rent for $800 a month. A decent two bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city of Boston or suburbs like Cambridge, but 40 miles west. A "three" bedroom 1100 sq ft house in a crap city like Fitchburg can rent for $1400.

I posted a three bedroom ranch that was renting for $3200 a month a little while ago. What do millionaires rent shitty 1950s ranch homes in a hick town?

Then you have property taxes. Up 100% in five years in almost every town even though assessments are actually down. I saw a home listed with a 2009 value of $364k and property taxes of $2800 a year. The current assessed value is $289k but taxes are $5200.

How are you supposed to live?

[Sep 09, 2015] The Fed Must Act Soon Why

"...You're an econ prof, no? In the first year macro I just finished, it was explained that inflation is a tax on the rentiers class. Thus the power elite hates inflation."
"...The Fed does absolutely nothing to require that the money it creates pays workers to build anything. Instead the only thing the Fed money does is cause existing asset churn which inflates asset prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant and being spent buying old labor in hopes that the value of the decades old labor will be worth more tomorrow."
Sep 08, 2015 | Economist's View

JohnH -> to pgl...

pgl still hasn't demonstrated the iron economic law that says that inflation increases must necessarily be passed along to labor, not stolen by capital.

The precedent of productivity increases stolen by capital over the past 40 years is not encouraging, but there are economists like Janet Yellen who still disingenuously are that productivity increases get passed along! And despite the evidence, pgl chooses to believe her!

mulp said...

But printing more money just forces the exiting money to be spent paying workers slower and slower.

The national economic policy selected by We the People is clearly:

DO NOT PAY WORKERS TO BUILD ANYTHING.

The Fed does absolutely nothing to require that the money it creates pays workers to build anything.

Instead the only thing the Fed money does is cause existing asset churn which inflates asset prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant and being spent buying old labor in hopes that the value of the decades old labor will be worth more tomorrow.

We the People understand that paying labor to build new assets will crater the prices of all the inflated asset prices, eg, creating the kind of excess supply we see in fossil fuels which will cause cratering prices, profits turning to losses, and the asset price bubble popping in a big way.

The 21st century has proved to me that I was totally wrong to believe in monetary theory based on the arguments and data of Milton Friedman, and that led me to reexamine the policies of FDR in the face of a populist Congress.

Insight one: deep crisis is required to motivate We the People.
Insight two: the only way to create a better economy is to pay more workers to work more
Insight three: the only way to pay more workers more to work more is for taxes taking money from those who have money which is basically everyone in the upper half who will then demand benefits NOW for all their taxes

Doing the liberal thing to prevent massive poverty in 2008 was the wrong thing. Democrats should have made demands that Bush and Republicans would totally refuse to agree to, so all the money market funds experienced runs and 50% of the depository banks got taken over by the FDIC, and half the businesses in the US stopped paying workers because they could get their cash in their banks because the banks were taken over by the FDIC. And in 2009, Democrats should have kept increasing demands and demanding ever higher tax hikes every time Republicans fought to block Democratic budget bills keeping the economy sinking deeper and deeper making more and more people poor.

The ideal outcome of 2009 would have been corporate tax rates of 50% on business profits of 5% ROIC or lower and 90% on all profits in excess of 5% ROIC, but with 100% deduction for all capital investment excluding buying existing corporations or partnerships. And 90% income tax rates in excess of twice the median income, excluding buying tax exempt infrastructure construction bonds or investing in energy efficiency capital assets.

Or a carbon tax that was set to rise every year until tax revenue was zero with all the tax revenue used to repay Federal debt.

Tax dodging is the biggest incentive to pay workers to build stuff that lasts and that is productive.

The Fed can't do anything but prevent the required crisis to force the required political change.

Or cause the crisis that will create change.

The Fed needs to jack up interest rates to, if nothing else, increase the Federal deficit rapidly by increasing the interest costs.

One of two things would happen: Republicans would win in 2016 and crash the economy by massive spending cuts driving tens of millions into poverty, homelessness, etc.

Or taxes rates would be greatly increased to reduce the deficit but the high tax rates would make hiring workers the cheapest way to cut taxes due and get some benefit.

If I were in the Fed I'd be calling for a 1% hike every year (.25% a quarter) for the next three years.

likbez said...

The USA now reminds me the USSR in a sense that government figures are not using open verifiable methodology. Some thing that those metrics became yet another "number racket". Some measures like inflation and GDP are definitely politicized.

That gives an impetus for sites like http://www.shadowstats.com

Those people who operate using pure government statistical figures without questioning their error range are just another brand of highly paid charlatans. And their papers and articles should be viewed as exercise in "tail wags the dog"

Actually that can be viewed as another dimension of mathiness.

For example government announced that GDP is 3.7%. And everybody jumps in admiration. And nobody asks what was GDI released for this period. Suckers...

Peter K. said in reply to likbez...

"The USA now reminds me the USSR in a sense that...

Republicans are dynamic scoring in order to massage the numbers to that their favored policies look better?

likbez said in reply to Peter K....

My point is the USA now reminds the USSR with its tendency to "beautify" economic data.

Think about all those birth-death adjustments, substitution of U6 with U3 (concepts of "discouraged workers" and "marginally attached workers"), redefining full employment metric (which no longer means 40 hours a week employment), hedonic adjustments/substitutes, "managing" inflation by changing the way it is calculated, price anomalies that bump GDP up, like tremendously overpriced military hardware, etc.

Please don't throw the baby out with the bathwater

Dan Kervick

"Finally, why the huge fear over a little bit of inflation rather than huge fear over higher than necessary unemployment?"

It is a good question, and frankly I have trouble believing that people like Fisher actually *are* worried about a little bit of inflation. Fisher set out his fuller position over a year ago, and I doubt it has changed much:

http://www.dallasfed.org/news/speeches/fisher/2014/fs140716.cfm

He's mainly afraid that the Fed might blow a bubble, and he's afraid that the independence of the political Fed is being compromised by it's being dragged into service to compensate for the lack of fiscal and regulatory action by Congress.

I would suggest that, on the second point at least, everyone should get used to the fact that central bank policy is inevitably a response to politics. That's because central bank policy is always based on general economic conditions, and general economic conditions are always to a substantial extent a function of government policy. So central bank policy has to be responsive to government policy. Tough cookies for all of those believers in an "independent" central bank. There is no such thing as an autonomous "economy" that is independent of political choices.

Other not fully acknowledged factors driving the recent debate are equally political. The Fed is worried that if normalization is delayed, then some time next year the Fed will *have to* reverse course, one way or another. If that takes place after the parties have chosen their nominees and the political race is in full gallop, the Fed will be accused of intervening (in some way, on behalf of someone) in the campaign, and will become a political football. (As far as I'm concerned that would be great, because the US central banking system needs radical reform - but the Fed guys wouldn't like it.)

The other thing they are obviously worried about is a recession. If the US experiences a recession for any reason over the next 18 months, and the Fed is still stuck down close to the zero bound, then it will not be able to exert a substantial stimulative impact - at least not without radical new measures like helicopter money. Again, that's something that wouldn't both me personally, but Independent Fed establishmentarians would freak.

John said...

You're an econ prof, no?

In the first year macro I just finished, it was explained that inflation is a tax on the rentiers class. Thus the power elite hates inflation.


[Sep 09, 2015] Accounting for the cost of military hardware in GDP

Warren, September 7, 2015 at 2:33 pm
kirill, September 7, 2015 at 3:43 pm
The professor from Harvard is a total clown. PPP GDP makes more sense than dollar GDP for any country other than the USA when comparing GDP sizes. PPP normalizes price scales for products and services of equal value. US produced overpriced military hardware is not worth every cent compared to cheaper Russian hardware. Nobody who claims the T-14 or even the T-90MS is trash compared to Abrams tanks can be taken seriously. So it simply does not make sense to use dollars to compare Russian military and civilian production which grossly understates the *physical* economy. The one composed of tangible matter and energy and not psychological delusions. Even services can be properly evaluated in terms of matter and energy so there is such a thing as an objective, physical economy.

Another way of countering the Harvard economic voodoo is to think what would happen if some rich Americans decided to buy up all that cheap, 3rd rate GDP of some other country. The prices would shift overnight and they would lose their ability to buy anywhere near the amount they thought the could. So pricing the GDP of states other than the US in dollars is beyond ridiculous. But it serves US propaganda purposes to claim that a 50% ruble devaluation shrank Russia’s GDP by 50%.

Oddlots, September 7, 2015 at 4:59 pm
He is presumably a tenured economics professor so you can’t expect much. It would be like interrogating the Manchurian Candidate.
Oddlots ,metadata"> September 7, 2015 at 7:07 pm
I do have to ask though, while paging Guy, whether the fact that traders can, on futures and options exchanges dominated by New York, Chicago, London, Hong Kong etc., multiply the actual physical economy in terms the amount of “munny” at stake, whether a focus on the “real” – physical – economy is entirely to the point.

Just as a rough stab at what I mean: this seemingly meaningless false economy has made London the powerhouse of England’s economy… It seems utter bullshit to me but it has “worked” somehow since Thatcher’s age.

My point is, I wouldn’t underestimate the staying power of the wholesale financialization of the economy. What I’d like to really understand is how it’s gotten this far and, FWIW, what it will look like when it comes to an end.

That’s going to be absolutely wrenching I suspect. Least of all for its advocates with perfect irony.

kirill. September 8, 2015 at 7:36 am
Indeed, money has established economic structures that are meta-stable. Since psychology is one of the main parameters of the economy (humans make choices based on various notions and delusions and this translates into physical processes converting matter and energy), money enables the manipulation of human behaviour including the establishment of perceptions that organize economic activity. Banksters are quite powerful politically, they manipulate the economy in ways that no politician can.

Over the last 20+ years we have seen how financial “technologies” have driven western GDP growth via debt growth. This applies to all levels including the individual consumer who is racking up large debts to pay for all sorts of consumer junk. The housing market is also grossly distorted and people are “buying” million dollar homes on family incomes of $70,000. Their mortgages are nearly all interest and only affordable due to ridiculously low interest rates.

But the racket can’t last forever. Growth through cheap credit is a nonsense concept in the long run. Already the national debts of many NATO states are beyond the ability of those states to pay them off. Even though they are “only” around 80% of GDP, there is no austerity program that would preserve the GDP level and the ability to pay. Greece is a nice example of what happens when the confidence in the system breaks. Greece was actually quite normal and attempts to paint it as some sort of special basket case are revisionism. The west is headed for the brick wall of reality. I am afraid that the elites realize this and are engineering WWIII to extricate themselves.

[Sep 03, 2015] Latest from the GDP Now Forecasting Model

"... What I would like to see is an analysis of why GDI reading was recently so much lower then GDP reading. ..."
Economist's View

Interesting divergence between "Blue Chip" consensus and the GDPNow measure from the Atlanta Fed:

GDPNow: The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our new GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release. Recent forecasts for the GDPNow model are available here. More extensive numerical details—including underlying source data, forecasts, and model parameters—are available as a separate spreadsheet.

Latest forecast — September 3, 2015

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.5 percent on September 3, up from 1.3 percent on September 1. ...

Gdpnow-forecast-evolution

... As more monthly source data becomes available, the GDPNow forecast for a particular quarter evolves and generally becomes more accurate. That said, the forecasting error can still be substantial just prior to the “advance” GDP estimate release. It is important to emphasize that the Atlanta Fed GDPNow forecast is a model projection not subject to judgmental adjustments. It is not an official forecast of the Federal Reserve Bank of Atlanta, its president, the Federal Reserve System, or the FOMC.
am said...
How do the Atlanta numbers compare to the actual BEA released numbers, e.g. April-June 2015. I tried to find comparisons on their site but couldn't see any.
likbez said in reply to am...
How BEA released numbers for April-June 2015 compare with reality might be a better question
Matt Young said...
http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm
--------
And this is where the growth is coming from. Look at the variance in growth rates by region over 4 years. Twice the growth rate westt of the rockies then east. There is no Keynesian model or hat trick which will reverse the trend. This is saddleback mountain, no aggregate spending program defeats the bifurcated distribution because it has no way to service the low growth economies at the expense of the high growth.
pgl said...
The Blue Chippers seem to be optimistic! AM raises a good question that should be done more broadly. Do they publish a comparison of the track record for all these forecasters?
likbez said in reply to pgl...
"Do they publish a comparison of the track record for all these forecasters?"

Any attempt to predict fuzzy number by definition is fuzzy. We need to talk about parameters of certain distributions which are represented by single numbers in BEA report.

What I would like to see is an analysis of why GDI reading was recently so much lower then GDP reading.

[Sep 02, 2015] A more accurate measure of economic output by Mark Thoma

"...GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's income in one way or another. But GDI differs in practice due to the way the national income and product accounts are constructed."
"...The first new measure, called gross domestic output (GDO), is now published by the Bureau of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how it compares to GDP:"
"..."the simple average -- what we have called GDO -- of the initial estimates historically has been a better gauge of the latest and presumably most accurate estimates of GDP growth than either GDP or GDI individually as well as a more stable predictor of future economic growth. Moreover, using GDO helps at least partially to resolve some recent economic anomalies. As a result, GDO offers a valuable new source of information for households, businesses, researchers, and policymakers seeking to understand economic issues in real time.""
"...However, while both GDO and GDPplus improve on using GDP or GDI alone, neither alternative overcomes all the problems with GDP and GDI, particularly the lag of several months before data on GDP and GDI first become available. In addition, it can be as long as several years before all the important data revisions are completed, and forecasts beyond a quarter or two ahead are unreliable"
CBS News
How well is the U.S. economy doing, and where might it be heading in the future?

To answer these questions, we need a way to assess the total amount of goods and services the economy is producing in a given time period. One measure of this quantity, gross domestic product (GDP) is well known. It estimates the total value of new goods and services produced in the U.S. over a given period, usually a quarter or a year. (Also, the goods must pass through organized markets, so black market activity and goods produced in homes aren't counted.)

However, there's another way to arrive at this estimate of total economic activity: gross domestic income (GDI).

GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's income in one way or another. But GDI differs in practice due to the way the national income and product accounts are constructed.

Thus, because neither measure is perfect on its own, and the errors in GDP and GDI are largely independent, it should be possible to combine the two measures to improve our estimate of how well the economy is performing in a given time period. That's what two recent strands of research are attempting to do.

The first new measure, called gross domestic output (GDO), is now published by the Bureau of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how it compares to GDP:

GDO

The graph is from a recent Issue Brief published by the Council of Economic Advisors. It discusses this new measure and notes that

"the simple average -- what we have called GDO -- of the initial estimates historically has been a better gauge of the latest and presumably most accurate estimates of GDP growth than either GDP or GDI individually as well as a more stable predictor of future economic growth. Moreover, using GDO helps at least partially to resolve some recent economic anomalies. As a result, GDO offers a valuable new source of information for households, businesses, researchers, and policymakers seeking to understand economic issues in real time."

The second new measure, called GDPplus, is an optimally weighted combination of GDP and GDI, with weights that are allowed to evolve over time.

This measure, which is available from the Philadelphia Fed, has some technical advantages over the simple average discussed above. However, while both GDO and GDPplus improve on using GDP or GDI alone, neither alternative overcomes all the problems with GDP and GDI, particularly the lag of several months before data on GDP and GDI first become available. In addition, it can be as long as several years before all the important data revisions are completed, and forecasts beyond a quarter or two ahead are unreliable. However, GDPplus, unlike GDO, can be calculated even if only one of GDP or GDI is available.

Thus, the best approach to characterizing how well the economy is performing at a moment in time, and how well it's likely to do in the future, is to use a measure such as GDPplus in combination with other windows into the state of the economy such as the unemployment rate, industrial production, consumption, investment and so on.

[Sep 02, 2015] Links for 09-01-15

"...Measuring value-added is key but when the global value chain is within a multinational - measuring value-added depends on intercompany prices. How do we know they are set at arm's length amounts? We don't. "
"...Ya we don't. It's a game of tax arbitrage "
Economist's View

pgl said...

Call me a nerd but the latest from Tim Taylor is something I need to read more carefully. But let me pull this sentence:

"In studies of global value chains, a standard measure is to calculate what proportion of the value-added from a country's exports are actually from imported inputs."

Measuring value-added is key but when the global value chain is within a multinational - measuring value-added depends on intercompany prices. How do we know they are set at arm's length amounts? We don't.

Reply Tuesday, September 01, 2015 at 01:31 AM

Paine said in reply to pgl...

Ya we don't

It's a game of tax arbitrage

[Aug 30, 2015] The Scary Number Hiding Behind Today's GDP Party

"...Hmm. Which to believe? As the old joke goes: "A person with one clock always knows what time it is. A person with two is never quite sure.""
Aug 30, 2015 | Bloomberg Business

The federal government today released two very different estimates of the U.S. economy's growth rate in the second quarter. The one that got all the attention was the robust 3.7 percent annual rate of increase in gross domestic product. Not many people noticed that gross domestic income increased at an annual rate of just 0.6 percent.

That's a big discrepancy for two numbers that should theoretically be the same, since they're two ways of measuring the same thing: the size of the economy. If you believe the GDP number, you're happy. If you believe the GDI number, you're thinking the U.S. is skating close to a recession.

The Bureau of Economic Analysis always gives more prominence to the GDP number in its quarterly press release. But today, for the second time in a quarterly report, it released an average of GDP and GDI growth rates. That average came in at 2.1 percent after rounding—and in this case, that's probably closer to the truth than either number alone.

There is no name for the new hybrid data series, which was described rather prosaically as "the average of real GDP and real GDI." President Obama's Council of Economic Advisers nicknamed it gross domestic output in a July issue brief. Here's what it wrote:

GDP tracks all expenditures on final goods and services produced in the United States, whereas GDI tracks all income received by those who produced that output. Conceptually the two should be equal because every dollar spent on a good or service (in GDP) must flow as income to a household, a firm, or the government (and therefore must show up in GDI). However, the two numbers differ in practice because of measurement error.

[Aug 30, 2015] Under the Hood of U.S. GDP Was Divide Between Growth, Incomes

Aug 30, 2015 | Bloomberg Business

Here's one key takeaway from the Commerce Department's report on gross domestic product Thursday in Washington: Gross domestic income climbed at a 0.6 percent annualized rate, well short of the rebound in growth.

* The increase in GDI last quarter followed a 0.4 percent advance in the first three months of the year, marking the weakest back-to-back gains since mid-2012

* The 3.1 percentage-point gap between GDI and GDP, which climbed at a 3.7 percent rate, was the largest in favor of GDP since the third quarter of 2007

* While GDI and GDP should theoretically match over the long run, they can diverge from quarter to quarter. There has been a debate about which is more accurate, with some Federal Reserve researchers finding incomes give better signals

[Aug 28, 2015] Q2 GDP Revised up to 3.7%

"...Economists are post-industrial shamans whose witch doctor modeling impedes macro economic understanding. The precision of models is ersatz, more or less inversely proportional to its real world relevance. The delusion of being a scientist is critical to their professional self-respect. "
"...You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal government, and will figure out that with a more assertive and economically engaged central government dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation, cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely avoidable mistake."
Aug 28, 2015 | Economist's View

anon

The Fed wants to raise interest rates:

Economists are post-industrial shamans whose witch doctor modeling impedes macro economic understanding. The precision of models is ersatz, more or less inversely proportional to its real world relevance. The delusion of being a scientist is critical to their professional self-respect.

Dan Kervick -> lower middle class...

A 3.7% quarter with several hands tied behind our backs by a don-nothing government. Think about what we could do if we were really trying.

pgl -> Dan Kervick...

YEA! Let's build that Mexican wall. Let's wage war on China. Lord - the stupidity here is multiplying!

Dan Kervick -> pgl...

This is an area in which you seem to be persistently incapable of avoiding lies.

You know very well that are a large number of ambitious long-term projects the US could do that are non-military, have nothing to do with immigration and could boost output tremendously.

You're becoming part of the LPTS crew: "liberal pundits terrified of socialism."

That's why Brad DeLong has an embargo on any talk about Bernie Sanders and his ideas.

That's why Paul Krugman is also avoiding Sanders like the plague and using daily red meet partisan servings to keep Democrats' attention riveted on the foibles of the Republicans.

That's why Brendan Nyhan has yet another column warning us all about the dangers of "Green Lanternism".

You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal government, and will figure out that with a more assertive and economically engaged central government dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation, cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely avoidable mistake.

40% of this country has household income of under $40,000 per year. If we remove the plutocratic capitalist stranglehold on this economy, use government to more efficiently distribute and invest our national wealth, and demote private enterprise to its proper subordinate place, we could double that rapidly and drive a wave of high-growth social transformation with all of the liberated economic energy.

This is going to happen. Take your pick: we're either going to get the somewhat fascistic and racist Trump version on strong government or democratic socialist version. The Ivy League twits hanging on for dear life to their established networks, revolving doors, tit-for-tatting, sinecures and don't-rock-the-boat regime of stagnant managerialism are going to butts handed to them by history.

pgl -> Dan Kervick...

Blah, blah, blah. I guess we could employ more economists at the BEA to do what they are already doing at Census.

Dan Kervick -> pgl...

The Census doesn't and can't combine income distribution numbers with growth numbers on a monthly and quarterly basis. The BEA could collect this data, but doesn't, because it is part of their mission to pretend class conflict doesn't exist.

The top quintile in the US pulls down about 50% percent of the income. That means we could get 3.7% annualized growth if their income grew by 6% while everybody else's income grew by less than 1/2 a percent.

Is that what's happening? Inquiring minds want to know. It seems like a natural mission for the BEA to track this. But they don't.

pgl -> Dan Kervick...

You have no clue what these people do or the task you are whining about. With all you incessant babbling and whining - your keyboard is likely ready to just rot away.

Me? I'm headed down to the Starbucks to whine that they don't make tacos. Duh.

Dan Kervick -> pgl...

I know what they do, and I know what they don't do. Their mission should be expanded.

likbez -> Dan Kervick...

Dan,

I think you are mistaken about "a natural mission for the BEA to track this". Our elected officials and Wall Street executives all have a vested interest in keeping the perception of a robust economy alive. The economy growth numbers and the employment data announced are critical to this perception, but a thorough analysis of the data suggests something quite different that what we are told.

Statistics now became more and more "number racket" performed, like in the USSR, in the interest of the powers that be.

The net result of this tricks is that the error margin of government statistics is pretty high. And nobody in economic profession is taking into account those error margins.

So in no way we can accept this 3.7% annualized growth figure. This is a fuzzy number, a distribution from probably 2.7% to 3.7%. Only upper bound is reported. And if you delve into the methodology deeper this range might be even wider. What is actually the assumption of quarterly inflation in the USA used in calculation of this number?

Which is another factor that makes neoliberal economics a pseudoscience, a branch of Lysenkoism.

JohnH -> Dan Kervick...

This is very revealing...nobody provides regular statistics on distribution. That lack of interest makes it blatantly obvious that policy makers only care about the top number--GDP--and are totally uninterested in knowing whether most Americans are prospering or not.

There is one source that updates Census data on a monthly basis. It shows that real median household income is still 3.8% below where it was in 2008 or in 2001. In fact, it's back where it was in the 1980s.

Of course, the 'recovery' has trickled down a bit, just as you would expect from trickle down monetary policy. Real median household incomes are no longer 9.6% below where they were in 2008...they're now only 3.8% below.
http://www.advisorperspectives.com/dshort/updates/Median-Household-Income-Update.php

Meanwhile, Saez and Montecino have pointed out that the 1% got 58% of the gains from the 'recovery,' while the 99% got 42%.

Of course, pgl doesn't even care enough about this to know where the data is...and, apparently, most 'liberal' economists are just as indifferent to distribution as he is.

Dan Kervick -> JohnH...

If it weren't for Piketty and Saez, we'd still be fumbling around in the dark on income and wealth distribution.

JohnH -> JohnH...

There's more here: real median household income by quintile 1967-2013
http://www.advisorperspectives.com/dshort/updates/Household-Income-Distribution.php

It shows the dramatic the separation between the top quintile and the bottom 80% during the Clinton years. Separation was even greater for the top 5%.

Yet the only thing that most economists ever notice is GDP growth...

pgl -> JohnH...

"Yet the only thing that most economists ever notice is GDP growth".

There you go again. Clueless as can be and lying your ass off.

likbez -> pgl...

And what you actually know about methodology of calculation of this GDP number. Inquiring minds want to know.

Correct calculation of nominal GDP depends on correct calculation of inflation, which is the most politicized of economic metrics and as such subject to tremendous level of manipulation.

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

=== Start of quote ====
The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

JohnH -> JohnH...

Another look at the ineffectiveness of trickle down monetary policy: all but the top decile have suffered decreases in wages and compensation since 2007.
http://www.epi.org/publication/pay-is-stagnant-for-vast-majority-even-when-you-include-benefits/

[Jul 29, 2015] Using Math to Obfuscate - Observations from Finance

Notable quotes:
"... then from Romer's assumptions the rival inputs cannot be earning their marginal product. ..."
"... The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2). ... ..."
"... Four-fifths of the "Economy" is a Complete Waste of Time ..."
"... I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither good nor bad that the economy ACTUALLY produces wasteful output. ..."
"... The amount of wasteful output "serves as an index" for the amount of useful output that could be produced if the economy wasn't producing wasteful output. ..."
"... "In a perfect free market world where the price mechanism adjusts production to our wishes and all externalities are priced in, GDP measures economic happiness." ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models." ..."
"... why do economies grow vulnerable over time ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models. ..."
"... Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment ..."
economistsview.typepad.com
More from Paul Romer on "mathiness" -- this time the use of math in finance to obfuscate communication with regulators:
Using Math to Obfuscate - Observations from Finance: The usual narrative suggests that the new mathematical tools of modern finance were like the wings that Daedalus gave Icarus. The people who put these tools to work soared too high and crashed.

In two posts, here and here, Tim Johnson notes that two government investigations (one in the UK, the other in the US) tell a different tale. People in finance used math to hide what they were doing.

One of the premises I used to take for granted was that an argument presented using math would be more precise than the corresponding argument presented using words. Under this model, words from natural language are more flexible than math. They let us refer to concepts we do not yet fully understand. They are like rough prototypes. Then as our understanding grows, we use math to give words more precise definitions and meanings. ...

I assumed that because I was trying to use math to reason more precisely and to communicate more clearly, everyone would use it the same way. I knew that math, like words, could be used to confuse a reader, but I assumed that all of us who used math operated in a reputational equilibrium where obfuscating would be costly. I expected that in this equilibrium, we would see only the use of math to clarify and lend precision.

Unfortunately, I was wrong even about the equilibrium in the academic world, where mathiness is in fact used to obfuscate. In the world of for-profit finance, the return to obfuscation in communication with regulators is much higher, so there is every reason to expect that mathiness would be used liberally, particularly in mandated disclosures. ...

We should expect that there will be mistakes in math, just as there are mistakes in computer code. We should also expect some inaccuracies in the verbal claims about what the math says. A small number of errors of either type should not be a cause for alarm, particularly if the math is presented transparently so that readers can check the math itself and check whether it aligns with the words. In contrast, either opaque math or ambiguous verbal statements about the math should be grounds for suspicion. ...

Mathiness–exposition characterized by a systematic divergence between what the words say and what the math implies–should be rejected outright.

Posted by Mark Thoma on Wednesday, July 29, 2015 at 10:52 AM in Economics, Financial System, Methodology | Permalink Comments (2)

[Jul 20, 2015] The Rivals (Samuelson and Friedman)
Jul 19, 2015 | Economist's View

pete said...

I always loved Boulding's somewhat critical review of Samuelson, discussing the limits of the mathematicization of economic theory. Of course Samuelson was the tip of the iceberg, and since then many overconfident economic mathematicians have led to very serious financial problems. I had one stats professor who called a complex theory on the blackboard "graffiti."

http://www.jstor.org/stable/1825768?seq=1#page_scan_tab_contents

pgl -> pete...
Samuelson did not do math for math's sake. He figured out first what the real world issue was and then used math to help explain his insights.
likbez -> pgl...
You need to distinguish "math" from "mathematical masturbation", or as they are now more politically correctly called "mathiness".

Many economic works that use differential equations belong to the latter category ;-). A lot of pitiful clowns pretending to be mathematicians do not even bother to understand what is the precision and error bounds of the input data. As in "garbage in, garbage out".

This is probably a unique case when mathematic equations are used to support particular political ideology. Support via "scietification" (as in Church of Scientology) of essentially political statements. Especially about unemployment and poverty.

anne -> anne...

All in all, the past 7 years have been a very good time for old-fashioned macroeconomics. But of course nothing will make the Germans, or the U.S. right, concede that Keynesian ideas have worked.

[ Keynesian ideas have worked? Influential among policy makers in general or not, Keynesian ideas have worked. ]

pgl -> anne...

Keynesian theory explains what happened. But what happened was the our policy makers failed to do the right thing. Had they listened to Keynes - the recoveries would have been much faster.

likbez -> pgl...

"Had they listened to Keynes - the recoveries would have been much faster."

This was impossible. There is such thing as "Intellectual capture". As Keyes noted

"The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist."

[Jun 15, 2015] What Assumptions Matter for Growth Theory
Jun 15, 2015 | Economist's View
Dietz Vollrath explains the "mathiness" debate (and also Euler's theorem in a part of the post I left out). Glad he's interpreting Romer -- it's very helpful:
What Assumptions Matter for Growth Theory?: The whole "mathiness" debate that Paul Romer started tumbled onwards this week... I was able to get a little clarity in this whole "price-taking" versus "market power" part of the debate. I'll circle back to the actual "mathiness" issue at the end of the post.
There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not? We can answer the first without having to answer the second.
Just to refresh, a production function tells us that output is determined by some combination of non-rival inputs and rival inputs.
Okay, given all that setup, here are three statements that could be true.
  1. Output is constant returns to scale in rival inputs
  2. Non-rival inputs receive some portion of output
  3. Rival inputs receive output equal to their marginal product
Pick two.
Romer's argument is that (1) and (2) are true. (1) he asserts through replication arguments, like my example of replicating Earth. (2) he takes as an empirical fact. Therefore, (3) cannot be true. If the owners of non-rival inputs are compensated in any way, then it is necessarily true that rival inputs earn less than their marginal product.

Notice that I don't need to say anything about how the non-rival inputs are compensated here. But if they earn anything, then from Romer's assumptions the rival inputs cannot be earning their marginal product.

Different authors have made different choices than Romer. McGrattan and Prescott abandoned (1) in favor of (2) and (3). Boldrin and Levine dropped (2) and accepted (1) and (3). Romer's issue with these papers is that (1) and (2) are clearly true, so writing down a model that abandons one of these assumptions gives you a model that makes no sense in describing growth. ...
The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2). ...

[There's a lot more in the full post. Also, Romer comments on Vollrath here.]

Paine

Excellent

Lots of conclusions are per determined by simple assumptions like constant returns to scale

If by scale we mean replication of the existing production system on a larger scale

Where say we triple every plant and highway etc

The model nicely captures the reality of a static production system
Where all factors are expandable even if at a cost

This is a very narrow notion of scale effects

If for example markets for oust expand and a different technique is optimal
Then there's a dynamic transition
Where residuals emerge.

anne -> Paine ...

I assume this is the reference which the writer is too inconsiderate to mention:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/are-ideas-really-non-rival.html

June 13, 2015

Are ideas really non-rival?
By Nick Rowe

Paine -> anne...

Rowe thinks he is making a great joke

But in actuality there is nothing but assertion of various hypothetical entities behind the entire neo classical construct

No matter how carefully these atoms are defined they remain figments

That one can conjure like epicycles

Example

Advertising Is a production factor ! Once we move away from he material basis of production lots of spirits dance in the air around us

Once a non rival good has been discovered or invented or created etc it's cost to replicate is nearly zero

To lay the bulk of profits at its feet is ridiculous of course. But intellectual property none the less is a growing means of exploitation...

Paine -> Paine ...

My definition of non rival is wrong of course. The meaning of non rival is castlessly inexhaustible

Nothing fits this description exactly. And almost is as bad as not at all.

Non rival ! Example of belief in the divinity of Jesus. I can believe as much whether you believe or not

anne -> Paine ...

All exchange value flows from labor time. Even if in complex patterns easily mystified by simple definitions. Of imaginary objects like non-rival production factors

[ I understand and am pleased. ]

Sandwichman said...

Four-fifths of the "Economy" is a Complete Waste of Time

"There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not?" -- Dietz Vollrath "What Assumptions Matter for Growth Theory?"

"Dietz Vollrath has a new post that goes a long way toward clarifying the battle lines in the fight over the foundations of growth theory." -- Paul Romer, "The Assumptions in Growth Theory"

Huh? These fellows omit the main assumption, the analogy -- "growth is a concept whose proper domicile is the study of organic units..." (Kuznets, 1947). Kuznets cited with approval Sidney Hook's discussion of the dangers of the use of this analogy.

"As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion.... The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like 'birth,' 'reproduction,' and 'death.'"

Growth "theory" gets around this objection to the uncritical use of analogy by ignoring it -- by 'closing the eye' to explicit caveats in the seminal contribution to the measurement of growth. Let's pretend that the economy really is an organism that grows perpetually but never dies.

Name one.

Carry on, growth theorists.


anne -> Sandwichman...

http://econospeak.blogspot.com/2015/06/the-chimerical-analogies-of-growth-and.html

June 6, 2015

The Chimerical Analogies of Growth and Distribution


http://econospeak.blogspot.com/2015/06/four-fifths-of-economy-is-complete.html

June 14, 2015

Four-fifths of the "Economy" is a Complete Waste of Time

-- Sandwichman

Sandwichman -> Sandwichman...

1. "growth is a concept whose proper domicile is the study of organic units..."

2. "The belief that society is an organism is an old but fanciful notion."

3. ?

4. Growth!

Sandwichman -> anne...

"the meaning of per capita growth in China over these last 38 years of 8.6% yearly"

It means, literally, that if you ate one bowl of rice for dinner in 1977, in 2015 you would eat 23 bowls of rice for dinner. Of course it doesn't *really* mean that. The "measurement" is actually a figure of speech.

Figuratively, it means something more like: many more Chinese own cars today than 38 years ago and those cars are worth hundreds of times what the old bicycle was worth. Never mind that the car is used to commute to work, that it takes as long to drive to work through congested traffic as it once did to ride a bike to work and that the air is unbreathable so it would be suicide to go back to riding a bike.

Still, growing 8.6% per year for 38 years is a prodigious achievement even if we don't know what it means.

Sandwichman -> anne...

A large part of that gain in life expectancy is attributable to an enormous decline in infant mortality. Expenditures on improved infant health care would be only a miniscule portion of the total economic growth.

When I say "prodigious" I mean remarkable or immense without attaching any value judgement about whether it is a good or a bad thing. There have obviously been some good things associated with that growth -- see infant mortality. There has also been an explosion of GHG emissions. If 2/3 of that growth was good things (reduced infant mortality, improved nutrition etc.) and 1/3 bad things (police surveillance, cost of commuting to work, etc.) then China would have been better off with a 6% growth rate.

Can't we just forget about the confounded aggregate and get on with promoting the good? No, apparently not. Two pieces of pie is better than one if it's cherry pie but not if it's "dirt" pie.

anne -> Sandwichman...

Can't we just forget about the confounded aggregate and get on with promoting the good?

[ Surely so, but if a part of the good is life span, well, that of India is 66 years which shows how far China has come and I really do know of the problems. ]

anne -> Sandwichman...

Again, I am waiting for an explanation of or a description showing what the past 38 years of per capita growth in China represent. What does the past 38 years of astonishing gains in Chinese productivity represent and how to depict these gains?

Paine -> anne...

We need a welfare index. And that greatly increases the degree of difficulty over a simple output index

Sandwichman -> Paine ...

"If the GDP is Up, Why is America Down?" Clifford Cobb, Ted Halstead, and Jonathan Rowe, The Atlantic, 1995.

http://www.theatlantic.com/past/politics/ecbig/gdp.htm

And do you know what the overwhelming response of economists was to that article? "Nothing new here." "We know GDP is not a measure of welfare. But it's useful because it tells us about the capacity to produce goods that could enhance welfare."

Or to paraphrase Orwell, "If this boot wasn't stamping on your face, you could put it on your foot and it would keep your toes warm -- FOREVER!" Paul Samuelson's version, "Evaluation of Real National Income":

"Production possibilities as such have no normative connotations. We are interested in them for the light they throw on utility-possibilities. This is why economists have wanted to include such wasteful output as war goods in their calculations of national product; presumably they serve as some kind of an index of the useful things that might be produced in better times."

I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither good nor bad that the economy ACTUALLY produces wasteful output.

The amount of wasteful output "serves as an index" for the amount of useful output that could be produced if the economy wasn't producing wasteful output.

anne -> Sandwichman...

http://econospeak.blogspot.com/2015/06/some-kind-of-index-no-normative.html

June 14, 2015

Some Kind of an Index -- No Normative Connotations

-- Sandwichman

Julio -> Sandwichman...

A question for you folks in this subthread:

"In a perfect free market world where the price mechanism adjusts production to our wishes and all externalities are priced in, GDP measures economic happiness."

Proposition: That myth underlies our world.

Conclusion: In our world, "GDP is not correlated to happiness" is, therefore, a subversive statement.

Is this sensible, and if so, does it make alternative measures of economic well-being difficult to construct?

Julio -> Sandwichman...

Aggregate is not the same as average.

The "prices as the driver" argument is that you will buy a yellow car and I a green one, and Detroit will make just enough of each, and that's the closest we'll ever come to an economy that reflects our wishes, and that's in turn the closest we'll ever come to (economic) happiness.

But this may be an aside: is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?

We could measure economic decisions by using economics as far as it takes us to evaluate their consequences, and then using our moral compass to do the measuring.

A more ad-hoc method which, for our collective decisions, has political pitfalls; but politics is the appropriate forum for those fights. We would no longer know (or care) what "progress" is, as a national aggregate.

Sandwichman -> Julio...

"is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?"

No, it's not entirely unrealistic and irrelevant but it IS very limited and, like GDP subject to misinterpretation as more substantive than it is.

The thing about GDP that won't be gotten away from is that it does provide information that is useful for projecting revenues for business and for government.

A welfare index wouldn't do that. You can tax income but you can't tax happiness -- at least not literally.

anne -> Sandwichman...

The measurement of economic well-being is inherently difficult (impossible) because it involves the aggregation of subjective judgments....

[ Agreed. ]

anne -> Sandwichman...

The sort of growth-happiness surveying referred to is to my mind no more than pseudo research. As empirical as bumble bees.

Sandwichman -> anne...

anne, I tend to agree with your skepticism about happiness surveying. However, I have also worked on so-called real survey research -- Canadian census. If you saw how the sausage was made...

The Case of the Missing Minsky by Paul Krugman
"...On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models."

NYTimes.com

Gavyn Davis has a good summary of the recent IMF conference on rethinking macro; Mark Thoma has further thoughts. Thoma in particular is disappointed that there hasn't been more of a change, decrying

the arrogance that asserts that we have little to learn about theory or policy from the economists who wrote during and after the Great Depression.

Maybe surprisingly, I'm a bit more upbeat than either. Of course there are economists, and whole departments, that have learned nothing, and remain wholly dominated by mathiness. But it seems to be that economists have done OK on two of the big three questions raised by the economic crisis. What are these three questions? I'm glad you asked.

As I see it, it makes sense to think of what happened in terms of three phases.

The questions then are how and why each of these things can/did happen. I think of these as the Minsky question - why do economies grow vulnerable over time ; the Bagehot question - why does all hell break loose now and then; and the Keynes question - how economies can stay depressed, and how such depressed economies work.

On the Keynes question, it's true that we haven't had a radical change in thinking, but that's mainly because the old thinking still works pretty well. That is, the answer for people asking who would be the new Keynes turns out to be that Keynes is the new Keynes. Or maybe that's Hicks - anyway, IS-LMish analysis worked well, and the economists who made fools of themselves were those who rejected the time-tested approaches.

What is new is that we have had a flowering of empirical work, and have much more econometric evidence on monetary and especially fiscal policy, price behavior, and more than we used to. Look, for example, at Nakamura/Steinsson's survey, or at the Blanchard work on multipliers in the euro area. So this is a happy story: the existing framework worked fairly well, and is now buttressed by a lot of really good empirical evidence.

On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models. But it wasn't very hard to fix these problems, or at least apply workable patches. Once you realized that repo was the new bank deposits, the basic crisis framework was already there; and there was already enough existing analysis of balance-sheet constraints and all that to make creation of a somewhat messy, inelegant, but usable set of models quite easy.

And here too we have seen a flowering of empirical work, e.g. Mian and Sufi on household debt.

Where we have not, as far as I can tell, made much progress is the Minsky question. Why did the system become so vulnerable? Was it deregulation (or failure of regulation to keep up with institutional change)? Simple forgetting, as memories of past crises faded? Excessively loose policy? I have views, but I have to admit that there isn't a lot of either fresh thinking or hard evidence here.

Why is Minsky still mostly missing? Partly because asking how we got here may be less urgent than the question of what we do now. But also, I'd guess, because it's hard. Bubbles, excessive leverage, and all that probably have a lot to do with the limits of rationality, and behavioral economics doesn't provide anything like as much guidance as it should.

Still, I'm relatively positive in my assessment of the state of macroeconomics. Against mathiness and political ideology, the gods themselves contend in vain, but that's not a problem with the models


kbaa, The Irate Plutokrat

It is good to see Krugman write in opposition to 'mathiness', economists' misuse of mathematics to justify their pet theories. And his suggestion that 'behavioral economics doesn't provide anything like as much guidance as it should' is probably as close to an admission as we are ever likely to get from an academic economist that it's human psychology that drives the economy after all, and that all of the various high minded macroeconomics theories are nothing more than propaganda to be used by lobbyists who present them as scholarship.

Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there is always the possibility of misusing mathematics to intimidate. Any paper that cites game theory or the Euler consumption equation to promote public policy should be regarded as fraudulent until shown to be otherwise. Mathematics serves the same function for academic economists as Latin theology did for medieval clerics: both provide an aura of erudite wisdom where there is no wisdom at all to be found.

NB For those who have never studied Calculus, "Euler" is pronounced "oiler", but there's no connection with the price of oil or any other commodity, and don't let any academic economist try to tell you otherwise.

Book Review "Keynes The Return of the Master"
WSJ.com

Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. Mr. Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who] pictured the economy as a system of simultaneous equations." The very idea is made to sound slightly crazed.

This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say, and it is too late to improve. This has, I believe, saved me from important errors of thinking."

Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally, the language of logic. Modern research into Keynes's theories-I have conducted such research myself-tries to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns out that the task is not easy.

Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment. But if recessions and depressions are as costly as they seem to be, why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium? This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.

Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

[Jun 15, 2015] What Assumptions Matter for Growth Theory

Jun 15, 2015 | Economist's View
Dietz Vollrath explains the "mathiness" debate (and also Euler's theorem in a part of the post I left out). Glad he's interpreting Romer -- it's very helpful:
What Assumptions Matter for Growth Theory?: The whole “mathiness” debate that Paul Romer started tumbled onwards this week... I was able to get a little clarity in this whole “price-taking” versus “market power” part of the debate. I’ll circle back to the actual “mathiness” issue at the end of the post.

There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not? We can answer the first without having to answer the second.

Just to refresh, a production function tells us that output is determined by some combination of non-rival inputs and rival inputs.

Okay, given all that setup, here are three statements that could be true.

  1. Output is constant returns to scale in rival inputs
  2. Non-rival inputs receive some portion of output
  3. Rival inputs receive output equal to their marginal product
Pick two.

Romer’s argument is that (1) and (2) are true. (1) he asserts through replication arguments, like my example of replicating Earth. (2) he takes as an empirical fact. Therefore, (3) cannot be true. If the owners of non-rival inputs are compensated in any way, then it is necessarily true that rival inputs earn less than their marginal product.

Notice that I don’t need to say anything about how the non-rival inputs are compensated here. But if they earn anything, then from Romer’s assumptions the rival inputs cannot be earning their marginal product.

Different authors have made different choices than Romer. McGrattan and Prescott abandoned (1) in favor of (2) and (3). Boldrin and Levine dropped (2) and accepted (1) and (3). Romer’s issue with these papers is that (1) and (2) are clearly true, so writing down a model that abandons one of these assumptions gives you a model that makes no sense in describing growth. ...

The “mathiness” comes from authors trying to elide the fact that they are abandoning (1) or (2). ...

[There's a lot more in the full post. Also, Romer comments on Vollrath here.]

Paine

Excellent !

Lots of conclusions are per determined by simple assumptions like constant returns to scale. If by scale we mean replication of the existing production system on a larger scale

Where say we triple every plant and highway etc

The model nicely captures the reality of a static production system
Where all factors are expandable even if at a cost

This is a very narrow notion of scale effects

If for example markets for oust expand and a different technique is optimal
Then there's a dynamic transition
Where residuals emerge.

anne -> Paine ...

I assume this is the reference which the writer is too inconsiderate to mention:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/are-ideas-really-non-rival.html

June 13, 2015

Are ideas really non-rival?
By Nick Rowe

Paine -> anne...

Rowe thinks he is making a great joke

But in actuality there is nothing but assertion of various hypothetical entities behind the entire neo classical construct

No matter how carefully these atoms are defined they remain figments

That one can conjure like epicycles

Example

Advertising Is a production factor ! Once we move away from he material basis of production lots of spirits dance in the air around us

Once a non rival good has been discovered or invented or created etc it's cost to replicate is nearly zero

To lay the bulk of profits at its feet is ridiculous of course. But intellectual property none the less is a growing means of exploitation...

Paine -> Paine ...

My definition of non rival is wrong of course. The meaning of non rival is castlessly inexhaustible

Nothing fits this description exactly. And almost is as bad as not at all.

Non rival ! Example of belief in the divinity of Jesus. I can believe as much whether you believe or not

anne -> Paine ...

All exchange value flows from labor time. Even if in complex patterns easily mystified by simple definitions. Of imaginary objects like non-rival production factors

[ I understand and am pleased. ]

Sandwichman said...

Four-fifths of the "Economy" is a Complete Waste of Time

"There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not?" -- Dietz Vollrath "What Assumptions Matter for Growth Theory?"

"Dietz Vollrath has a new post that goes a long way toward clarifying the battle lines in the fight over the foundations of growth theory." -- Paul Romer, "The Assumptions in Growth Theory"

Huh? These fellows omit the main assumption, the analogy -- "growth is a concept whose proper domicile is the study of organic units..." (Kuznets, 1947). Kuznets cited with approval Sidney Hook's discussion of the dangers of the use of this analogy.

"As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion.... The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like 'birth,' 'reproduction,' and 'death.'"

Growth "theory" gets around this objection to the uncritical use of analogy by ignoring it -- by 'closing the eye' to explicit caveats in the seminal contribution to the measurement of growth. Let's pretend that the economy really is an organism that grows perpetually but never dies.

Name one.

Carry on, growth theorists.

anne -> Sandwichman...

http://econospeak.blogspot.com/2015/06/the-chimerical-analogies-of-growth-and.html

June 6, 2015

The Chimerical Analogies of Growth and Distribution


http://econospeak.blogspot.com/2015/06/four-fifths-of-economy-is-complete.html

June 14, 2015

Four-fifths of the "Economy" is a Complete Waste of Time

-- Sandwichman

Sandwichman -> Sandwichman...

1. "growth is a concept whose proper domicile is the study of organic units..."

2. "The belief that society is an organism is an old but fanciful notion."

3. ?

4. Growth!

Sandwichman -> anne...

"the meaning of per capita growth in China over these last 38 years of 8.6% yearly"

It means, literally, that if you ate one bowl of rice for dinner in 1977, in 2015 you would eat 23 bowls of rice for dinner. Of course it doesn't *really* mean that. The "measurement" is actually a figure of speech.

Figuratively, it means something more like: many more Chinese own cars today than 38 years ago and those cars are worth hundreds of times what the old bicycle was worth. Never mind that the car is used to commute to work, that it takes as long to drive to work through congested traffic as it once did to ride a bike to work and that the air is unbreathable so it would be suicide to go back to riding a bike.

Still, growing 8.6% per year for 38 years is a prodigious achievement even if we don't know what it means.

Sandwichman -> anne...

A large part of that gain in life expectancy is attributable to an enormous decline in infant mortality. Expenditures on improved infant health care would be only a miniscule portion of the total economic growth.

When I say "prodigious" I mean remarkable or immense without attaching any value judgement about whether it is a good or a bad thing. There have obviously been some good things associated with that growth -- see infant mortality. There has also been an explosion of GHG emissions. If 2/3 of that growth was good things (reduced infant mortality, improved nutrition etc.) and 1/3 bad things (police surveillance, cost of commuting to work, etc.) then China would have been better off with a 6% growth rate.

Can't we just forget about the confounded aggregate and get on with promoting the good? No, apparently not. Two pieces of pie is better than one if it's cherry pie but not if it's "dirt" pie.

anne -> Sandwichman...

Can't we just forget about the confounded aggregate and get on with promoting the good?

[ Surely so, but if a part of the good is life span, well, that of India is 66 years which shows how far China has come and I really do know of the problems. ]

anne -> Sandwichman...

Again, I am waiting for an explanation of or a description showing what the past 38 years of per capita growth in China represent. What does the past 38 years of astonishing gains in Chinese productivity represent and how to depict these gains?

Paine -> anne...

We need a welfare index. And that greatly increases the degree of difficulty over a simple output index

Sandwichman -> Paine ...

"If the GDP is Up, Why is America Down?" Clifford Cobb, Ted Halstead, and Jonathan Rowe, The Atlantic, 1995.

http://www.theatlantic.com/past/politics/ecbig/gdp.htm

And do you know what the overwhelming response of economists was to that article? "Nothing new here." "We know GDP is not a measure of welfare. But it's useful because it tells us about the capacity to produce goods that could enhance welfare."

Or to paraphrase Orwell, "If this boot wasn't stamping on your face, you could put it on your foot and it would keep your toes warm -- FOREVER!" Paul Samuelson's version, "Evaluation of Real National Income":

"Production possibilities as such have no normative connotations. We are interested in them for the light they throw on utility-possibilities. This is why economists have wanted to include such wasteful output as war goods in their calculations of national product; presumably they serve as some kind of an index of the useful things that might be produced in better times."

I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither good nor bad that the economy ACTUALLY produces wasteful output.

The amount of wasteful output "serves as an index" for the amount of useful output that could be produced if the economy wasn't producing wasteful output.

anne -> Sandwichman...

http://econospeak.blogspot.com/2015/06/some-kind-of-index-no-normative.html

June 14, 2015

Some Kind of an Index -- No Normative Connotations

-- Sandwichman

Julio -> Sandwichman...

A question for you folks in this subthread:

"In a perfect free market world where the price mechanism adjusts production to our wishes and all externalities are priced in, GDP measures economic happiness."

Proposition: That myth underlies our world.

Conclusion: In our world, "GDP is not correlated to happiness" is, therefore, a subversive statement.

Is this sensible, and if so, does it make alternative measures of economic well-being difficult to construct?

Julio -> Sandwichman...

Aggregate is not the same as average.

The "prices as the driver" argument is that you will buy a yellow car and I a green one, and Detroit will make just enough of each, and that's the closest we'll ever come to an economy that reflects our wishes, and that's in turn the closest we'll ever come to (economic) happiness.

But this may be an aside: is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?

We could measure economic decisions by using economics as far as it takes us to evaluate their consequences, and then using our moral compass to do the measuring.

A more ad-hoc method which, for our collective decisions, has political pitfalls; but politics is the appropriate forum for those fights. We would no longer know (or care) what "progress" is, as a national aggregate.

Sandwichman -> Julio...

"is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?"

No, it's not entirely unrealistic and irrelevant but it IS very limited and, like GDP subject to misinterpretation as more substantive than it is.

The thing about GDP that won't be gotten away from is that it does provide information that is useful for projecting revenues for business and for government.

A welfare index wouldn't do that. You can tax income but you can't tax happiness -- at least not literally.

anne -> Sandwichman...

The measurement of economic well-being is inherently difficult (impossible) because it involves the aggregation of subjective judgments....

[ Agreed. ]

anne -> Sandwichman...

The sort of growth-happiness surveying referred to is to my mind no more than pseudo research. As empirical as bumble bees.

Sandwichman -> anne...

anne, I tend to agree with your skepticism about happiness surveying. However, I have also worked on so-called real survey research -- Canadian census. If you saw how the sausage was made...

[Mar 27, 2015] Microeconomic Origins of Macroeconomic Tail Risks

Economist's View
Microfoundations from Acemogl, Oxdaglar, and Tahbaz-salehi:
Microeconomic origins of macroeconomic tail risks, by Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi: Understanding large economic downturns is one of macroeconomics’ central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behavior for moderate deviations.

Most empirical studies in macroeconomics approximate the deviations of aggregate economic variables (such as the GDP) from their trends with a normal distribution. Besides analytical convenience, such an approximation has been relatively successful in capturing some of the more salient features of the behavior of aggregate variables in the US and other OECD countries.

Macroeconomic tail risks

A number of recent studies (see Fagiolo et al. 2008), however, have documented that the distributions of GDP growth rate in the US and many OECD countries do not follow the normal, or bell-shaped distribution. Large negative or positive growth rates are more common than the normal distribution would suggest. That is to say, the distributions exhibit significantly heavier ‘tails’ relative to that of the normal distribution. Using the normal distribution thus severely underpredicts the frequency of large economic downturns.

This divergence can be seen clearly in Figure 1. Panel (a) depicts the quantile-quantile plot of post-war US GDP growth rate (1947:QI to 2013:QIII) versus the normal distribution after removing the top and bottom 5% of data points. The close correspondence between this dataset and the normal distribution, shown as the dashed red line, suggests that once large deviations are excluded, the normal distribution is indeed a good candidate for approximating GDP fluctuations. Panel (b) shows the same quantile-quantile plot for the entire US post-war sample. It is easy to notice that this graph exhibits sizeable and systematic deviations from the normal line at both ends. Together, these plots suggest that even though the normal distribution does a fairly good job in approximating the nature of fluctuations during most of the sample, it severely underestimates the most consequential fact about business cycle fluctuations, namely, the frequency of large economic contractions.

Figure 1. The quantile-quantile plots of the post-war US GDP growth rate (1947:QI to 2013:QIII) vs. the standard normal distribution (dashed red line)

Acemoglu fig1 24 marNote: The horizontal axis shows quantiles of the standard normal distribution; the vertical axis shows quantiles of the sample data.

Input-output linkages, micro shocks, and macro risks

In recent work (Acemoglu et al. 2014), we have argued that input-output linkages between different firms and sectors within the economy can play a first-order role in determining the depth and frequency of large economic downturns. Building on an earlier framework by Acemoglu et al. (2012), we show that if all firms take roughly symmetric roles as input-suppliers to one another (in what we call a ‘balanced’ economy), not only GDP fluctuations are normally distributed, but also large economic downturns are extremely unlikely. In other words, absent any amplification mechanisms or aggregate shocks, microeconomic firm-level shocks cannot result in macroeconomic tail risks. More interestingly, this result holds regardless of how these firm-level microeconomic shocks are distributed.

Our subsequent analyses, however, establish that the irrelevance of microeconomic shocks for generating macroeconomic tail risks would no longer hold if the economy is ‘unbalanced’, in the sense that some firms play a much more important role as input-suppliers than others. More specifically, we argue that:

The propagation of microeconomic shocks through input-output linkages can significantly increase the likelihood of large economic downturns.

The implications of our theoretical results can be summarized as follows:

First, the frequency of large GDP contractions is highly sensitive to the nature of microeconomic shocks.

In particular, in an unbalanced economy, micro shocks with slightly thicker tails can lead to a significant increase in the likelihood of large economic downturns. This suggests that unbalanced input-output linkages can lead to the build-up of tail risks in the economy.

Second, depending on the distribution of microeconomic shocks, the economy may exhibit significant macroeconomic tail risks even though aggregate fluctuations away from the tails can be well-approximated by a normal distribution.

This outcome is consistent with the pattern of US post-war GDP fluctuations documented in Figure 1.

This observation underscores the importance of studying the determinants of large recessions, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.

Finally, there is a trade-off between the normality of micro-level shocks and imbalances in the input-output linkages.

An economy with unbalanced input-output linkages subject to normal microeconomic shocks exhibits deep recessions as frequently as a balanced economy subject to heavy-tailed shocks.

Solving the ‘small shocks, large cycles puzzle’

In this sense, our results provide a novel solution to what Bernanke et al. (1996) refer to as the ‘small shocks, large cycles puzzle’ by arguing that the interaction between the underlying input-output structure of the economy and the shape of the distribution of microeconomic shocks is of first-order importance in determining the nature of aggregate fluctuations.

Conclusion

Understanding the underlying causes of large economic downturns such as the Great Depression has been one of the central questions in macroeconomics. Our results suggest that the frequency and depth of such downturns may depend on the interaction between microeconomic firm-level shocks and the nature of input-output linkages across different firms. This is due to the fact that the propagation of shocks over input-output linkages can lead to the concentration of tail risks in the economy. This observation highlights the importance of separately studying the determinants of large economic downturns, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.

References

Acemoglu, D, V M Carvalho, A Ozdaglar, and Al Tahbaz-Salehi (2012), “The network origins of aggregate fluctuations”, Econometrica, 80, 1977–2016.

Acemoglu, D, A Ozdaglar, and A Tahbaz-Salehi (2014), “Microeconomic origins of macroeconomic tail risks”, NBER Working Paper No. 20865.

Bernanke, B, M Gertler, and S Gilchrist (1996), “The financial accelerator and the flight to quality”, The Review of Economics and Statistics, 78, 1–15.

Fagiolo, G, M Napoletano, and A Roventini (2008), “Are output growth-rate distributions fat-tailed? Some evidence from OECD countries”, Journal of Applied Econometrics, 23, 639–669.

anne

Understanding large economic downturns is one of macroeconomics’ central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behavior for moderate deviations....

-- Acemogl, Oxdaglar, and Tahbaz-salehi

[ While I may well not understand this, from what I think I understand I have no idea how this would account for the Depression or the past recession. Precisely how did small firm-level shocks create the Depression or the past recession? What shocks to what firms, when and where was there any regulatory response? ]

djb said in reply to anne...

At least when Keynes described a business cycle he aimed to intuitively understand what the causes were

Here i cant find it

are they saying that societies controlled by monopolies are subject more frequent and severe cycles?

New Deal democrat said...

"are they saying that societies controlled by monopolies are subject more frequen and severe cycles?"

Yes, basically that's it. Human decision-makers are fallible. In an oligopoly or monopoly, all it takes is one bad decision by one CEO to send a shock wave through the entire sector. Contrast with 100 CEO's of smaller companies in the same sector. Any one or several poor decisions are unlikely to cause a big disruption.

Or, put another way, the study demonstrates that "the bigger they are, the harder they fall."

[Jun 24, 2013] Time to ditch GDP by Martin Hutchinson

Jun 11, 2013 | Asia Times

Much commentary this year has been devoted to the dramatically negative effect the "sequester" spending cuts would have on US gross domestic product. In Japan, one leg of Prime Minister Shinzo Abe's three-part plan to revive the economy is additional state spending, predicted to increase gross domestic product (GDP) in spite of its damaging effects on Japan's huge debt and budget deficit.

Yet in both cases, the economic effects predicted are statistical artifacts, not real changes. GDP, which includes government spending at cost, unlike its treatment of all other economic activity, is a deeply flawed statistic, rigged up by Keynesians to make Big Government look better.

Several economic statistics have similar flaws. Consumer Price Indexes, for example, no longer include house prices or any realistic proxy therefore, allowing inflation watchers to miss price bubbles like that of 2002-06 in the US, which if statistics had been collected properly would have led to far higher interest rates and a resultant deflation of the housing bubble. Similarly, the 1996 "hedonic pricing" adjustment, which over-compensates for quality improvements in the tech sector by pretending that each Moore's Law doubling in chip capacity produces an actual doubling in value, has suppressed reported CPI inflation since it was introduced.

While the elimination of asset prices from the CPI and the suppression of tech sector inflation had substantial academic support when they were introduced - in economics, you can always find academics to support anything - their true driver was political. Politicians like lower interest rates, which asset-bubble-driven CPI increases would prevent, and want the appearance of good economic stewardship produced by lower reported CPI figures.

It also doesn't hurt that lower reported CPI figures greatly reduce the actuarial future cost of social security and other benefits politicians have promised the electorate. Voters will never notice a little chiseling on the CPI figures by which their benefits are adjusted, whereas they will certainly notice the tax increases that would be necessary to fund them properly.

The current proposal to adjust benefits by "chained CPI" figures, which reflect a re-balancing of consumption on price movements that bears no relation to consumers' actual behavior, is another step in this direction that will remove another tiny slice each year from social security recipients' welfare. Truly, the proponents of these CPI changes should go into the salami business.

As with the CPI, the designers of the GDP statistic (and its Gross National Product brother, which bases output on ownership, rather than physical location) had their own political agenda. Simon Kuznets, who unveiled the GNP statistic to the US Senate in 1934 (and published it in the National Bureau of Economic Research Bulletin of June 7, 1934) was a lifelong Keynesian who was trying to put an economically sound foundation under the New Deal's intellectually incoherent policies. Since he regarded government activity as a positive good that should be expanded in downturns, he included the cost of government directly in GNP/GDP at full cost -- thus automatically producing an increase in output when the size of government increases.

Kuznets should not be blamed inordinately. To get GDP, he went through "national income paid out" and then adjusted for business profits. That's not the way we'd calculate the statistic today, and it makes the inclusion of government at cost more understandable - he simply assumed government made neither a profit nor a loss.

In reality, on his methodology, government makes a huge loss, because the market value of its outputs is greatly exceeded by the cost of its inputs. You can see the effect of this in the US Postal Service, which some want to privatize, as with a US$4 billion privatization of the Belgian postal service, planned for this month.

However if you look at the Post Office's financials, privatization is obviously impossible, because the entity has negative value, with a net worth of minus $35 billion and an operating loss of $16 billion in 2012. By GDP accounting, if the USPS is included in government its output is deemed to be its $81 billion of expenses, while considered as a private sector entity its output is only $65 billion.

From a national accounting perspective, the US Postal Service is one of the easiest bits of government to assess: its output is sold at market prices, just like a private corporation, albeit a horrendously unprofitable one. Other parts of government are much more difficult. The State Department and Department of Defense have no measurable outputs at all and, in the case of defense, vast inputs, yet few would argue that the government could function without them, at least in some form.

Conversely, the Environmental Protection Agency, issuing regulations covering effectively the whole of US economic activity, imposes a vast hidden cost through regulation that is nowhere accounted for in GDP. That's the pernicious effect of regulation: if the US improved automobile fuel efficiency through a higher gasoline tax, the costs would be out there for all to see, whereas by imposing the Corporate Average Fuel Economy Standards the EPA is able to impose far higher costs on the economy that are completely invisible directly.

Some of those costs are visible indirectly, in the higher costs and lower profits of US automobile manufacturers; others, such as the additional lives lost of inadequately protected passengers in high-gas-mileage cars involved in automobile accidents, are completely invisible. (Lives would also be lost if a higher gas tax caused manufacturers to make the automobile fleet flimsier, but in that case consumers would have the option of buying a steel-reinforced gas guzzler and paying the extra fuel cost, whereas under CAFE regulation they don't.)

There are thus two approaches to reforming GDP. One would be to take each division of government and attempt to assess the value of its output, which is negative in the case of the EPA, parts of the Commerce and Agriculture Departments (protectionism) and possibly the Education Department (dumbing down schools).

That sounds like a fun intellectual exercise, but it would involve endless political judgments about which the two sides could not possibly agree. In the extraordinary US political system, that could perhaps be managed - you could have two different party groups in the Congressional Budget Office, producing Republican and Democrat GDP estimates. The Republican estimate would take a free market approach, assigning a negative value to large parts of government. Conversely the Democrat estimate could go further than current GDP accounting, and include all kinds of hedonic adjustments, as in Joseph Stiglitz's "well-being" proposal, supported by France's ex-president Nicolas Sarkozy in 2009. However every time control of congress changed, the "official" estimates of GDP would be revolutionized, altering the entire economic history of the preceding decade - and causing the utmost confusion in the markets.

A better alternative therefore would be to ignore government altogether, and calculate a Gross Private Product, the national output of the private sector, from which almost all government costs must in any case be borne. To a first order of accuracy, this can be done already from the Bureau of Economic Analysis' published data - you simply subtract line 21 (government consumption expenditures and gross investment) from GDP (line 1) and the result is a decent ballpark estimate of GPP.

Using GPP, US economic history takes a different shape, most notably around World War II. Economic growth becomes more sluggish in 1933-38 than the conventional record shows, (still with a downturn in 1937-38) then in 1939-40 (after the November 1938 mid-term congressional elections had swung heavily to a bipartisan conservative consensus and stopped the New Deal in its tracks) there was a rapid recovery that brought back the output levels of 1929. Later, instead of soaring in World War II as did GDP, GPP was squeezed during the war, before enjoying an astonishing recovery in 1946 that doubled real GPP and finally pushed prosperity beyond 1920s levels.

Paul Krugman proposed in 2011 that the US would benefit from an alien invasion, since the military expenditure on death rays and so forth to fight the aliens would stimulate the economy. Indeed, later he even proposed that the government stage a fake alien invasion to achieve the same effect. His proposal demonstrates nicely the fallacy of GDP accounting.

Under GPP, the additional government waste on death rays would be ignored, while GPP would decline as the private sector was squeezed to provide the resources for the extra military spending. Krugman's proposal also illustrates nicely the intellectual (and incipient financial) bankruptcy of Keynesianism; it's obvious nonsense if you do the accounting properly.

GPP accounting also illustrates the true effect of government cutbacks in the last six months. First quarter GPP, boosted by the sequester and defense cuts, both of which allowed more room for the private sector to thrive, grew at 4.1% compared with the anemic 2.4% growth in GDP. It's not surprising the stock market has taken off.

When leftists whine that cutbacks will destroy growth or cheer that stimulus spending will increase it, they can be confident of their forecast - because the GDP statistic is constructed to make it true. The spending stimulus of 2009-10, which peaked in the fourth quarter of 2009, delayed the recovery of GPP by six months, into 2010.

Moving from GDP to GPP would kill off many damaging economic policies, as well as giving us a much better picture of where the economy is really going. It's a slam-dunk.

(Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country. Gross National Product (GNP) is a measure of a country's economic performance, or what its citizens produced (ie, goods and services) and whether they produced these items within its borders.)

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

(Republished with permission from PrudentBear.com. Copyright 2005-13 David W Tice & Associates.)

[Apr 9, 2012] High Noon The Greenback Goes For Its Gun in the Fight Of Its Life

April 9, 2012 | The Kremlin Stooge

kirill

Nice article. I would repeat a point I made in a previous thread that the GDP of the USA is a fiction. Using the methodology to define the CPI pre-1990, the current and for most of the last 20 years CPI in the US is understated by a factor of two. This is a big deal since it means that the GDP growth in the range of 3% was more like zero and periods of no-growth were actual contractions. The CPI is only one component of the GDP deflator but there is indication that producer price increases have been quite high too.

The mass migration of US factory jobs to China and all the “right-sizing” and “down-sizing” was not for free and it looks like the US GDP has been stagnating for the last 20 years. I originally bought into the line that there were productivity gains, but there were also major wage reductions (all those lost manufacturing jobs were replaced with low pay service sector jobs.) All the talk about the new electronic economy was a crock too since those jobs went to China and India as well. The only source of growth that I can see is population increase in the US which is significant at around 2%.

So I would say the US GDP is closer to 10 trillion and not the 15 trillion that is being trumpeted in the media. China is a bigger economy now than the USA, except in per capita terms. The estimate of 2050 for the BRICS to overtake the west is based on overly rosy figures for the western GDP. There are too many inflation measurement shenanigans to take these figures at face value. So my thinking is that Uncle Sam and his minions will be able to do nothing to stop the US dollar from losing its world reserve status. The BRICS are not Iraq or Iran. Even Iran is an impossible nut for the west to crack since there is no way there is going to be an Iraq style invasion due to the much larger size and military capability of Iran compared to Iraq. Bunker busters will not do much either. Trying to bomb Iran back into the stone age will fail as well since Iran has surface to air missile systems that will actually bring down US jets and not some junk from the sixties.

[May 15, 2010] The End of GDP

May 15, 2010 | The Big Picture

There is a longish article on the value (and misuse) of the GDP stats in the Sunday NYT magazine. The author lays out the case that the US will, over the next few years, supplement or perhaps even replace GDP as the ultimate measure of economic growth.

In its place? Several 100 metrics that measure all manner of other factors, both quantitative and qualitative.

This is intriguing, for numerous reasons. First, of all the official economic data points the government releases, GDP is the easiest to game — you simply under-report inflation, and GDP appears to be better than it is. And ever since the Boskin Commission’s misbehavior (I call it a cowardly theft from the elderly), we have been dramatically under-reporting inflation data. Hence, we have nearly two decades of bogus GDP data in the can.

Second, and perhaps more significantly, GDP simply measures how much stuff we produce, buy and sell, and the folks we hire to make that stuff. It ignores all manner of other elements that go into that process.

I am not suggesting that GDP is a valueless measure (at least, if it were somewhat more accurate). But it is woefully incomplete. And the impact of making policy towards GDP has had very specific, corporate benefits. If we were to incorporate other more human factors, the net result could be quite substantial.

I wonder if we might see some sort of a pushback on this, especially from the Randians and Chicago-ites.

Regardless, it is a worthwhile topic to think about, if you are at all interested in how the government deploys its substantial resources into the economy.

Here is an excerpt:

“Whatever you may think progress looks like — a rebounding stock market, a new house, a good raise — the governments of the world have long held the view that only one statistic, the measure of gross domestic product, can really show whether things seem to be getting better or getting worse. G.D.P. is an index of a country’s entire economic output — a tally of, among many other things, manufacturers’ shipments, farmers’ harvests, retail sales and construction spending. It’s a figure that compresses the immensity of a national economy into a single data point of surpassing density. The conventional feeling about G.D.P. is that the more it grows, the better a country and its citizens are doing. In the U.S., economic activity plummeted at the start of 2009 and only started moving up during the second half of the year. Apparently things are moving in that direction still. In the first quarter of this year, the economy again expanded, this time by an annual rate of about 3.2 percent.

All the same, it has been a difficult few years for G.D.P. For decades, academics and gadflies have been critical of the measure, suggesting that it is an inaccurate and misleading gauge of prosperity . . . In the U.S., one challenge to the G.D.P. is coming not from a single new index, or even a dozen new measures, but from several hundred new measures — accessible free online for anyone to see, all updated regularly. Such a system of national measurements, known as State of the USA, will go live online this summer. Its arrival comes at an opportune moment, but it has been a long time in the works. In 2003, a government official named Chris Hoenig was working at the U.S. Government Accountability Office, the investigative arm of Congress, and running a group that was researching ways to evaluate national progress. Since 2007, when the project became independent and took the name State of the USA, Hoenig has been guided by the advice of the National Academy of Sciences, an all-star board from the academic and business worlds and a number of former leaders of federal statistical agencies. Some of the country’s elite philanthropies — including the Hewlett, MacArthur and Rockefeller foundations — have provided grants to help get the project started. “

That’s your weekend homework assignment . . .

Selected Comments

tamesthyena:

The US moved from GNP to GDP when those pesky Exports-Import accounts started going negative in the early Eighties. The US authorities then encouraged the IMF to rebase their Purchasing Power Parity adjustments at the core of making real international economic comparisons when the Nominal GDP numbers using regular Dollars started to make the Chinese economy look too large for comfort two or three years ago.

Now they are focusing on what, Happy National Production as the measure for economic performance? These adjustments are to clear thinking macroeconomics and policy making what Pro Forma earnings are to Accurate Accounting and investing; they initially intentionally delude the public, and end up softening the blow of relative economic decline

riverra:

Progressive and environmental economists have long recognized that GDP is a grossly inaccurate measure of how well we are doing economically. Principal reasons are that it counts a lot of “bads” as well as “goods”- anything that generates cash flow (e.g. money spent on cigarettes) and externalizes (does not count) a range of negative externalities that arise from economic activity (e.g. pollution produced when we import goods on container ships).

One of the original alternative measures to gain traction was the Index of Sustainable Economic Welfare (ISEW), which is similar to the later Genuine Progress Indicator (GPI).

Here is a link to info about the latter, including its theoretical foundation:
http://en.wikipedia.org/wiki/Genuine_Progress_Indicator

VennData:

Let’s get Michael Boskin on it. He did such a great job on CPI…

http://www.ssa.gov/history/reports/boskinrpt.html

…and then blame Clinton for it…

http://www.shadowstats.com/article/consumer_price_index
http://seekingalpha.com/article/7061-beware-of-core-rate-hypnosis-pre-clinton-cpi-shows-7-inflation-etf-gld
http://www.thefinancialhelpcenter.com/Economy/Inflation-the-Big-Lie.html

etc… etc…

The Curmudgeon:

The problem with measuring GDP cuts to the heart of what an economic system is for. Presumably, economic systems exist to maximize the welfare of their participants in some way. Whenever GDP is mentioned intelligent analysis should necessarily include what the GDP level means for per capita income and then how that income is distributed. Otherwise, you just get an abstract, meaningless number.

When China takes the top GDP spot in the world in the next few years as it surely will, its people will still, on average, be far less well-off than the US, Japan, and most every other developed economy on the basis of both per capita income and the distribution of that income among its people.

alfred e:

Ouch! I still sting from how Clinton and Boskin raped America for the federal government’s benefit. CPI my ass.

Once I have that recalled I am off-base and beyond logic.

It just all becomes more unbelievable every day. And we get to eat it.

mgkurilla:

It’s even worse than merely comnig to grips with a realistic and honest GDP figure. Currently GDP makes no effort to evaluate the sustainability of the growth. All the low interest rate credit inducing growth earlier in the decade was worse than unsustainable, it was metastatically toxic to everything else.

In addition, we don’t distinguish between GDP contributors that are functionally merely extractive based generators of GDP (like GS) versus the truly growth promoting activities. If you pay to tear down an eyesore in a city, you contribute to GDP. But there’s a difference if you stop there versus doing something economically useful with that location.

Health care is another component that can go either way. Spending 25% of our health care dollars on the last 6 months of life is not going to produce returns down the road. This is why there is usually a disconnect between main street and wall street.

ezrasfund:

GDP is a very crude measure, indeed. Yesterday’s computer, slow and expensive, added more to GDP than today’s much faster and cheaper device. The NYTimes I read today online, updated every few minutes, adds less to GDP than the paper that was printed, distributed and sold. That unnecessary surgical procedure adds more to GDP than a wellness program. That auto accident resulting in a totaled car adds more to GDP than a safe trip.

Our pursuit of GDP has gotten us a lot of things we don’t need, including plenty of financial services, lots of expensive medical procedures, and some houses in AZ.

Moss:

Well stated ezrasfund.

The existing GDP measure always puts emphasis on more quantity with no real measure of feedback loops either positive or negative. Energy efficiency, clean air or water, safety, health…. Eating less will reduce GDP but probably go along way to having a healthy population and a much less expensive health care system.

Joseph Martinez:

Since the hegemony forces are behind the ‘State of the USA’ that is the overpaid all-star board from the academic and business world and some of the country’s elite philanthropies just how accurate can it be?

As part of the middle class I have seen the middle class real income increase 0% in the past ten year and have watched that the income of the people that are behind the ‘State of the USA’ increase 100% to 1000%.

I can’t take any prudence in the report. I know that the USA status in the world is in question but to have another report out moving numbers around again is not what we need.

evans:

Best argument against GDP per capita as a measure of comparative well-being is the position of Ireland in OECD or World Bank tables.

One only has to spend a few days traveling around there to realize that its “wealth” is illusory (as we are now discovering).

Even back in 2007 when it was flying, it was a “poor” country: crappy houses; crummy public infrastructure; and–not that it counts in these figures– a provincial and derivative culture.

The fact that it scores higher than Canada, Denmark, or Germany says it all.

1 Luxembourg 78,559
— Macau 59,451
2 Norway 58,141
3 Singapore 49,288
4 United States 46,716
5 Ireland 44,195
— Hong Kong 43,922
6 Switzerland 42,534
7 Netherlands 40,850
8 Austria 38,153
9 Sweden 37,383
10 Iceland 36,770
11 Denmark 36,604
12 Canada 36,444
13 Australia 35,677
14 Germany 35,613
15 United Kingdom 35,445
16 Finland 35,426
17 Belgium 34,493
18 Japan 34,099
19 France 34,045

World Bank GDP p.c. (PPP) 2008

Actually, GDP overstates national well-being. From the point of view of anyone who works for a living, the GDP is nearly irrelevant. Since the start of the 80s, an hour of work has meant less and less in terms of per-capita share of the GDP. That is, the GDP has grown, and it has grown faster than the population, but working an hour gets you less and less of it. If you look at the current recession, which has supposedly ended because the GDP is rising again, then you can see the disconnect is complete. GDP can rise all it wants, but your hour of work will get you no more, and that’s assuming you can get an hour of paid work.

MikeinNOLA:

“Ezrafund has it right…moreover, the existence of a GDP stat gives positive feedback to the Keynsian babboons who think that juicing the number with QE or stimulus number is the equivalent of a recovery….They don’t seem to get the difference between cause and effect: a good economy will produce a good GDP, but having a good GDP doesn’t mean you have a good economy.”

Ezrafund does indeed have it right. Same point I was trying to make, but in a less verbose and more direct fashion.

I think MikeinNOLA misinterprets the potential of Keynesian stimulus though.

To be sure, shoveling borrowed money into the economy without proper analysis of true costs and benefits can easily exacerbate problems with mindless GDP growth that alternative measures of economic well-being are designed to account for. But if stimulus money is spent on sustainability-oriented infrastructure such as mass transit, greater energy efficiency, etc. per capita economic well-being may very well increase over the longer term.

In other words, whether or not Keynesian stimulus spending makes sense depends to a great degree on what the money is being spent on or invested in. Analytical tools such as ISEW and GPI are intended to facilitate better decision making about precisely these kinds of issues.

markwax:

“Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. . . .

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.

And it can tell us everything about America except why we are proud that we are Americans.” Robert F. Kennedy, 1968.

Mike in Nola:

riverrat: You from NOLA, too?

Although, I can’t claim an extensive knowledge of Keynes theory, it seems mostly to prescribe deficit spending during recessions. I don’t count what you describe as really Keynsian; it’s just common sense spending that might do some good along the way and probably should have been started even when we didn’t have huge deficits. As long as we are having to pay extended unemployment, we should have a new WPA, not just thowing money at states to support the same old bureaucracies that employ many administrators who don’t really produce anything.

[Mar 01, 2010] Inventories Don't Kill Growth — People Kill Growth by Robert P. Murphy

Mises Institute

Mises Daily: Monday, March 01, 2010 by Robert P. Murphy

The most destructive ideas in academia are those that are technically defensible but nonetheless encourage erroneous intuitions. In economic science, a prime example of such a destructive idea is GDP accounting. As the recent punditry on the "inventory blip" of the fourth-quarter growth figures perfectly illustrates, the mainstream macro framework leads us into absolute absurdity.

The GDP Hall of Shame

In previous articles, I have pointed out that the familiar GDP accounting tautology, Y = C + I + G + X, is technically correct, but leads many economists to abuse the equation and in the process make horrible policy recommendations.

For example, it is this typical macro framework that leads our financial press to assume that saving is bad because consumer spending "is responsible for" so much of the economy. The national-income tautology also recently led Paul Krugman — who won the Nobel for his work on international trade theory — to (apparently) commit a basic mercantilist fallacy in a quick blog post.

GDP and Inventory Adjustments

Before we dive into the latest confusion, let's review the theoretical relevance of changes in inventories when it comes to calculating GDP. First of all, remember that Gross Domestic Product tries to measure the total amount of finished goods and services produced during a particular period (typically three months or a year).

In practice, the Bureau of Economic Analysis (BEA) estimates how much consumers, businesses, government, and foreigners spent on finished goods and services (made in the country) during the period in question. Let's say it was $10 trillion. Then, the BEA looks at the change in the value of inventories during the period. So if inventories started out at $500 billion and ended up at $400 billion, then inventories fell $100 billion.

Now the last step is to adjust the "final demand" figure by the change in inventories. In our case, the $10 trillion in total purchases must be adjusted to only $9.9 trillion in new production during the period, because $100 billion of those purchases were fulfilled by drawing down inventories.

So yes, those goods were produced within the country and contributed to GDP, but they did so in a previous period and were already counted in an earlier GDP figure. It would be double counting the same production if we included $100 billion of output

  1. when a business "invested" by buying the newly produced output and throwing it in the warehouse and then again
  2. when the retailers moved the goods from the warehouse and into consumers' houses.

So far, so good. Setting aside the severe conceptual and data problems for GDP estimation, it is an obvious refinement to look at changes in inventories to better isolate how much "stuff" was actually produced in a certain period, as opposed to how much stuff was purchased.

The Economists Make a Mess of Things

Even though technically the inventory adjustment makes sense, in practice economists botch things horribly. (We do this a lot.) Recently, when the GDP estimates for the fourth quarter of 2009 came out, many cynics dismissed the 5.7 percent "headline figure" as being mostly an "inventory blip" or an "inventory bounce." Although he was not alone, AEI economist Kevin Hassett was the most forceful I saw on the topic, so it's worth quoting from his Bloomberg article:

When is quarterly gross domestic product growth of almost 6 percent bad news? When it looks like what was reported last week.

US GDP increased 5.7 percent at the end of last year, with more than half of that growth — 3.4 percent — attributable to changes in inventories. This astonishing impact of inventory has ample historical precedent, and the bottom line has terrible implications for 2010.

Inventories are a remarkable corner of the economy. They are the goods and materials that companies keep on hand to make sure that their operations run smoothly. They are the boxes of food on shelves at the grocery store and the bins of metal parts sitting next to the assembly line in a manufacturing plant.…

Inventories are even more important during recessions. In [a] paper, co-authored with Louis Maccini in 1991, [Alan] Blinder found that 87 percent of the decline in GDP from the peak to the trough of the recession was attributable to inventories.…

Since 1970, there have been nine quarters, like the last one, when GDP grew by at least 3 percent and inventories accounted for at least half of that growth. The history of those quarters is hardly a favorable sign of what is in store. (emphasis added)

First, let us note the familiar problem with relying on conventional GDP calculations. Hassett talks as if inventories themselves have some power to steer the economy, as opposed to the human choices underlying changes in inventories. It's a bit like saying 87 percent of fevers can be attributed to thermometers.

But when it comes to the discussion of last quarter's GDP figures, the focus on inventory changes is particularly perverse. I bet those readers who don't already know the answer would have been quite confident after reading Hassett's article that inventories rose in the fourth quarter.

After all, it would make sense for someone to say, "Sure, production was up 5.7 percent in the 4th quarter of 2009 compared to its level in the 3rd quarter. But that spike in output is unsustainable, because 3.4 percentage points of the growth went right into warehouses. It's not as if the final consumers picked up their spending by the full 5.7 percent."

As I say, the above reasoning would be problematic because it presumes that spending green pieces of paper is the ultimate source of prosperity, but besides that, it would make a certain sort of sense.

Yet that's not what happened in the fourth quarter of 2009. No, inventories fell, as the BEA's press release makes clear:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 5.7 percent in the fourth quarter of 2009.…

The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed investment that were partly offset by decelerations in federal government spending and in PCE.…

The change in real private inventories added 3.39 percentage points to the fourth-quarter change in real GDP after adding 0.69 percentage point to the third-quarter change. Private businesses decreased inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter and $160.2 billion in the second. (emphasis added)

The BEA's press release is a testament to the Orwellian nature of GDP accounting. An innocent person would have every reason to assume that phrases such as "positive contributions from private inventory investment" and "an acceleration in private inventory investment" meant that inventories rose in the fourth quarter. But, as the press release says, inventories actually fell by $33.5 billion.

What's really strange is that the change in inventories was fairly small. So the real "contribution" was not even the change in inventories, but the change in the change. In other words, we have moved the analysis one more step into absurdity by explaining the creation of real goods and services by referring to the second derivative of something (inventories) that does not have the power to create goods and services.

A Numerical Illustration of the Absurdity

I have tried to spell out my frustration with the typical handling of GDP inventory accounting to my colleagues, and yet the sharpest of them were nonplussed to say the least. But I hope that the following numerical example will show quite convincingly just how crazy the techniques that I've described above are.

Suppose we have an economy with the following characteristics:

Year

Starting Inventories Ending Inventories Final Purchases

GDP

GDP Growth
2010 $1 trillion $1 trillion $2 trillion $2 trillion N/A
2011 $1 trillion $0 $2 trillion $1 trillion −50%
2012 $0 $0 $2 trillion $2 trillion +100%

Of course, the numbers above are completely unrealistic, but they can illustrate the knots we tie ourselves in when worrying about inventories.

First, let's make sure we understand the cells in the table. In 2010, inventories didn't change, and so the only way people could consume $2 trillion in purchases of finished goods and services is if that output were actually produced during 2010. Hence GDP is also $2 trillion.

Things are different in 2011. People still bought $2 trillion worth of total stuff. However, only half of that was newly produced in 2011, because the other $1 trillion was taken from the inventory stockpile. That's why GDP fell in half, down to $1 trillion.

In 2012, people once again spent a total of $2 trillion on finished goods and services. Since inventories didn't change during the year, obviously these purchases were consummated through entirely new production during the period. Hence, GDP rose back up to $2 trillion for the year, a 100-percent increase over the previous year's level of output.

Now in this context, look at what someone like Hassett would be forced to say after the 2012 number came out: "Sure, the BEA and the press are running around celebrating the ostensible doubling of real output in 2012. But if you dig into the numbers, you see that fully 100 percent of the growth is attributed to the $1 trillion acceleration in private inventory investment. If we net out the contribution of inventories to GDP growth in 2012, we see that growth was zero. We should be prepared for a double dip in 2013, after this one-time blip of statistical GDP growth."

I hope the reader sees just how nonsensical this type of analysis would be for the table above. In what possible sense did inventories "contribute" to GDP in the year 2012? Inventories didn't even exist at any point in 2012. They were $0 at the beginning of the year, and $0 at the end of the year.

What happened is that people spent $2 trillion buying stuff, and workers took raw materials and other inputs and transformed them into $2 trillion of real output. This was twice as much as the same workers physically produced in 2011. So how in the world does an "inventory adjustment" — from $0 to $0 — cancel out that doubling of physical production?

Furthermore, is it really true that we need to worry about real GDP falling off a cliff after such a huge "inventory bounce"? After all, final demand has been steady at $2 trillion for three years straight. And even if entrepreneurs got spooked again and wanted to draw down inventories to satisfy their demand in 2013, they can't — there are no inventories to draw down.

It's true that someone like Hassett could point out that the growth of GDP was bound to collapse, but so what? There would have presumably been huge unemployment in the year 2011, as half of the economy's productive resources sat idle. Yet in 2012, all those resources would be back in normal operations. Those workers, tractors, drill presses, etc., wouldn't have any reason to see their usage dwindle in 2013, despite the massive "inventory contribution" to GDP growth in 2012.

In fact, to the extent that businesses want to rebuild their inventories in 2013 to give themselves a buffer greater than $0, workers will need to put in extra shifts. Under any reasonable standard, the situation of inventories in 2012 would lead us to expect GDP and employment growth in 2013. It's true, there would be a drop in the growth rate of GDP, but workers care more about their hours than they do about second derivatives of arbitrary magnitudes.

Conclusion

The textbook GDP equation is not false; it is a tautology and so of course it is true. Nonetheless, it is a destructive framework for thinking about macroeconomic events. Abuse of the equation leads economists and pundits to blame savings and praise reckless consumption, to hate imports and love exports, and (in principle) to attribute a doubling in the flow of goods coming out of factories to a nonchange in the level of a nonexistent stock of inventory.

Hassett and others are right to doubt the strength of our alleged "recovery." I think that the economy is currently held together by bubble gum and Ben Bernanke's charm. But to explain our economy's fragility, I would analyze the government and the Fed's policies. A slowdown in the fall of inventories per se is not a warning sign at all. If anything, it is a signal that businesses are becoming more optimistic.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives.

Comment on the blog.

[Dec 28, 2009] How not to solve a financial crisis by Edward Harrison

Dec 28, 2009 | nakedcapitalism.com

kevinearick

This caused a bit of an uproar over at the NYT:

GDP, Deficits, Law, & Outcomes

Deficits measure maladaptive behavior, the failure to effectively save, and invest in future viability, to maximize NPV and induce growth. Capital is in trouble because it failed to invest in the future, and the current policy of infinite monetary policy (see Freddie and Fannie) is to accelerate the short, now that the future, demographic deceleration, is here.

There is no way to measure I because capital borrowed from the future to create “earnings” as the basis for borrowing again, compounding the error, to magnify C, supplying artificial demand abroad to create global dependency, increasing self-interested G to process the transactions.

I, C, & G are all artificial, because GDP never measured economic profit; it measures economic activity, maximizing borrowing from the future to pay increasingly irrational, maladaptive costs, to bail out capital – eliminating the path to the future.

Healthcare is classic, 20% of the economy to subsidize maladaptive behavior, created by the ponzi capital pyramid between producers and consumers in the food chain, a problem that would quickly solve itself if the structural subsidy to capital were removed.

Monetary policy is being employed to create artificial scarcity, social demand, to re-enforce non-performing capital and the government serving it.

The constitution was designed to protect the majority from these self-liquidating circumstances. Shorting the constitution with family law terminated savings and investment, doubling down on debt and consumption, in a too-big-to-fail strategy, that always fails. Capital had a going-away party.

The US Supreme court, on the vote of a handful, removed the evolutionary lead of natural new family formation, discharging the middle class battery to ground, capital.

Capital breeds on the laws of property. Labor breeds on the laws of physics. They had an agreement to grow a semi-neutral middle class. Capital broke that agreement under the false assumption that its global economy was the only “game” in town. Labor is protected by its relationship with evolution, and always has access to ground, alternative capital.

The point in developing the Internet was to make the process transparent. The dismantling of the USSR was just a beta test.

The dinosaurs were a sunk cost. Everyone clutching non-performing assets may want to make a new years resolution, or continue partying. Titration is nearly complete, non-performing capital is turning to salt, and social evolution is about to accelerate again.

Now, we watch as the municipalities are pushed over the cliff, as the momentum of global implosion hits American shores, but at least the feds got a big pay raise for putting the states and municipalities at the edge of the cliff first, to buttress themselves.

[Nov 17, 2009] Feldstein- House Prices to Fall Further

patientrenter:

“Thrift in the long run is a very good thing, but increasing thrift as you come out of a recession is going to be a drag." "

Most economists focus on increasing our GDP. They understand its limitations, but after 20 or 30 years of measuring how good an economic policy is by how much it increases GDP, they tend to forget the limitations in their daily work. So when a recession comes along, the reaction is reflexive - the recession decreases measured GDP, and that is bad, so do whatever is necessary to reverse that, setting aside longer-term considerations.

Martin Feldstein is very smart, but he has been completely captured by the always-increase-GDP-at-all-costs faith common amongst professional economists. This is not healthy. It's like identifying hunger as a problem that must be eliminated at all costs. For truly starving people, the resulting actions are great and good. For middle class Americans going from lunch to dinner, it's unhealthy to keep feeding them snacks so that they feel no pangs of hunger.

The recent financial scare and economic recession was a signal that we were doing some things wrong. What we need now is a recognition of what we were doing wrong, and public decisions on the changes. That might result in a decrease in measured GDP, but it would lay a solid foundation for a more productive economy for us all going forward. Instead we have people like Martin Feldstein calling for actions that return us to the old ways, because measured GDP was higher then. Nuts!

[Nov 15, 2009] Who’s Afraid Of A Falling Dollar

"GDP and inflation are as baked as Ken Lay’s books."

The Baseline Scenario

DavosSherman

Who should be how.

Also you might want to watch Chris’s videos on GDP. You own a home and they say, well you’d pay 5k a month in rent. Even though you don’t pay rent they DO add it to GDP.

GDP and inflation are as baked as Ken Lay’s books.

You can fly your plane or drive your car and believe that you have a full tank, when your car runs out of gas and the realization that the gauge was busted sinks in it might not be a pretty sight if it is raining and night and cold and you have a little one in the car.

Best of luck folks, this site has been removed from my RSS reader. Deleted like CNBC’s. Gosh, I can still hear Maria’s voice. Ughh,.

[Nov 15, 2009] Krugman on the Need for Jobs Policies

naked capitalism

Yves Smith:

American GDP figures are wildly distorted, this has never gotten the press it deserves. The US is the ONLY economy that uses hedonic adjustments to GDP. That means it increases GDP to allow for the fact that computers have become more productive over time (this is completely different than the hedonic adjustments for inflation, BTW).

A modern desktop computer is about as powerful as a mainframe as of late 1980s. So I kid you not, these adjustments started in 1987, and they count you desktop in GDP as the same value what the equivalent big iron computer would have cost in 1987. Mish managed to get the BEA to send him a spreadsheet in 2005, and it showed the cumulative impact was 22% of GDP. This is far and away the most dubious of the official statistical adjustments, and gets far and away the least commentary.

The Bundesbank has also complained a few years ago that if German calculated GDP the way the US did, it’s growth rate would be a half a percent higher. If you take the Bundesbank figure instead, and calculate GDP growth over 22 years, using 2.5% versus 3.0% growth, you get an 11% cumulative difference.

[Oct 30, 2009] Rosenberg On A Flat Normalized GDP Number

zero hedge

Yesterday, the market moved on what was the double whammy of the government's own rather fluid favorable interpretation of what was essentially the government's very own stimulus. Yet others can play, and unwind, the number fudging game too. According to David Rosenberg, absent the now declining impact of the massive governmental stimulus, GDP would have been flat if not negative. So much for bickering over whether GDP was 2.7% or 3.5%: at the end of the day, on a normalized, non-stimulus inflated basis, GDP was flat, and if the equity market cared about isolating non-recurring items such as excess government spending driving a collapsing economy, the stock market reaction would have been quite the opposite.

From Rosenberg:

Never before did a gap between a 3.2% consensus GDP forecast and an actual print of 3.5% manage to elicit so much excitement in the equity market. It just goes to show how speculative the stock market has become. The question is why it is that the economy couldn’t do even better?

Historically, the auto sector adds 0.1 percentage point or 0.2 percentage point to any given GDP report. In the third quarter, courtesy of cash-for-clunkers, the sector added 1.7 percentage points to the headline figure, which is less a than 1-in-10 event in terms of probabilities. Tack on the rebound in housing and government spending and the areas of GDP that received the most medication from public sector stimulus contributed almost all of the growth in the economy. You read this right. If not for all the government incursion into the economy in Q3, real GDP basically would have stagnated.

Because of the housing and auto subsidies, the personal savings rate plunged to 3.3% in Q3 from 4.9% in Q2 — in the past quarter-century, there have been only four other times that the savings rate went down so much in one quarter. If not for that plunge in savings, real GDP actually would have contracted fractionally last quarter. The entire GDP growth was funded by a rundown in the savings rate that occurs less than 5% of the time.

Moreover, what is normal in that first positive post-recession GDP release is a 5% annual rate of growth. That puts 3.5% in Q3 into a certain perspective, especially when you consider the massive amount of stimulus that underpinned the latest batch of data.

What is normal in this first positive post-recession GDP release is a 5% annual rate of growth, not 3.5%

The parts of the economy that did not receive government support didn’t fare too well in the third quarter. For example, total business spending (on structures, equipment and machinery) actually contracted at a 2.1% annual rate — the fifth decline in a row. State and local government spending also fell at a 1.1% annual rate. Since there was no cash-for-clothing program, spending on apparel slipped at a 1.5% annual rate. The economists had all been talking about an inventory cycle taking hold and yet there was an additional $130 billion of de-stocking in the third quarter.

a critical question that nobody seems to be asking: how are companies reacting to this presumed economic rebound? If CapEx, inventories and lending, corporations are the only ones who seem to be willing to think about the facts behind the hype:

The question has to be asked, if companies, both non-financial and financial, are big believers in this new post-recession V-shaped recovery that seems to have the hedge funds and most strategists excited, why are companies still cutting back in capital expenditures and inventories and why are banks still cutting back on lending at an unprecedented 15% annual rate.

David concludes with a point that he tried to highlight on Fast Money yesterday, if only he wasn't caught up in futile debates over trivial data points:

While it seems very flashy, 3.5% growth is far from a trend-setter. Let’s go back to Japan. Since 1990, it has enjoyed no fewer than 19 of these 3.5%-or-better GDP growth quarters. That is almost 25% of the time, by the way. And we know with hindsight that this was noise around the fundamental downtrend because the Japanese economy has experienced four recessions and the equity market is down more than 70% from the peak. What is important for the future is whether the U.S. economy can manage to sustain that 3.5% growth performance in the absence of ongoing massive government stimulus. In other words, it may be a little early to uncork the champagne.

From our lens, the big risk going into Q4 is a renewed contraction in real final sales. That is not priced into the various asset classes right now.

For more relevant economic observations, Rosie's morning piece is a captivating read.

Daedal

Indeed... until that can falls off a cliff. This 3.5% GDP growth is a debt-financed fiasco. The detriment is not only that this GDP growth is unnatural and likely temporary, but that future (natural) growth in GDP will be gutted by the Gov/Fed so that they can service the outstanding debt responsible for this current 'growth'.

chindit13

If we can believe this recently released Q3 GDP figures---and why would a rational person ever question an official government statistic---then Ben Bernanke is dead right:

HE SAVED THE WORLD.

Those pundits on the tube can talk all they want about China’s miracle growth or how industrious Asia will lead the world out of this economic mess, but according to the numbers---and numbers don’t lie---the US is the one leading the Chuck Prince “I’m Still Dancing” Two Step, and the rest of the world is just along for the ride.

How, you may ask...and ask you may. Given the relative sizes of the world’s economies, just this third quarter surge in the US brought to you by C4C, residential short sales, iPhones, Kindles, pawn shop and bankruptcy lawyer receipts represents more of an addition to World GDP than all the growth of all Asian economies combined, including the glorious Middle Kingdom and its 8.8888888%, M3 driven, comrade-can-you-spare-me-a-loan, Cha-shu balls-to-the-wall supergrowth. So much for the Pacific Century eh? Pikers, they are.

Who would have thought, oh ye of little faith and even less credit, with all that unemployment, all the boarded up storefronts, empty shopping malls, and Goldman Sachs partners purposely refraining from ostentatious displays of their spending ability, we could have kicked the butts of copper-hoarding Chinese pig farmers nine ways from Tiananmen Square.

Somehow, in spite of the constant stream of gloom and doom permeating from every sociopathic blogger this side of Sofia, the Great Machine of American Consumption ( the new GMAC) found a way to churn out 5.5 Goldman Sachs Bonus Pools (a new international unit of measurement on course to replace the metric system) worth of brand spanking new growth that wasn’t there before, or at least wasn’t there in Q2 (and may not be there when revision time comes).

Yes, those 306 million plucky Americans generated almost as much new growth in a quarter as five guys in AIG Financial Products Division lost in Q3 last year. THAT’s getting it done! Slackjawed I am, and I hereby apologize to my least favorite deli counter trio BLT (Ben, Larry and Timmy) for being a wag and calling this the Growthless Recovery. Instead I’m calling it as I see it: the Potemkin Recovery.

Anonymous

Used to be that the wealthy in this country were steel magnates, owners of mining concerns, hoteliers, railroad tycoons, industrialists.

It has become the 2/20 hedge fund managers that have taken their place. Running a warehouse full of quants with a dollop of industrial espionage to play buy/sell with paper and electronic IOUs.

All the while that is funded by pension funds, 401K, trust funds, little sums set aside which must be "invested" to stay ahead of the time deterioration thanks to the Fed's inability to preserve the storage value of the currency.

Those little nickle/dime returns helped to salve the fear that the ponzi investors really weren't that deeply into "risk". Until the bottom fell out, gov't reared its ineffective and complicit head, and the private central bank showed extreme partiality in dispensing economic injustice upon the peon classes.

The great wake up occurred. The push is for people to divest from the paper trade, to take greater steering power over their retirement portfolios, and to step back from risk taking (now seen as pure loss making).

The capital markets have lost all legitimacy. The money flows will continue to be out especially as we witness Fed machination on one hand, and gov't arbitrary stimulus on the other.

With the excess being squeezed from the system, peon withdrawals, and leverage multiples being pulled down, the finance sector (though on a dope high at present) faces a bleak future.

Do they think they can create another quick generation to con into the parlour games?

Game over. Lights out.

[Sep 23, 2009] It’s the debt, stupid

naked capitalism
Submitted by Edward Harrison of Credit Writedowns.

Let’s say I run a company. For the sake of argument, we’ll call it a shoe store in New York City. I am making $100,000 net per year now. But, I look around me and see huge opportunity for growth. So I go to my bank and ask for a loan to expand my business. I invest the money in expanding the store, and over the next five years I increase my earnings to $140,000. Not bad!

Is this a well-run business?

GDP is not enough

Well, if your first instinct is to say, “you didn’t give me enough information,” I would have to agree. But, this is the way GDP statistics are used to measure the success of an economy.

Clearly then, GDP is an inadequate measure for understanding how healthy an economy is. Nobel Prize-winning economist Joseph Stiglitz brought this issue into the public domain last week when he spoke in Paris, calling the focus on GDP a ‘fetish’ and favoring a broader measure of economic health.

Stiglitz was responding to reporters after a study on alternative measures of economic growth commissioned by French president Nicholas Sarkozy was released. At the time, Bloomberg reported Stiglitz saying:

GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one…

So many things that are important to individuals are not included in GDP. There needs to be an array of numbers but we need to understand the role of each number. We may not be able to aggregate everything together.

Stiglitz is talking about the social costs of growth here. Think about pollution, infant mortality rate, healthcare, life expectancy, or rates of obesity to name a few. And his views are echoed in an article which prompted this tirade from me called “Emphasis on Growth Is Called Misguided“ by Peter Goodman in today’s New York Times. Read it.

However, in this post, I want to focus on one narrow issue: debt.

The income statement vs. the balance sheet

In the shoe store example I gave, I borrowed money to fund growth. In assessing how successful my growth strategy is, the obvious question is: how much did I borrow? It’s the debt, stupid.

What if I borrowed $1,000,000 at 7% interest? $40,000 is a return of 4% on that money, less than the cost of debt. In that case, the growth strategy is a loser.

We need to see the balance sheet as well as the income statement to know what is happening. GDP gives us no insight into the balance sheet of an economy, and is therefore incomplete as a measure of economic health. (I’ll leave the cash flow statement for another day!)

There is 4% growth sustained only through a rise in debt, growth that would have been 2% without an increase in relative indebtedness. And there is 4% growth fuelled by a positive return on that debt.

I am sure you have seen the graphs I published last October at the height of the panic in my post “Charts of the day: US macro disequilibria.” What should be clear from those charts is that the U.S. has been living in a period fuelled more by increases in debt and a concomitant increase in asset prices than in a world of sustainable growth.

The economics profession focus on the income sheet only

I suspect the GDP fetishism owes a lot to the models currently in use in the economics field, which focus exclusively on an economy’s income statement.

When I studied economics, in our introductory course, we used a book called “Economics – Principles and Policy” by two Princeton-affiliated professors William Baumol and Alan Blinder, a former vice chairman of the Federal Reserve (Yes, I still have the book from over twenty years ago). The only mention of debt comes in Chapter 15 on “Budget Deficits and the National Debt” and it is basically a discussion of trade-offs between budget deficits and inflation.

Nowhere are aggregate debt levels in the private sector mentioned. Now, I could be wrong because it is not in the index and I couldn’t find it in the book. I see this is reflective of the absence of debt as a topic in economic theory taught in universities.

In fact, the Chapter just before is called “Money and the National Economy: The Keynesian-Monetarist Debate.” I think the title says it all. Baumol and Blinder are Keynesians and they released a book to teach Economics in the Keynesian tradition. To the degree they discuss any other economic models, it is only to weave the monetarist view into their own framework. In the introduction of Chapter 14, the book states:

Then we turn to a very old and very simple macroeconomic model – the quantity theory of money, and its modern reincarnation, monetarism – for an alternative view of the effects of money on the economy. Although the monetarist and Keynesian theories seem to be two contradictory views of how monetary and fiscal policy work, we will see that the conflict is more apparent than real.

Now that crisis has hit, there is no inter-weaving of theories. Those two worlds, the monetarists (freshwater economists as Krugman calls them) and the Keynesians (saltwater economists in Krugman’s parlance), are at war over economic theory’s contribution to the global economic meltdown. The Economist laments:

Economic writers will continue to try and describe the arguments wracking the field for an audience which wants to know about them, but economists need to figure out how to resolve some of these questions on their terms. If the best the dismal science can do in establishing the merit of one position versus another is make a play for the hearts and minds of lay-people, then economics is in more trouble than we all thought.

More noteworthy for me is how the salt- and freshwater types completely disregard debt, an issue central to the Austrian and Minskyian schools of thought. Paul Krugman wrote 6,000 words focused only on the income statement. There was no mention of the huge rise in debt in the U.S. and other economies like the U.K., Spain, Ireland, Iceland or Latvia (I take up the issue of Latvia, Iceland and Hungary in the post that followed this at Credit Writedowns).

All of these countries have one common feature: asset price booms underpinned by rising debt levels. Let’s hope we start seeing more discussion about the balance sheet in future.

fresno dan:

Very, very good point. But what is more interesting is that it is such an obvious point, yet economists give little attention to financing and debt. Money just appears and debts just get retired.
One hears talk nowadays as if the only trade off is between unemployment (under use of all resources) and inflation. Gee, am I the only dinosaur here? We had this thingy called stagflation in the 70’s. Theoretically impossible. I imagine in a year or two the misery index will reappear.

Greg:

Following this argument to its conclusion, the US government should be borrowing where the ROI of the investment is likely to be significantly higher than the cost of the debt.

To take one particularly compelling example, spending on education has an estimated ROI of 10% annually.

http://www.cbo.gov/ftpdocs/91xx/doc9135/AppendixA.4.1.shtml

The US government can borrow money at 4%.

WH:

Ummm… Let me know if I am misreading this or am thinking about this wrong, but I think you are mistaken. This growth strategy is a winner.

Do you mean “net income” or EBITDA, here?
If it is net income, then, then interest is deducted.

That means that the return on the $1 million is 11% =
($70k interest + $40k net income)/$1 million.

The return is greater than the cost of capital. This investment has a positive NPV and a good ROI. It is a very good growth strategy.

This can also be looked at as a annual increase in expenses of $70k produced an additional annual revenue of $110k. That is a 57% return.

Edward Harrison:

This isn’t an exercise in measuring return on capital of a fictitious shoe store WH. That is irrelevant and is merely for illustrative purposes. But, if you must go there, you will notice I said “$100,000 net per year now.” That’s net, not gross. Assume that is EBITDA.

Jeff Ellerbee:

Dude, do you even have an advanced economics degree? Saltwater/freshwater isn’t about monetarist/keynesian (even in Krugman’s parlance). Please stop posting about topics you haven’t researched thoroughly–especially academic macroeconomic theory. For your kind information, Minsky is a neo-Marxist (qua Marx as critique of Capitalism; shorter version, “Capital tends to Crisis”). And Austrian is just both dead wrong (with respect to what actions should be taken in this environment) and a political non-starter for a number of reasons. Honestly, Keynesian is about counter-cyclical fiscal policy and maintaining stability in long-run aggregate supply. Please, please get a clue outside of some Economics 101 textbook.

Edward Harrison:

Jeff, you are the one who needs to get your facts straight: http://en.wikipedia.org/wiki/Saltwater_and_freshwater_economics

Edward Harrison:

I would also suggest you read a 1988 NY Times article by Peter Kilborn:

http://www.nytimes.com/1988/07/23/business/fresh-water-economists-gain.html

The difference between the schools is as you indicate, Keynesians see counter-cyclical fiscal stimulus as key to fighting recessions, while the freshwater types are more libertarian. Friedman believed money supply was the key to control over the economy and best represents the freshwater types along with Lucas.

Your label of Minsky as a neo-Marxist is just that, a label. The key difference between the neoclassicals and the Keynesians on one side and the Austrians and Minskyians on the other is the focus on debt.

steve from virginia:

When I studied economics, in our introductory course, we used a book called “Economics – Principles and Policy” by two Princeton-affiliated professors William Baumol and Alan Blinder, a former vice chairman of the Federal Reserve (Yes, I still have the book from over twenty years ago). The only mention of debt comes in Chapter 15 on “Budget Deficits and the National Debt” and it is basically a discussion of trade-offs between budget deficits and inflation.

Don’t got no debt … don’t got no energy, either!

Dozens if not hundreds of pieces of economic analysis are presented every day in academia, in the media and over the Internet. Energy is either not mentioned at all as an input factor … or is given backhand mention, only.

Consider two economies … separate but equal. The sexy, attractive finance economy gets all the attention. The productive economy upon which the sexpot entirely depends is falling apart due to mis- investment. Mainly, it is currently constrained by oil depletion against a backdrop of expanding – finance driven – demand.

When a big highway bridge falls, due notice is taken. Consider Cantarell oil field in Mexico: 2 million barrels per day at the peak of production with 1m bbls. exported to the US in 2003. Net exports will reach zero in two years, cutting revenue to the Mexican government and oil availability here.

The 500% increase in oil price since 1998 has had a destructive effect on the productive economy, masked/hedged against by the finance bubbles. Theoretically, the Fed can monetize all the US public and private debt. It cannot control or monetize oil prices. $70 oil is an economy destroyer which is working its evil right this minute.

Not just debt. Oil.

mikkel:

As I mentioned in another thread, Stiglitz is the only major economist I know of that has talked about resource utilization and how easy it is to spike the GDP in the short term by destroying the environment with over consumption, but leads to lower growth rates over the long term.

There’s a reason he’s marginalized.

Ishmael:

Mr. Harrison – I believe your point about debt and GDP is an extremely important one but the story is even worse than you portray. I have not worked through the computations but it appears to me that GDP is basically handled on a cash basis of accounting versus the accrual method and when money is borrowed it is added to the GDP and when it is paid back is a subtraction from GDP. Go out borrow money and the money is spent then GDP increases. Save money (or more accurately negatively borrow) and the money is removed from the system so we have a decrease in GDP.

For instance in your shoe store example, the individual borrows money to expand his store and spends it. This does not generate any additional income to the store right then but the general economy will get a lift from his additional spending. The next year, since there is no borrowing by the shoe store there will be a decrease in the economy.

The extra $40,000 of earnings impact is questionable for the store since we do not know as you pointed out what the debt service is for the expanded store. However, for the complete economy is it not really a zero impact because the positive for store was a negative elsewhere in the economy.

It seems to me that GDP should be shown net of the change of borrowing. Then the naturally sustainable level of GDP would be shown.

In truth, for each country sustainable GDP would only be driven by exporting (assuming currency stays constant ie gold standard) or technology changes which would include the use of resources that would incorporate the oil reference above. Overall improvement of GDP for the complete world on a per capita basis would only be driven by technology changes.

In the US if we subracted incremental increases in debt each year from GDP we would have had a declining GDP.

The funds flow statement bridges the balance sheet and the income statement. The current GDP number seems to be fixing funds from operation with funds from financing. This would be very misleading statement for a company and seems to also be true for a country.

[Sep 14 2009] Gross domestic embellishments

"...GDP is riddled with imperfections. It only covers production exchanged in the private market or the public sector and misses the vast amount of productive activity inside the household, such as family care for children and the elderly. Ignoring sustainability, GDP is boosted by resource depletion that may increase income today but lower it in the future: a form of destruction more than production."
September 14 2009 | FT.com

Nicolas Sarkozy, president of France, is concerned that gross domestic product, the most popular yardstick of economic performance, does not capture how well societies (in particular, no doubt, France) are doing. Suspicious observers may think he set up his commission on measuring “social progress” mainly to kick Anglo-Saxon capitalism while it was down. In fact, its report is full of sensible, if old, insights.

GDP is riddled with imperfections. It only covers production exchanged in the private market or the public sector and misses the vast amount of productive activity inside the household, such as family care for children and the elderly. Ignoring sustainability, GDP is boosted by resource depletion that may increase income today but lower it in the future: a form of destruction more than production.

[Sep 09, 2009] "Rethinking GDP"

"...Policies that promote job growth ultimately generate GDP growth; however, policies that promote GDP growth do not generate job growth. "
"...I would suggest term "Junk GDP" which like the term "junk food" reflects dubious or explicitly harmful for the society activities included in GDP.
For example excessive monetization of services harms the society (as rise of health insurance costs and university education costs in the USA can attest) but increases GDP.
I would suggest that the USA has the highest percentage of junk GDP among developed nations. May be higher then 30%. "
Sep 09, 2009 | economistsview.typepad.com
Joseph Stiglitz says we need better measures of economic performance:
Rethink GDP fetish, by Joseph E. Stiglitz, Commentary, Project Syndicate: ...Eighteen months ago, French President Nicolas Sarkozy established an international Commission on the Measurement of Economic Performance and Social Progress, owing to his dissatisfaction - and that of many others - with the current state of statistical information about the economy... On Sept. 14, the commission will issue its long-awaited report.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximize it, but citizens also demand that attention be paid to enhancing security, reducing pollution, and so forth - all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognized. But changes in society and the economy may have heightened the problems...

For example,... in one key sector - government - we ... often measure the output simply by the inputs. If government spends more - even if inefficiently - output goes up. In the last 60 years, the share of government output in GDP has increased [substantially]... So what was a relatively minor problem has now become a major one.

Likewise, quality improvements ... account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. ...

Another marked change in most societies is an increase in inequality. ... If a few bankers get much richer, average income can go up, even as most individuals' incomes are declining. So GDP per person statistics may not reflect what is happening to most citizens.

We use market prices to value goods and services. But ... the ... pre-crisis profits of banks - one-third of all corporate profits - appear to have been a mirage.

This realization casts a new light not only on our measures of performance, but also on the inferences we make. Before the crisis, when U.S. growth ... seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt U.S.-style capitalism. Of course, anyone who wanted to could have seen American households' growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic.

Recent methodological advances have enabled us to assess better what contributes to citizens' sense of well-being... These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income. They also demonstrate the importance of social connectedness.

Any good measure of how well we are doing must also take account of sustainability..., our national accounts need to reflect the depletion of natural resources and the degradation of our environment.

Statistical frameworks are intended to summarize what is going on in our complex society in a few easily interpretable numbers. It should have been obvious that one couldn't reduce everything to a single number, GDP. The report by the Commission on the Measurement of Economic Performance and Social Progress ... should ... provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability...

Elliot says...

When Keynes wrote "The General Theory" he focused on the economy reaching and maintaining full employment. Friedman led a shift away from that and pushed for a focus on the price level and growth.

We need to return to a focus on full employment.

The statistics we use are often misleading (inflation has been a particularly misleading stat during the housing bubble), yet are used to justify and rationalize mere assumptions.

Policies that promote job growth ultimately generate GDP growth; however, policies that promote GDP growth do not generate job growth.

Government policies should focus on employing the maximum number of people possible. Job growth will ultimately yield way to a growing economy, in which the largest number of people partake in the prosperity and growth.

http://southpawpolitic.blogspot.com/2009/09/full-employment-vs-gdp-growth.html

Posted by: Elliot | Link to comment | Sep 09, 2009 at 11:33 AM

Beezer says...

Redefining progress has the GPI, genuine progress report.

http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm

"The GPI starts with the same personal consumption data that the GDP is based on, but then makes some crucial distinctions. It adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution.

Because the GDP and the GPI are both measured in monetary terms, they can be compared on the same scale. Measurements that make up the GPI include:

Income Distribution

Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.

Housework, Volunteering, and Higher Education

Much of the most important work in society is done in household and community settings: childcare, home repairs, volunteer work, and so on. The GDP ignores these contributions because no money changes hands. The GPI includes the value of this work figured at the approximate cost of hiring someone to do it. The GPI also takes into account the non-market benefits associated with a more educated population.

Crime

Crime imposes large economic costs on individuals and society in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime.

Resource Depletion

If today’s economic activity depletes the physical resource base available for tomorrow, then it is not creating well-being; rather, it is borrowing it from future generations. The GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or degradation of wetlands, forests, farmland, and nonrenewable minerals (including oil) as a current cost.

Pollution

The GDP often counts pollution as a double gain: Once when it is created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.

Long-Term Environmental Damage

Climate change, ozone depletion, and nuclear waste management are long-term costs arising from the use of fossil fuels, chlorofluorocarbons, and atomic energy, respectively. These costs are unaccounted for in ordinary economic indicators. The GPI treats as costs the consumption of certain forms of energy and of ozone-depleting chemicals. It also assigns a cost to carbon emissions to account for the catastrophic economic, environmental, and social effects of global warming.

Changes in Leisure Time

As a nation becomes wealthier, people should have more latitude to choose between work and free time for family or other activities. In recent years, however, the opposite has occurred. The GDP ignores this loss of free time, but the GPI treats leisure as most Americans do—as something of value. When leisure time increases, the GPI goes up; when Americans have less of it, the GPI goes down.

Defensive Expenditures

The GDP counts as additions to well-being the money people spend to prevent erosion in their quality of life or to compensate for misfortunes of various kinds. Examples are the medical and repair bills from automobile accidents, commuting costs, and household expenditures on pollution control devices such as water filters. The GPI counts such "defensive" expenditures as most Americans do: as costs rather than as benefits.

Lifespan of Consumer Durables & Public Infrastructure

The GDP confuses the value provided by major consumer purchases (e.g., home appliances) with the amount Americans spend to buy them.

This hides the loss in well-being that results when products wear out quickly.

The GPI treats the money spent on capital items as a cost, and the value of the service they provide year after year as a benefit. This applies both to private capital items and to public infrastructure, such as highways.

Dependence on Foreign Assets

If a nation allows its capital stock to decline, or if it finances consumption out of borrowed capital, it is living beyond its means.

The GPI counts net additions to the capital stock as contributions to well-being, and treats money borrowed from abroad as reductions. If the borrowed money is used for investment, the negative effects are canceled out. But if the borrowed money is used to finance consumption, the GPI declines."

Posted by: Beezer | Link to comment | Sep 09, 2009 at 12:07 PM

Arthur Fullerton says...

GDP measures activity, not benefit -- as such the problem is not so much the measurement of GDP as it is the meaning invested in the statistic. If we equate GDP growth with benefit and GDP decline with detriment, then we fall into the old trap of confusing means with ends.

Think of the GDP of an economy as being analogous to an engine's RPM. We do not confuse a car's RPM with its gas mileage or its creature comforts. Similarly GDP is not a measure of an economy's efficiency or efficacy.

Developing alternative measures and managing to maximize other outcomes is perfectly appropriate, but the shortcoming is not in the GDP statistic, rather it lies in how people misuse the statistic as a proxy for benefit.

Posted by: Arthur Fullerton | Link to comment | Sep 09, 2009 at 12:26 PM

SS says...

The United Nations Human Development Report: http://hdr.undp.org/en/reports/global/hdr2007-2008/
and Human Development Indicator (therein) do an excellent job capturing health, access to potable water, air quality and other indexes of a countries well being.

SS

Posted by: SS | Link to comment | Sep 09, 2009 at 12:50 PM

paine says...

ah joe

like ferdinand the bull..chasing butterflies

when he could toss giants on his horns

Posted by: paine | Link to comment | Sep 09, 2009 at 01:00 PM

William says...

Stiglitz made a big huff about "Green net national product (Green NNP)" in his book Making Globalization Work. Surprised he didn't mention it.

Posted by: William | Link to comment | Sep 09, 2009 at 01:59 PM

kievite | Sep 09, 2009 at 05:27 PM

It's pretty funny the cult of GDP was one of the most distinctive features of the USSR economic life.

For the US also serves as an economic fetish (especially for Fed and related agencies).

I would suggest term "Junk GDP" which like the term "junk food" reflects dubious or explicitly harmful for the society activities included in GDP.

For example excessive monetization of services harms the society (as rise of health insurance costs and university education costs in the USA can attest) but increases GDP.

I would suggest that the USA has the highest percentage of junk GDP among developed nations. May be higher then 30%.

Among most obvious candidates are FIRE, military-industrial complex, junk food industries, junk medicine, junk drags (aka big pharma).

Posted by: kievite | Sep 09, 2009 at 05:27 PM

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