Regular readers know that I have long railed against the use of GDP, which I see a being close to useless, if not positively dangerous. This analysis just highlights the point. It was therefore extremely encouraging to find an article by Bob McTeer, a former Dallas Fed President, who recognises the danger in the use of GDP:Paul Ashworth, chief US economist at Capital Economics, said in a note that while the initial impact of the storm on the economy could be quite large" when the clean-up is taken into consideration the "overall impact on GDP growth could even be positive."
He said, assuming all output was lost in the two regions for two days, it could mean a 0.7pc loss for the quarter as a whole.The economy expanded 2pc in the last quarter.
However, he cautioned that this was an extreme assumption: "These back of the envelope calculations undoubtedly overstate the loss of output. Not all output has been lost, particularly not across the whole East Coast region. Some people will be working as normal, others will be working from home."
Generally and loosely speaking, a higher GDP, reflecting both higher spending and higher incomes, is a good thing. However, if the higher GDP is boosted by hurricane clean-up and repair, that’s not so good. The problem is we don’t get a subtraction for the destruction of existing assets; just an addition for replacing them. At least one might think of the clean-up as “shovel ready” projects. Wars are similar in that they generate GDP without bringing with them a higher standard of living.The article seems to imply that the faults of GDP are well recognised, but this is not apparent when considering the almost fetishistic focus that is made on the GDP measure. One of my biggest bugbears is the government debt to GDP ratio. It is now a commonplace, and frequently replaces the hard number of the actual cumulative total of debt and GDP growth is used as a signal that an economy is capable of servicing debt. In the case of our earlier commentator, we can see quite how dangerous GDP actually is.
My favorite example in school of the short-comings of GDP (GNP then) was provided by the question what happens if a man marries his maid. If she keeps doing the household chores as a wife, they are taken out of the market place and GDP shrinks. Getting hair cuts at home or eating at home more and eating out less would have a similar impact on GDP without necessarily reducing standards of living. Just remember that GDP was designed to measure output in the marketplace, not to measure economic well-being.
In the case of Hurricane Sandy, hurrcane damage will apparently be able to improve the governments capability to service debt. Never mind that the government will be borrowing a bucket load of money to pay for the clean up of the devastation and destruction of assets; this will better allow the government to pay back its debt because, you see, GDP will grow from the fallout of a hurricane. I can see no better illustration of the fallacious thinking of those who worry about GDP slipping when governments cut back on borrow and spend. Borrowing to create activity in an economy, as I have argued previously is seen as a perpetual growth machine which is 'lossless'. In this case, the loss and replacement of perfectly good assets apparently creates economic growth.
No doubt some commentators will claim that government 'investment' is different; it creates long term growth. For example, many such people will propose project 'x' or 'y' as an investment. What they do not discuss is that these projects will come on top of borrowing for consumption. Also, as I discussed in a recent post, in one case I found a proposal to 'invest' in new rail infrastructure for the UK, even though rail is heavily subsidised such that this is not an investment with a positive return, but an investment to increase expenditure into the future (not withstanding that it might have quality of life benefits). 'Yes', there are some genuine investments that might be made, but these should not be made on top of borrowing for consumption. However, the term 'investment', as used by government, is often highly malleable, and is often nothing to do with investment but is rather concerned with expenditure for consumption.
The case of the US is interesting, as I have seen arguments made that the US has under-invested in infrastructure, and then present the idea that investment now is the solution. Again, why was the US government borrowing during the 'good times' and not investing in these apparently neglected projects? Why were they borrowing for consumption rather than for investment? Why is it that these economists were not railing against the government borrowing and consuming in the good times, when they could have been borrowing to invest in these projects? The answer is simple; they do not want to make the hard choices. Every element of government spending can be found to have a justification, but that justification does not include confronting the hard choices of either raising taxes or choosing between priorities within the constraints of the actual tax revenue available.
It is much easier to just borrow the money and leave the problem of paying until later. As I have long argued, at least in developed economies, there is no real reason why governments should be borrowing at all, barring major natural disaster or events like World War II. They have a strong base of income to draw upon, and can pay for both expenditure and investment from that income. Even if taking a Keynesian position, governments are not supposed to be borrowing and spending for consumption during the good times, but are supposed to only do this during the bad times.
I reiterate the point; those who support government borrowing and spending have never wanted to make the hard choices - either persuade the taxpayers that they really need to pay more taxes, or confront the difficult problem of priorities for expenditure. Instead, they propose borrowing and spending, during both the good and bad times. As they do so, they hide behind fig leaves such as GDP, which hides the long term damage that they are inflicting upon the economy; they persuade people that the economy is 'growing', even whilst the debts mount, and the activities which are developed through borrow and spend boost GDP. The real problem is cowardice; they cannot persuade people to pay for the expenditure of the government, so they pass on the problem of paying to the future. They believe that all of those government expenditures are 'good', but do not have the guts to make their case honestly and openly and subject the real cost to the scrutiny of voters. It is a tragedy, and I can only wish that voters would start to punish this cowardice.
"there is no real reason why governments should be borrowing at all, barring major natural disaster or events like World War II "
ReplyDeleteIf you take the avalanche of dollars exported from the US to China over the past decade or so ( the cumulative dollars of X million US citizens buying Y gazillion Made-In-China Objects for Z years ) , it's hard, realistically, to see where those dollars could possibly end up but right back at the US Treasury. What else , after all, can 'China' do with them, given it's desire for a cheap renminbi ?
If you want to see this as the US 'borrowing' trillions & being 'indebted to the Chinese' as a result, then I suppose you can, but that's really not a realistic or informative way of looking at the situation. It's a way of looking at the situation that results from imagining that the world still runs on a gold standard, & that govt. deficits are in any way comparable to *household* deficits. ( If we imagine a household that 1: has a perfect money printing machine in the basement & 2: whose coinage is only 'spendable' within that one household we might have a better analogy ).
This enormous avalanche of dollars circulates from the US consumer -> Chinese producer -> Chinese Central Bank -> US Treasury. Or, to cut out the middle man: US Consumer -> US Treasury. Thus, neccessarily, so long as the US runs a trade deficit, it will have no option but to issue vast amounts of receipts when this cash is neccesarily returned home, yet still people insist on thinking of this as 'national debt'. ( As if the poor starved Treasury was holding out a begging bowl at the Chinese Embassy) .
It really isn't. If those dollars were spent on US made goods ( ie never left the country) those dollars would be spent within the domestic US economy generating jobs & presumably wealth. Since they are 'lost' abroad & return, as they must, via the Treasury Route, the only way to square the whole stupid circle is for the US Govt to take the place of the consumer & spend those dollars back into the US economy. If they didn't, of course, those dollars would be effectively gone for good & " hello massive deflation!" as the amount of dollars *in circulation* steadily decreases. And this is the reason the US POSITIVELY ***HAS TO BORROW*** ( ie re-absorb it's own exported dollars) It has literally no option if it doesn't want to see an economic collapse.
So , in fact, far from there being "no real reason why [the US government in particular] should be borrowing at all, barring major natural disaster or events like World War II " there would be complete economic catastrophe if they didn't.
If you rephrase the quote as "there is no real reason at all why [the US government in particular] should be spending the cash the US consumer passes on to it ( via a detour to China) to hold on to in vast amounts " the problem becomes much clearer & the answer fairly obvious.
Of course, if the Chinese Govt didn't interfere with the process, a typical Chinese exporter would find more & more that as he took his hard earned dollars to the (free) market to exchange for renminbi, he would find the queue at the money changers increaingly long and the amount of renminbi the free market would give him for his dollars ( what ? more dollars ? jeez!) increasingly small. IE the renminbi would have gone through the roof & the Chinese xport boom would have spontaneously priced itself out of the market. It is to avoid exactly this scenario that the Chinese Govt buys up all those dollars at a nice high price, keeping the yuan low. The problem then is, what to do with the enormous resulting pile of dollars, and the only solution is to lend them at virtually no interest right back to the US. Result = Huge Deficit. Neccessarily.
If GDP is "close to useless" you have destroyed the basis for virtually all economic analysis, even your own.
ReplyDeleteHow on earth would you know we are having a recession or output expansion at all in the absence of a real output measure? How do you know the "Great Depression" happened? How would you gauge the success of your own economic prescriptions?
The case of the US is interesting, as I have seen arguments made that the US has under-invested in infrastructure, and then present the idea that investment now is the solution. Again, why was the US government borrowing during the 'good times' and not investing in these apparently neglected projects?
Because these sorts of large government expenditures during boom times might cause unwanted inflationary pressures or competition for resources with the private sector.
And in the last 30 years we have seen PRECISELY the abandonment of Keynesian style macro-economic management, above all in recessions, which has led to a serious underinvestment in public infrastructure.
By definition, a recession (or period of high unemployment and slack in the economy with historically low capacity utilization, as now) is the perfect time to engage in public works spending, so as to avoid problems that would be experienced in boom times.
"Why is it that these economists were not railing against the government borrowing and consuming in the good times, when they could have been borrowing to invest in these projects? "
The academic world and media is full of economists railing against "profligate" governments on the basis of mainstream neoclassical theory, which has dominated the profession since the 1970s.
"Even if taking a Keynesian position, governments are not supposed to be borrowing and spending for consumption during the good times, but are supposed to only do this during the bad times."
Which demonstrates why your plaintive cry above ("why was the US government borrowing during the 'good times' and not investing in these apparently neglected projects?") is wrong. But apparently you never noticed the contradiction.
"they cannot persuade people to pay for the expenditure of the government, so they pass on the problem of paying to the future."
You cannot rob future generations of wealth by government spending today: there is no way for future people to magically transfer resources or money backwards in time to today. All real output used in government spending today comes from resources produced today or accumulated in stocks in the past.
All government spending and repayment of bonds in the future does is to re-distribute income at that point in time in the future. The aggregate level of wealth (real output) is not affected. By contrast, allowing depression and low growth rates today for long periods will permanently reduce the aggregate capital stock and future wealth.
Reply from C.E: I think there are some assumptions in your comment. You suggest that my own economic analysis would be lost without the use of GDP. I do not use GDP as the foundation of my analysis. Are you saying that GDP is a good and useful tool to understand real growth in an economy? You mention that we would not know the great depression ever happened; do you think that, if GDP was not used nobody would have noticed? There were no other indications that the economy was going awry? Really? It would have slipped by unnoticed?
DeleteYou say in one of your comments:
"Because these sorts of large government expenditures during boom times might cause unwanted inflationary pressures or competition for resources with the private sector.
By definition, a recession (or period of high unemployment and slack in the economy with historically low capacity utilization, as now) is the perfect time to engage in public works spending, so as to avoid problems that would be experienced in boom times."
There is just one problem with your reply. Yes, if the borrowing to spend on infrastructure was undertaken during a boom, it might be inflationary in the sense that you mean by inflation. However, what about if it was done whilst reducing borrowing for consumption at the same time. As I said, it is simple. No will to make hard choices.
I note you neatly evade the point that Keynes was in favour of public spending during a recession, but not in the good times. Why have you not answered this point in your answer? My point is simple; borrow in good and bad, why? Not even Keynes would support this.
You later say:
"Which demonstrates why your plaintive cry above ("why was the US government borrowing during the 'good times' and not investing in these apparently neglected projects?") is wrong. But apparently you never noticed the contradiction."
My position in my post is absolutely clear; no need for government borrowing - ever (except the limited exceptions I gave). There is no contradiction, except in the fact that what was not a priority before, suddenly becomes a matter of urgency now. The contradiction is in the way borrowing is used and justified.
Continuation of reply from CE,
DeleteYou later say:
"You cannot rob future generations of wealth by government spending today: there is no way for future people to magically transfer resources or money backwards in time to today. All real output used in government spending today comes from resources produced today or accumulated in stocks in the past.
All government spending and repayment of bonds in the future does is to re-distribute income at that point in time in the future. The aggregate level of wealth (real output) is not affected. By contrast, allowing depression and low growth rates today for long periods will permanently reduce the aggregate capital stock and future wealth."
So governments can borrow money now, and nobody every has to pay it back in the future. That is the crux of your argument. You have dressed it up somewhat, but that is what you are saying. As such, we are all fools to worry about borrowing. There are no negative consequences, as we can see in Greece.....just a little example of " All government spending and repayment of bonds in the future does is to re-distribute income at that point in time in the future." When I grasped what you were trying to say here, I was genuinely surprised. Perhaps you did not intend this meaning? No negative consequences for the future for current borrow and spend? Have you not noticed that eventually, when governments borrow too much, Greece like events take place....
I was hoping to reply to Chaingang Charlie with the limited time I had, but your comment was simply startling. I would like to spend more time on replies, but time is not my friend. I hope this brief reply will at least suffice for your comment.
"Are you saying that GDP is a good and useful tool to understand real growth in an economy?"
ReplyDeleteCorrect. And, as I said, without it, you rob yourself of the primary measure of economic activity. How would you gauge the success of your own economic prescriptions without a real output measure? Even the Austrians are not so stupid as to rob themselves of a real output measure: they just create a new aggregate resembling GDP but with G taken out.
"However, what about if it was done whilst reducing borrowing for consumption at the same time. As I said, it is simple. No will to make hard choices. "
Governments in boom times generally run budget surpluses. So if they run no debt, how can they even reduce "borrowing for consumption at the same time" when no such borrowing occurs?
"I note you neatly evade the point that Keynes was in favour of public spending during a recession, but not in the good times."
And he was right. What you have missed is that "goods times" means when the private sector provides sufficient I and C in GDP to create high employment and strong growth. Keynes also favoured fiscal expansion when the private sector did not deliver high employment, but was in a business cycle expansion:
“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” (Keynes, J. M. 1936. The General Theory of Employment, Interest, and Money, Macmillan, London. p. 372).
"So governments can borrow money now, and nobody every has to pay it back in the future. That is the crux of your argument. "
No, it isn't and this is nothing but a straw man argument.
The crux of my argument: government repayment of debt (which is real) redistributes income from some people to others. Already that requires some people do in fact face costs in terms of reduced income. But the loss is someone else's gain (bondholders). The government bond repayments are someone's income too.
The argument is not that "nobody every has to pay it back in the future" but that future generations do not magically transfer resources or money back in time, which would thus reduce their own output. Government spending today via debt does not "rob" them - unless you believe in time machines or magic.
All the deficit hawks and fiscal conservatives over the years have never refuted this point, when Abba Lerner exploded their myths and nonsense decades ago:
Lerner, A. P. 1948. “The Burden of the National Debt,” in Lloyd A. Metzler et al. (eds.), Income, Employment and Public Policy, Essays in Honour of Alvin Hanson. W. W. Norton, New York. 255–275.
Ah, Lord Keynes, you are back. I wonder whether you still have time to deluge me to death in argument now that you have your own blog? I will write a brief reply, and you will probably respond with a comment longer than both my reply and the original post together.
DeleteYour first point: I asked whether you nobody would have noticed the great depression without GDP. No answer? Incidentally, I am not an Austrian economist, although I do like some of their ideas.
You appear to be claiming that governments were running surpluses; there were a smattering of surpluses, but mostly the period of the run up to the crisis was not one of surpluses in the West/Japan. I seem to recall high levels of employment too.
My straw man argument? You seem to suggest that there is no negative consequence for the future in borrowing now; I gave the example of Greece and you are oddly silent on this. How does this work in your system of "the loss is someone elses gain" in which again you seem to imply no overall net negative consequence? That is your implication, is it not? As for your time machine argument; people can transfer obligations into the future, onto both themselves and others through government borrowing. Incidentally, I did not use the word 'rob'.
Incidentally, I guessed the first comment was from you, even though it was anonymous. I deleted a part of the comment to that effect, in case I was wrong. Scholarly turning of black into white is your unique signature.
Answers:
ReplyDelete(1) "I asked whether you nobody would have noticed the great depression without GDP. No answer"
Of course, they would have noticed via other data like unemployment and mass business collapse. Perfectly true.
You've not answered the charge that you rob yourself of the primary measure of economic activity, by throwing out GDP. How would you gauge the success of your own economic prescriptions without a real output measure?
I am well are you're not an "Austrian." My point is: even Austrians do not reject aggregate real output measures.
(2) "You appear to be claiming that governments were running surpluses; there were a smattering of surpluses, but mostly the period of the run up to the crisis was not one of surpluses in the West/Japan."
In fact, outside the US, UK and Japan, many nations were running surpluses: Australia, Spain, Germany. You could find others if you bothered to look.
(3) " ... gave the example of Greece and you are oddly silent on this."
Greece's crisis from 2008 has been the result of (1) severe austerity and (2) giving monetary sovereignty to the ECB.
Japan has a public debt worse than Greece, which can be easily verified here:
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
But Japan faces no crisis precisely because it has done the opposite of Greece.
Ireland was running surpluses before the crisis, yet Ireland is now a basket case - just as EU periphery nations like Estonia and Latvia have been destroyed by self-imposed austerity.
No doubt you will say that is what needed: mass poverty, GDP collapse, mass emigration etc.
See how that would play in Germany or the US. The last time a major industrialized nation went for austerity on that scale was Weimar Germany, 1930-1932.
I acknowledged that there were some surplus countries in the run up (but no real attempt to reduce debt to nothing, interestingly).
DeleteAs for the example of Greece, you seem to think Greece's problem is austerity. Or how about the fact nobody was going to continue lending to Greece, and in order to continue to have a functioning government they had to cut back in order to get further credit? Austerity was imposed upon Greece exactly because it was a basket case of government excess borrowing and bloat. To suggest that austerity caused Greece's problems is to put the cart before the horse. It smacks of dogma in the face of reality. It is not complicated; nobody was willing to fund a country that was clearly incapable of paying back what it already owed. Greece had to accept austerity as it cannot function without further borrowing, and had to accept terms that might, just might, allow it pay back the new lending (which it will probably not do, for the reasons I have outlined at length in previous posts).
Ireland, they bailed out their banks and bust themselves in the process - Iceland presents a contrast (no doubt you will claim it was their controls etc. that made the difference, but refusing to bail out banks seems to be the key, and you will know that has always been my view).
Japan is interesting case, and not one I can answer in a brief reply. However, every trick in the book tried but with a result of ongoing stagnation. Majority of savings going through the postal system which funds Japan's debt, and now shifting to net outflows. Japan also has potential to raise taxes, as they are low by OECD standards. Much more could be said....but a crisis will come...
As to what is needed; if people had faced up to the real nature of the crisis at the outset, there would be no reason for mass poverty etc. The longer this lunacy goes on, the greater the likelihood of this as an outcome. You are cheerleading for a worse outcome, just one that is round the corner, ever larger, and harder to reverse from. Fiscal stimuli, money printing have been used but where are we at now? Is the crisis disappearing? I think not.
Ah, but I forgot...we need more money printing, more stimuli etc. etc. etc. We stopped the stimuli too soon etc. etc. etc.
I will leave you with the last word, as I know from experience that you will never end the debate.
"Japan is interesting case, and not one I can answer in a brief reply. However, every trick in the book tried but with a result of ongoing stagnation."
ReplyDeleteReal GDP for Japan:
1997 | 1.56%
1998 | -2.05%
1999 | -0.14%
2000 | 2.86%
2001 | 0.18%
2002 | 0.26%
2003 | 1.41%
2004 | 2.74%
2005 | 1.93%
2006 | 2.04%
2007 | 2.36%
2008 | -0.7%
2009 | -5.2%
2010 | 4.00%
2011 | -0.7%
While the lost decade 1993-2002/3 was one of low growth and debt deflationary crisis, that ended about 2002/3.
And it is well known that the recession from 1998-1999 was caused by quite sharp fiscal contraction and austerity in Japan.
The GDP data for the period 2003 to 2007 (before the crisis hit) show an average growth rate about 2%, which means Japan’s economy returned to roughly the OECD average after 2003.
Is that what you call stagnation?
"if people had faced up to the real nature of the crisis at the outset, there would be no reason for mass poverty etc."
You mean if people had erroneously taken your view c.2008 and allowed their economies to collapse, thus causing massive GDP contraction, mass poverty etc. there would be no reason for mass poverty etc.? That is bizarre illogic.
I will start with a very small apology. I said I would leave the last word on this to you. I am not going to do what I promised. For a long time, you have commented on this blog. You pile up statistics and references to academic studies. You grind down, rather than use logic or reason. Let's review your answers.
DeleteThe first issue is that of GDP, the subject of my post. You say that everyone uses GDP. As if that is an argument. Is it an argument? Everyone uses it, so it must be ok. I give an example of exactly how flawed this is as a meaningful measure. It is a measure which would record the bombing of a city as a positive. You give no answer to this. Because you have no answer except to say that it is what is used, and other people are using it. I could use a hydrometer to measure distance, and so could others. However, quite sensibly, people would point out this is a poor instrument for the purpose. Your argument is simply that it is the instrument that is used, and even if it does not measure anything meaningful, it is all we have to use.
I point out that the great depression would have been noticed without GDP, and you accept this. You have still not explained why a tool that distorts reality should be useful. And the answer is that, if a tool can see destruction measured as growth, it is so flawed as to be silly. My polite suggestion is take your head out of books, and use reason. A tool which can claim economic growth as a result of destruction is dangerous.
You then quote me statistics out of Japan that use GDP? Clearly, you have won the argument....incidentally, the Japanese GDP does not look particularly positive, does it? Also, with the current levels of Japanese borrowing?... and you have read enough of this blog to know my arguments about the impact of government (and other) borrowing on GDP. For new readers, sorry for an unclear answer that deals with previous posts, but dig through the blog and you will find my points made in detail.
Ah, and then there is the argument that Japan was caused by a fiscal contraction.You read this blog, so I know that you know that I predict exactly this outcome for a fiscal contraction. It happens. However, austerity? Really? Give me the figures for Japanese government borrowing, and we can discuss 'austerity'. It is a meaningless word. You deploy it in the same way that Krugman deploys the word for the UK. Whilst there is some tiny cut in borrow and spend, the level of borrowing is still massive, but that is 'austerity'. This is little more than rhetoric. Is that the best you can offer?
DeleteReply Continued:
Then there is the matter of Greece, and my discussion of your putting the cart before the horse. You have no answer, so you ignore it. You try to claim that governments borrowing and spending has no negative consequence, I give you a real example of the consequence, and then you try to change the history of events to fit your dogma. THE CRISIS OF GREEK DEBT PRECEDED AUSTERITY. Any attempt to pretend otherwise is simply dogmatic fantasy, and it conclusively disproves your point made in your original comment. It is not a question of just shuffling around money between actors with no overall consequence.....
When governments borrow to the point that nobody trusts their ability to repay, and need to borrow to support a standard of living that is itself contingent upon borrowing, then the pain starts. People are strange. They only lend in the expectation of being repaid. Odd, I know, but that is the simple reality (now I will admit that sometimes people lend for reasons such as geopolitical strategy and willing to accept loss, but this is not one of those situations). You, much like people like Krugman, imagine that you can print money, borrow and spend, and that there are no consequences. If that were the case, nobody would ever suffer any economic hardship, as the answers are all there. We can simply fix any crisis that comes along. Just print money, borrow and spend, and we will all be wealthy. Is that how the world really works, outside of the dreams of academics?
This is all fine, but there is a problem that there is a world out there that does not seem to respond to your theory. Take the UK as an example. Borrowed, spent, printed money, and still in crisis. The magic that you propose has not made it right.
Your final comment is to say that there is a 'bizarre illogic' in the belief that addressing a problem when it becomes apparent, that fixing the problem is better than compounding a problem. If that is bizarre illogic, then I endorse bizarre. Even if taking the current crisis as stemming from the financial crisis (which I do not think is the root cause, but for the sake of argument I will accept here), then your answer to too much debt is to have the government rack up new debt to replace private debt. Yep, just as the private debt gave an illusion of wealth, the government debt will continue the illusion. And that is your answer? That is the answer that leads to Greece.....
Your error is fundamental. It is dogmatism. I pick and mix from economic schools because I see what fits the world as it is. I reflect, and when I am wrong, I reflect more deeply. I am critical and self critical. Your problem is dogmatism. GDP is useful because it is used - that is nothing to do with logic and reason. It is 'I use it because everyone else does'. Not very convincing, is it?
Now I really will leave it here, and leave the final comment to you. I will put a link to this discussion on your website. If your blog readers are interested in previous debates, I guess they can search using the words 'Lord Keynes'. Perhaps they will find our previous debates to be interesting, albeit that I normally retire out of sheer exhaustion.
GDP:
ReplyDelete"You say that everyone uses GDP. As if that is an argument. Is it an argument? Everyone uses it, so it must be ok. I give an example of exactly how flawed this is as a meaningful measure. It is a measure which would record the bombing of a city as a positive."
And yet everyone would know that the GDP activity resulting from any disaster, natural or otherwise, would represent rebuilding, rather than normal consumption or investment.
You're positing that people are too stupid to recognise the underlying limitations of GDP data, when disasters happen. On the contrary, certainly economists especially are very much aware of the limitations you describe. E.g., everyone knows that Japan's GDP will be affected by its recent disasters - is there really anyone with a half decent knowledge of economics who can't recognise that a certain percentage of Japanese GDP growth is disaster rebuilding?
And my argument above is this: not a absurd argument-from-the-majority fallacy, but the simple question how you would know the state of the economy with a real output measure.
In fact, you have beautifully illustrated my point: you declare there has been nothing but "ongoing stagnation" in Japan? Oh really? And how on earth do you there has been "ongoing stagnation" in Japan without a real output measure?
Do you use magic or telepathy perhaps?
Greece:
Greece's current crisis is this: difficulty in funding deficits, and ongoing recession because it cannot raise private investment and consumption via fiscal expansion, a situation imposed on it by its adherence to the Eurozone.
As I have been pointed out, if Greece had currency and monetary independence, a floating fiat currency capable of depreciating (making its exports cheaper), and a central bank committed to defending its government's treasury operations, it would not be in the crisis it is currently in.
And other nations that have rejected fiscal contraction have no difficulty funding deficits, have positive real output growth, falling unemployment, inflated asset prices are falling, and private debt levels are falling, thanks to fiscal stimulus. Despite what you say, this crisis IS abating in many countries - thanks to prompt government action.
Meanwhile, your readers can review the litany of disastrous predictions you've made over the years:
(1) that the US and the UK were becoming the new Zimbabwes (with the implied idea that they would suffer hyperinflation),
(2) that 2009 would be the year of the fall of the West,
(3) that 2011 would see that fall of the US dollar, etc. etc.
It is blatantly obvious that if Greece had its own currency it would have faced a currency crisis, imported inflation and high nominal interest rates.
DeleteJust ask yourself what interest rate you would demand to lend the Greek government money, given all that we have discovered about Greek finance. Then consider the question again in the circumstances of a freely floating drachma.
So if the UK/US aren´t going to suffer hyperinflation why don´t they "print" a load more money? 1,3 trillion should do the trick for the UK ....for the time being. Why mess about the the odd 80 billion here and there?
DeleteCan you give me a one word/figure answer Mr Keynes, how much funny money can be injected into the UK economy before hyperinflation takes off?
How about profit and loss and balance sheet.
ReplyDeleteSo you are advocating that as a lender I should continue to lend to Greece because it can print its own dollars even though it has no capabilities to repay its debt? Since when does throwing money after bad is a good thing? If that is the case can I have your money then? I promise to pay it back at some stage...
So adding more debt as a temporarily reprieve is your solution? Yes it "IS abating in many countries" - meaning we will just defer the problem for another day but nothing has been solved.
"(1) that the US and the UK were becoming the new Zimbabwes (with the implied idea that they would suffer hyperinflation),
ReplyDelete(2) that 2009 would be the year of the fall of the West,
(3) that 2011 would see that fall of the US dollar, etc. etc."
Time will be the judge. I think there are things that have been set in motion directly from the policies being used to counteract the economic downturn in the US and UK. This could be the beginning of the journey towards all 3 of these. In the commentary on our current predicament it is hard to set exact dates on predictions but some view of the end game can be assumed from the current fundamentals. so certain policy works in the short to medium term but simply serves to store up problems for the next term of politicians and economists to deal with.
I have read (and enjoyed) the eloquent jousting between Cynicus and Lord Keynes. Argued with respect and panache, it's also clear that, whilst seemingly at polar opposites, there's actually a surprising amount of convergence of opinion too (the CE/LK Venn Diagram circles overlap quite a bit by my scoring). I look forward to more debates.
ReplyDeleteMy take is that, whatever happens (and time will tell) won't happen until the smart money has been squirreled away to the safest of safe havens. Then we'll start to see a fairly swift unravelling.
The real rulers of the universe - the top 0.1% who really run the planet - have already written the script and (unpredictable events such as uprisings, terrorism, natural disasters etc. aside) will try to control the inevitable fallout as much as possible. But they're clearly not ready *just* yet.
Bob
All this talk of GDP and how to get it going again.
ReplyDeleteThis Professor at Utah believes only an economic collapse will help us remain below the stated safe level of warming for the planet, given that the increase in wealth is linked largely to our access to energy that can supply the throughput for consumer economies.
http://www.earth-syst-dynam.net/3/1/2012/esd-3-1-2012.pdf
We are assigning 200 species a day to extinction at current rates.
Any attempt at economic reform has to include the issue of climate change in its models to be deemed sustainable in any way, which makes a lot of the discussion here pretty useless.
It seems to me that the substance of the argument has got rather lost in the lengthy to-ings and fro-ings.
ReplyDeleteGDP measures turnover in that it measures economic activity regardless of what has caused (or, if you prefer, funded) that activity. Where one of the causes of an increase in economic activity is something that has a cost in the future GDP is necessarily misleading because it does not reflect that future cost.
I can increase GDP by borrowing £10,000 a year and spending it in Mr Patel's Merrymart and Madame Fifi's Sauna and Hanky-Panky Parlour. Mr Patel and Chantelle (my "therapist" of choice) will have thousands of pounds a year extra to spend and GDP will go up even more when they spend it. But eventually I have to cut back my spending when my debts get so great that I cannot find anyone stupid enough to lend me any more and the mugs I have borrowed from before require repayment. At that time Mr Patel and Chantelle will be poorer, as will the people to whom they distributed the cash I previously paid them out of my borrowings. GDP will fall, but the substance of the position is that the rise in GDP caused by my borrowing was artificial. It did not represent increased wealth-creation merely increased turnover.
The position is no different in principle for governments. There is a very simple reason why it is no different for governments, that is because everything eventually boils down to people. All economic activity is the result of what people do. Government borrowing today requires people to pay interest today and repay the capital tomorrow, government itself pays nothing because it only has what people give it. Even taxes levied on corporations are actually levied in substance on people, they cannot be otherwise because the things done by corporations are actually done by people.
Because GDP is boosted artificially by the spending of borrowed money it is necessarily misleading as a measure of real wealth in an economy. There is no formula for calculating what proportion of GDP reflects increased turnover due to borrowing that is not sustainable.
It is worth noting that only in recent years have economic commentators treated GDP as the most important indicator of the state of a national economy. Until I was in early middle-age we heard virtually nothing of GDP and a lot about the balance of payments.