You are currently browsing the tag archive for the ‘GDP’ tag.
GDP is “the size of our economy,” the sum total of goods and services produced by “our economy” consolidated into a single dollar figure. In case you didn’t already know this, how big it is, and how fast its growing, is considered by many observers to be important. When it doesn’t seem to be growing as fast as it was in the past, people write books.
It’s also probably not surprising to anyone who reads this blog (BREAKING: it still exists) that how we measure GDP is, when you dig into it, at least a little weird. For starters, the border between what is and isn’t “the economy” as opposed to “stuff people do with their time” is a little fuzzy. Plus, stuff that seems to definitely be party of “the economy” is occasionally hard to measure. This ends up with the rent that homeowners don’t actually pay themselves but are “imputed” to pay themselves to work out to be 5-10% of all of GDP!
When you think about it, that isn’t wrong—we obviously spend a lot of money building houses, buying new and used houses, fixing broken houses, and renting houses we don’t own, in a way that suggests a) houses are definitely part of the economy and b) if we don’t measure the benefits homeowners get from owning very larger economic objects then GDP will look weird as a result. The folks who do this for a living explain it better and more thoroughly than I can.
But when you think about it, it does suggest that the legal and economic structure of relationships between people and institutions can matter a lot in deciding what does and doesn’t go into GDP. To wit, let’s visit a parallel universe, one where America is just the same as it is today except for one big difference.
In this universe, there is a very popular thing called The Netflix Organization that millions of Americans use to stream content. Everything physically and institutionally about The Netflix Organization and how people use it is the same as Netflix in our universe, but legally it’s structured just a little differently:
- The Netflix Organization is collectively owned by its members, not its shareholders.
- Its shareholders are actually all creditors who just have a set of unusually-structured debt contracts with the Netflix Organization.
- The monthly fees that owners pay to The Netflix Organization are actually collective contributions by the owners to
- pay organization staff and other costs;
- service debt payments (actual debt + dividends in our universe)
- cover depreciation; and
- engage in capital improvements (improving streaming performance and UIs, creating and buying rights to new content).
So here’s what would be weird about this universe—if you just left it here, GDP would be exactly the same as it is in our universe. But you wouldn’t just leave it here. Because the owners of Netflix don’t seem to be making any income! Yet they’re collectively paying billions every year to support this capital that they collectively own, which wouldn’t make any sense if it wasn’t producing economic value to its owners. So you need to impute the value of streaming Netflix content to users, and consider that economic output that would be added to GDP.
And depending on how you calculate it, that’s a lot of value. Netflix claims American users streamed 42.5 billion hours of content last year. How would you impute a dollar value onto that? Well, an average movie ticket last year cost $8.43. The average movie is around 2 hours; so you could impute a value of $4.215/hour streamed. But of course each hour streamed is probably viewed by more than one person; let’s just stipulate that the average works out to around two.
You would then impute a value of Netflix Organization income to its owners of $358 billion—which would add around 2% to 2015 GDP! And not only that—Netflix streaming is growing rapidly, from 29 billion hours in 2014. That figure would’ve only added 1.3-1.4% to 2014 GDP; put another way, the growth in Netflix streaming alone boosted nominal GDP growth by 0.6-0.7 percentage points last year.
Now, the assumptions I used to impute economic value to Netflix streaming are more than challengeable. But the point is that, in this parallel universe, you would very likely have to go through the exercise and impute something. We don’t do that in our universe because Netflix is considered to be selling a product to consumers, and therefore the product is automatically valued at the purchase price when it’s considered for addition to GDP. Which is fine! Fundamentally what I’ve done above is to rearrange a bunch of activity not considered economic in our current framework into something different purely on paper, with no real world change, and yet prompt a potential—and potentially large—reevaluation of our core economic metric.
The point of this exercise—and this post—isn’t that “GDP is bad” or “GDP isn’t accounting for disruptive tech, bro” or “the Lucas critique/Goodhart’s law/Cambell’s law,” although it necessarily includes a little of all those things. It’s mostly just that there’s an inherently arbitrary nature to measuring anything, and that if you want to measure something, you should probably measure it in a lot of different ways.
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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.”
Nixon says, "let's not add fractions with different denominators"
I always enjoy going to zerohedge for the most intelligent, compelling, and engaging iteration of the sociopathic perspective on events. I was disappointed, however, to see Tyler Durden submit this guest post from Bill Buckler, who is apparently of this publication. Anyway, in the course of writing some positive things about Ron Paul, Buckler writes:
The root of the problem is perfectly illustrated in the fact that since August 1971, the funded debt of the US government has risen from $US 400 Billion to $US 15,236 Billion. The severity of the problem is illustrated by the fact that with Mr Obama having yet to complete his third full year as President, he has presided over $US 4,600 Billion (or almost one-third) of that increase. The root of the problem is the abandonment of money – the final legal connection between Gold and the US Dollar was ended in August 1971. The severity of the problem is the grotesque expansion of what has taken its place.
Of course this is a giant stink bomb of the “correlation equals causation” fallacy. But beyond that this is a comparison equivalent to comparing apples to zebras. This may be painfully obvious to most people, but let’s examine some other things that happened between 1971 and the present.
Firstly, we went from having 200mm people to 300mm. Secondly, NGDP went from $1.1 trillion to $14.6 trillion. And lest hard-money types wave that all away as ruinous inflation, the Inflation Calculator says that $1 in 1971 is equivalent to $5.32 today, which if you take it purely at face leaves today’s RGDP relative to 1971 at $2.7 trillion, a nearly three-old increase even though population increased 50%, leaving per-capita GDP much higher, which can be confirmed by looking at all kinds of measurements of quality of life in the United States over the last 40 years and seeing them all rise. So we are a much wealthier country now than we have been, and we have experienced a decent amount of inflation, so it makes no sense whatsoever to just throw up the nominal gross national debt numbers from 1971 and today and call it “the root of the problem.”
And look – the debt-to-GDP ratio, which is a very useful measurement since it complete controls for any nominal growth that isn’t reflected in real standards, has tripled! In 1971 it was below 40%, now it’s over 100%! If you wanted to push the idea that we are dangerously indebted (we aren’t, but if you did), that’s all you have to say. You don’t have to make grossly misleading comparisons to prove that point.
FWIW, I’m not even mentioning how deeply unfair this is specifically to the President, who was handed a $500b structural deficit and an economic implosion worthy of the Great Depression by his successor. I’m not sure it’s really possible to stabilize debt-to-GDP in those conditions unless you unilaterally abolish most government functions.
