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Since none of you seem to be on Ello, and since why should BI get all the fun, I’m reposting this here.
The Economy In 1000* Emoji
The Key Facts
Each emoji represents one one-thousandth (0.1%) of GDP. All data from 2013 BEA NIPA tables, with the exception of estimates of federal non-defense and state & local consumption expenditure breakdowns, derived from CBPP, Mercatus, and Tax Policy Center estimates.
*Gross emojis actually total 1,334 because of imports and net foreign travel; net emoji equal 1,003 due to rounding.
Without further ado, here’s your economy:
PRIVATE CONSUMPTION:
PRIVATE INVESTMENT
GOVERNMENT
FEDERAL DEFENSE
FEDERAL NONDEFENSE
STATE AND LOCAL
NET EXPORTS
EXPORTS
IMPORTS
LEGEND (similar categories merged):
New Cars
Used Cars
Car Parts
Furniture
Appliances
Foodware
Tools
Information Equipment
Sports Equipment
Sports and Recreation
Books
Watches and Jewelry
Therapeutic Equipment
Educational Books
Luggage
Phones and Faxes
Food
Alcohol
Women’s Clothing
Men’s Clothing
Children’s Clothing
Other Clothing
Gas and Fuel
Pharmaceuticals and Medical Equipment
Recreational Items
Supplies and Inventories
Personal Care
Tobacco
Newspapers, Magazines, etc
Rental Housing
Owner Housing and Housing Construction
Water
Electricity
Medical Services
Hospitals
Vehicle Services
Transportation
Travel
Culture
Gambling
Other Recreation
Restaurants
Financial Services
Communications
Education
Professional Services
Clothing Services
Religious Activities
Home Maintenance
Net Foreign Travel
Nonprofits
Industrial Supplies
Aircraft
Other Exports
Consumer Goods
Intellectual Property
Governance Exports
Other Imports
Durable Goods
Nondurable Goods
Governance Imports
Defense
Structures
Equipment
Police
Other Federal Services
subtraction from the total
So these are the three largest components of GDP, all indexed to 1960:
Clearly one of these is not like the others, but the well-known fact that investment, not consumption or government spending, is mostly what fluctuates with the business cycle is very visible. I wanted to dig a little deeper, though, especially to compare the current recession to priors. So I made this graph:
Bars are unbroken periods of percent change in GPDI; their height is the total percent change in the period, their width is the length.
Here it is smoothed a bit using a highly-advanced method called “arbitrary eyeballing”:
And this time with feeling:
While none of these three graphs is perfect, looking at all of them the various recessions we’ve experienced and their depth and breadth become quite clear. And it seems striking that our current mess represents a vastly larger and longer decline in private investment then any prior recession since WWII.
So let’s break down GPDI; the biggest component is the broad heading of “fixed non-residential investment:”
Looking at the log (which is quite often a good idea, see James Hamilton for more) you can see that this recessions seems notably but not dramatically more severe than past downturns, and that we are on a decent track for recovery.
But here’s residential structures:
Wowzers. Two facts worth noting: residential investment has fallen off a cliff and is nowhere near recovering; the so-called “housing boom” is barely visible.
That becomes a little clearer, though, when you look at single-family construction vs. multifamily and “other” (dorms, trailers, etc):
Single-family construction clearly gets a little wacky during the mid-aughties, whereas multifamily is catching up from slacking on trend; since then, multi-family is rebounding while other is wishy-washy and single-family is really terrible.
What’s remarkable about all this, though, is that you can with some confidence say non-causally that recessions are, for all intents and purposes, fluctuation in housing construction.
In the past, we’ve had recessions, interest rates are cut, recession over. Now, interest rates can’t be cut, and we’re not building enough housing, and therefore there’s too much unemployment (especially among the young who are largely the building class):
In fact, relative to older folks, this is the worst the young have had it since the 70s:
Now, why does lowering interest rates reverse recessions? There are many good reasons, but to some extent they’re all about setting expectations. When the Fed “cuts rates,” what is doing is what its doing is just buying lots of government securities, which is what “quantitative easing” is; the difference between the former and the latter is the ends, not the means. The former is a kind of credible expectation setting of broader outcomes – “we will buy bonds until interest rates are where we say they should be, dammit.” The latter sets a much narrower expectation that doesn’t necessarily imply broader changes in the economy.
Now, there is an idea out there that Paul Krugman calls “the confidence fairy,” which he belittles…and he’s right (at least in practice)! As it is formulated by conservative pols and pundits as a partisan cudgel, it basically amounts to a non-sequitur; recessions, ergo, implement the tangential policies we support regardless of economic conditions (derp).
But I’m not sure the confidence fairy is entirely a fiction. In what I think is a bit of a cousin to Steve Waldman’s story of finance as the world’s most important confidence game, it seems like in the past recessions have been alleviated because the Fed creates self-fulfilling prophecies – by buying bonds to depress interest rates, they incentivize individuals to invest based on an implicit assumption about future growth dependent on their investment. And it all worked rather nicely until we hit the ZLB:
The thing that the Fed has fundamentally failed to do is pull their usual trick; they haven’t convinced anyone that the economy will be better tomorrow, so they’re not doing the things today that will create that improvement.
This, in a roundabout way, is where I get to responding to Ryan Cooper’s terrific article making the case for helicopter money. Helicopter money is a good idea. I like it. I support it. It is a humane, fair, and efficient way to help everyone get through hard times. But my gut tells me its not, on its own, enough to kickstart us out of the funk our economy is in. While the biggest reason the 2008 tax rebate didn’t help the economy was its puniness relatively to the impending crisis, it was doubly hobbled by the fact that it was a one-off with no guarantee of being repeated (which it hasn’t, though the payroll tax cut was it’s cousin). Ryan supports giving the Fed the power to mail checks unilaterally, not by implicitly supporting a fiscal-side program, which is a great idea – coordinating the king and the wizard can be a tricky game. But even then, a $2000 check can be extraordinarily helpful in the medium term to people in need, but it in-and-of-itself does not a housing construction recovery make. Helicopter money works best, and may work only, as the whip hand of a credible promise by the Fed of meeting a broader economic target; it can, though, be a very persuasive whip.
Kevin Grier, the sufferable half of Kids Prefer Cheese, writes this about AirBNB:
I used to think AirBNB was cool, but now that Thomas Friedman has slurped it in the Times, I’m not so sure. One interesting thing in the piece was how the AirBNB founder confuses his company’s revenue with new economic activity.
Surely most of AIRBNB’s revenues are actually just diversion, no? I’d guess that at least 75% of their revenue is just diverted from hotel/motel revenue.
This is a common mistake. “look how much NAFTA increased trade”, “Look how much the new stadium will boost the local economy” are examples of this kind of erroneous thinking.
Creation vs. diversion is an important and often overlooked distinction.
I just had a great stay in an AirBNB property in Brooklyn, but the Staten Island Hilton Garden Inn lost the revenue that AirBNB generated.
He’s right about Tom Friedman, of course, but wrong about everything else. But wrong for interesting reasons!
The first, and simple reason, is that on the margins AirBNB, by creating cheaper, unique, higher-quality, or differently-located lodging options, may result in more overall travel. I may choose to take that why-the-heck-not weekend trip to FunTown if I know I can book a super-cheap night in someone’s apartment, or stay in the cool gentrifying neighborhood that doesn’t have any formal hotels.
Secondly, and more importantly, it is certainly the case that AirBNB is more often than not “diverting” trips that would have otherwise occurred in hotels. But that doesn’t mean it’s not creating new economic activity!
A house or apartment is capital, a machine that provides a flow of services, primarily “comfortable shelter.” When you own a house, you can choose to consume those services however you want – entirely for yourself, rent them out to others, occasionally donate a share of those services to friends or relatives (for example, my in-laws just stayed with us the past week, and next week a friend is staying with us). However, until recently, was difficult and uneconomical to rent out one’s residence for simply a day or weekend or week because of issues relating to information, trust, payment mechanisms, and insurance.
But these are all problems that AirBNB, a new technology, has effectively and efficiently solved, making renting out a portion or the whole of one’s home like a hotel or B&B go from “extremely challenging” to “extremely easy.” This makes houses more valuable. To quote the master, Paul Romer:
Economic growth occurs whenever people take resources and rearrange them in ways that make them more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.
Basically, the combination of AirBNB + house = hotel is a new recipe that makes existing resources more valuable than they once were. If AirBNB really takes off, what we’ll see is that, as more people elect to take trips and stay in people’s homes (as my wife and I have done before and will do again, thanks to AirBNB) the existing stock of homes become more valuable, there will be substantially increased efficiency in the hospitality industry and there will be more efficiency in urban land use since the hotel-to-overnight-stay ratio will decline and thus valuable land downtown can be used for other purposes, like offices, residences, entertainment or commerce.
I’m not a shill for AirBNB, but it’s a great example of how the combination of information exponentiation and aggregation economies of scale that the internet enables can substantially increase economic growth and human welfare by making all the stuff we already had more valuable. My wife and I got an espresso maker on Freecycle, so we didn’t buy one. We bought something else instead (probably a couple of board games). So in one sense that was just consumption diverted from one thing to another, but comparing the equilibria that’s clearly a net increase for human welfare. In the pre-internet days, that espresso maker goes to a landfill. Instead, it goes to us. So the original owners are unaffected, the public waste burden is reduced, and we get the espresso maker we wanted and other stuff. Someone else went on Craigslist and bought a board game for $5 that cost $60 new, and used the savings to help buy a new espresso maker. It’s all about increasing efficiency, and just because it doesn’t always increase GDP doesn’t mean it doesn’t increase welfare and, eventually, growth.
Yesterday a friend of mine tweeted an invitation via a new service called Feastly. The invitation was to come to her home and eat a delicious, home-cooked gourmet meal in exchange for money. The service, Feastly, is set up to do exactly that – while it is still in private beta (and therefore cannot be fully-explored until one is invited in) it clearly aggregates offerings of that sort, sortable by dietary restrictions, price, attire, pet-friendliness, and other criteria. It’s a great idea, and one I wish I thought of.
On a social scale, I think as we see more services like this that directly connect buyers and sellers – think eBay, Etsy, ebook self-publishing – it will throw further into question whether statistics like GDP/GNI are useful metrics, not just of broader concepts like "standard of living," but of what they purport to measure. Every meal eaten on Feastly and not at a formal restaurant is one that involves an exchange of goods and services for money, and most of them will likely not be counted by current methods of measuring GDP. This issue predates the internet, of course, but the internet’s amazing power to match small-scale producers to buyers will accelerate this trend, as will the advent of 3-D printing.
So Ashok and I sparred a bit on Twitter re: the meaning and effect of taxation and spending (and probably pestered the heck out of James Pethokoukis and Joe Weisenthal in the process). I’m not sure how to embed Twitter conversations (if anyone knows how, I’m all ears), but the long-and-short of it is that the actualities of taxes and spending are weirdly different from the optics.
The trick is to remember that every policy change is a change from some baseline. So, from whatever the baseline currently is, there is no fundamental or economic difference between:
1) Cutting taxes by X on some activity, and
2) Spending X subsidizing that activity
assuming that they are both funded identically (though identical tax hikes, spending cuts, or debt incursions).
Now, in practice, there will be differences. Scott Sumner’s thought experiment about the society that taxes 100% of GDP by taxing 100% of income then writing welfare checks equal to taxed income demonstrates that, since we would expect that society really would look different than the one that taxed nothing at all (if only because such a program would have some overhead). But those differences would be based in behavioral economics, not classical or neoclassical economics.
And the same in real-world examples. There would definitely be differences between these two alternative scenarios:
1) A 2% payroll tax cut (debt-funded).
2) A check mailed to every American for the exact same amount (debt-funded).
But those differences would be instutional, not economics (the check-cashing industry, for example, would obviously prefer the second policy to the first). But there’s no reaosn to think they would "crowd out" (or for that matter, "crowd in") different activities.
The real point is, as Matt Yglesias says, the tax share of GDP is a very poor to think about the “size of government.”