Friday, December 31, 2010

What If We Reworked GDP?

What we’ve learned since we developed national income and product accounts before World War II is that growth can work through accumulation (Solow), that growth is far more important for welfare than business cycles (Lucas), and that ideas are more important for growth than capital (Romer).

If our NIPAs reflected this, how would they change? Brian Domitrovic:

The key to Mr. Romer's analysis is that ultra-developed economies tend to have a high and rising degree of non-depreciable capital. Driving production in these economies are increasingly fewer machines—which wear out, must be serviced, and replaced—in comparison to "book knowledge"—the formula for a drug, computer code, a distribution system—that does not depreciate at all. Therefore, ultra-developed economies come to devote fewer resources to maintaining the capital stock and more to actual production.

In light of the new growth theory, a good portion of what counts as output—fixing all those old machines—should be minimized in the aggregate output statistic, just as development of non-depreciable capital, in which the U.S. specializes, should be given extra weight. In recent years, America has been doing far more than Europe to create permanent (not to mention sharable) capital goods, and this fact at present is not captured in GDP.

Don’t even get me started about China. They’re putting up huge growth numbers based on stuff that no one else wants to do, in a system that’s rigged to measure those things from the age when we were interested in doing them. And yet people worry about that.

The Tail That Wags the Dog

It’s hard to get across to undergraduates, politicians and pundits that trade in goods doesn’t count for squat, and that trade in assets like currency is what’s driving international economics.

Perhaps this chart will help:

Yep, back when most of us were kids, currency trading was already 10 times larger than trade in goods and services.

Currency markets, in fact, do in a week what containers ships do in a year.

I’ve thought for a while that there’s a market for a textbook that focuses on grosses of things like the capital account, the market for hires and fires (i.e.,  JOLTS data), and government finance, rather than the net figures that the legacy media focuses on.

Via Paul Kedrosky’s Infectious Greed.

BTW: “Tail that wags the dog” is an aphorism that is almost unknown in Utah. This is one of those weird quirks of language for which I have no explanation. Utahs, in fact, find this phrase hysterical when they hear it: they immediately “get it” but also find it wonderful to learn such a cute phrase. It’s almost like when Utah’s “my heck” swept the rest of the country about 8 years ago.

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Thursday, December 30, 2010

Keynesian Theory Suggests the Stimulus Package Was Just Crap

John F. Cogan and John B. Taylor:†

The key tenet of Keynesian economics is that government purchases of goods and services stimulate additional economic activity beyond the amount of the purchase itself. …

[The stimulus package] attempted to stimulate government purchases in two ways. First, it provided funds to finance federal government purchases of goods and services … Second, it provided grants to states and local governments to enable them to increase purchases of similar goods and services.

… Of the $862 billion stimulus package, the change in government purchases at the federal level has, thus far, been extremely small. From the first quarter of 2009 through the third quarter of 2010, government purchases have increased by only 3% of the $862 billion ($24 billion). …

… State and local government purchases of goods and services did not increase at all in response to the large federal stimulus grants. These purchases have remained slightly below their pre-ARRA level since the fourth quarter of 2008.

In sum, the stimulus package was a bunch of crap, pushed by politicians, who lied about how it fit into a particular economic theory.

Note that this isn’t even belaboring the point that Keynesian theory doesn’t seem to be correct on all – or even many – counts.

And it tends to support Paul Krugman’s point, albeit in a backhanded way. Krugman has asserted that the stimulus didn’t work because it wasn’t big enough. He’s right. Most of it was crap. He’s naive to think that others should pony up more cash for stimulus he pushed so hard for, when the last load of that crap got flushed down the toilet.

† Most economists would agree with me that Taylor is probably on the "medium" list to get a Nobel Prize in the future.

Monday, December 27, 2010

How Not to Increase GDP

There’s a scene in an excellent but little known movie called Blue In the Face, where a hustler played by Michael J. Fox (!!!) asks another character “How much would I have to pay you to get you to eat a bowl of dog shit right now?” Which leads me to:

Seth Roberts’ joke post about China:

Person A to Person B: “See that piece of shit? If you eat it I’ll give you 100 million yuan.”

Person B eats the shit.

But Person A doesn’t want to give him 100 million yuan.  He says to Person B: “How about I eat shit too? Then we’ll be even.”

Person B agrees.

Person A eats some shit. “Now we’re even,” he says.

They have just increased GDP by 200 million yuan.‡

I'm a big fan of GDP - it's the best game in town - but this is a good illustration of what can go wrong with GDP.

The practical concern is how much of reported GDP in a place like China is actually transactions like this. Certainly the Chinese are building things like high-rises that no one wants only to tear them down again shortly thereafter.

† The backstory with Blue In the Face is that the cast of Smoke had such a good time filming it that they decided to do another movie right then and there. I recommend both.

‡ For those inclined to think that GDP hasn't changed here, in principle, in-kind transfers like this do count as part of GDP. What’s key here is that the market value of eating the shit has been established. But, in-kind transfers are not measured well. So theoretically, this would be part of GDP, but for practical purposes it would probably be missed.

Compensation Growth by County

It’s 2009 data, but it shows the pattern of the most recent recession: compensation grew the most in the upper midwest (blue), and declined the most on the west coast, and along a diagonal from Florida through Wisconsin.

Bourgeois Dignity as a Source of Growth

Deidre McCloskey argues that what changed around 1700 to produce consistent growth was sociological: we stopped thinking of people making money as a bad thing, and not surprisingly people went off and made a lot of it.

Here’s an interview.

… What people like about the Weber hypothesis [i.e., the Protestant work ethic] is that it combines a spiritual change inside the souls of businesspeople (Geist was the German word) with a focus on routine investment (savings rates were supposed to be higher among Calvinists). It combined idealism with Marxism. No wonder everybody likes it. But alas, it’s wrong.

What changed was the sociology. That is, what changed was the attitude of the rest of the society toward businesspeople, and with that new attitude came a change in government policy. …

Friday, December 24, 2010

Hayek Poster

Don Boudreaux is (reasonably) worried about whether it’s legal to use the photo … but the whole mash-up by Peter Barber it is too good to pass up:


Wednesday, December 15, 2010

200 Years of Health and Wealth

Hans Rosling:

People don’t dislike economic growth because it doesn’t work.

They dislike it because they’re twisted.

Kids Prefer Cheese: Hans Rosling's Chart is SERIOUSLY MISLEADING

I noticed this too Angus ...

But I didn't post about it ... and there's a decent reason (actually two - perhaps not good, but merely decent).

1) Income inequality really wasn't the point of the chart. Health outcomes equality is. I see this chart like a comparison of per capita income to per capita consumption: we really shouldn't be worried as much about inequality in the former as in the latter.

2) I think the vertical axis is far more likely to have an upper bound, and therefore a declining growth rate, than the horizontal axis. In our lingo, longevity is unlikely to be I(1), while per capital income is likely to be I(1). And, if it's I(1) in a log-linear form, then we'd probably do a log transform first. The base 10 log isn't what we'd normally use in macro, but it still works. Now, it would also be pretty standard to difference the logged I(1) variable when plotting two series like that: it's why we plot inflation - instead of the price level - against interest rates. In this case, Rosling might have done per capita real income growth rates against longevity, and I don't think he would have ended up with just-so story that he did. If he did though, I think many people would have walked away with the impression that low growth rates are a good thing. Too many people make that assumption casually for me to advocate encouraging it.

Sunday, December 12, 2010

Another Unemployment Rate by County Video

Three years of county by county unemployment:

Unemployment 2007-2010

The impression is not like some monolithic discrete change as presented in the legacy media, but more like a piece of fruit going bad on the table … it starts with a little brown spot or two that slowly takes over.

Saturday, December 11, 2010

The Uneven Recovery

Recessions and expansions are always uneven, so this shouldn’t be a surprise.

And, keep in mind that this is just showing above and below average, so every metropolitan area has to be either yellow or red.

But, how many people do you know from yellow areas that are complaining about the recession (that officially ended 15 months ago), or the weak job market?