Is GDP Wildly Underestimating GDP? | Hacker News Reader

Is GDP Wildly Underestimating GDP?

asymptosis.com

45 pointsd4nt31 comments

I don't even think that it is only the non-traded sectors (e.g. Wikipedia, Facebook, online dating) where we've gained massive utility that is not tracked in GDP.

Consider medicine. In the official statistics, medicine drastically drags down (real) GDP by contributing heavily to inflation. But I propose that medicine has suffered deflation which is just not captured by existing inflation measurements. Note that absolutely no hedonic adjustment is applied to medical costs in official statistics - if we move from dying a painful death (cost $10) to taking a magic pill that solves all the problems (cost $100), that's treated as 900% inflation.

Ask yourself - 1970 medicine at 1970 prices (i.e. you can't use anything that reached the market in 1971 or later), or 2015 medicine at 2015 prices. If you choose the latter then medicine has suffered deflation.

It's a very interesting exercise to re-compute standard statistics based on CPI measures which simply exclude medical inflation (let alone recognize deflation).

> non-traded sectors (e.g. Wikipedia, Facebook, online dating) where we've gained massive utility that is not tracked in GDP.

The GDP is overestimated (but not because of the non-traded sectors). Remember 2013 when the fed needed to show some...ANY... growth? Start the padding! - http://seekingalpha.com/article/1368001-u-s-governments-new-... - Which almost every administration has been doing in their own way, since Nixon. But Commissions, legal bills and expenditures on real estate transactions are included in GDP? Our GDP has been in a negative slide for awhile. The Fracking miracle was a light in the tunnel, but steel is dead, cars are dead, aerospace is dead (in the context of the US GDP).

The manipulation of government-published data is not specific to Democrats or Republicans, and seems to be getting more and more shameless:

1. "Seasonal adjustment". This year, the 1st quarter GDP had to be 'seasonally adjusted' TWICE to finally show (meager) positive growth, instead of initially reported contraction.

2. The inflation rate used by the government to calculate the GDP is unrealistically low. It is debatable how much higher real inflation is, but most independent ( and supported by numbers) analyses I have seen typically estimate inflation rate to be at least 3-4 percent higher than the one reported. If the real inflation rate were to be used to calculate the GDP, there would be no or negative growth.

3. In 70% or 80% of cases, the initial, headline-grabbing news are later revised lower and published quietly (usually Fri afternoon)

http://www.cnbc.com/2015/07/30/us-government-revises-earlier...

TL;DR: We need non-government, independent economic agencies to calculate vital economic growth indicators.

Speaking of official versus independantly measured inflation data, the CPI is actually matching up with the Billion Prices Project pretty well.

http://bpp.mit.edu/usa/

I'm not sure why you think seasonal adjustment is such a big deal since the pluses and minuses are conserved - it can't have any effect on year over year GDP figures.

Absolutely. The present band of Market Monetarists heretics think an "official" NDGP futures market would be a move in this direction.

But one side effect of this is that inflation* as a regulatory concept becomes much more deprecated. That's a big change. It is not clear to me that there is any inflation at all, but I tend to avoid trendy goods and I don't live ( by design ) in high-rent areas.

*even though RGDP+inflation=NGDP.

My bias in this is that RGDP & inflation look like an unstable control input where NGDP does not ( I believe this is because of lag ) . "Should control theory be applied to the economy at all" is a very good question.

Funny fact: in European Union there had been recently passed the law that mandates that estimated value of prostitution and drug dealing (among others) is included in GDP calculations. That came from desperate need of EU to make GDP stats look better.

The problem with medicine as a case of providi g vastly more utility is that it hasn't. And most of the improvement has come from old and largely public intervenion not acute, intensive, personal treatments.

Most healthcare improvements, in the sense of longevity and mortality, came prior to 1920 or so, from municipal fresh water, sewerage, waste collection, improved nutrition, and public health methods (infectious disease controls and quarantines) and antisceptic and anesthetic advances.

Antibiotics and vaccines, among other advances, have ddone far less than these.

Even the advances since the 1970s are far more raising health standards among the least healthy, particularly minority men and women, than raising the life expectency of the best-served parts of the population.

Most medical expenses (nearly 15% of U.S. GDP) are simply not productive.

I agree that the bigger gains came from non-medical interventions and basic medicine. I also believe a lot of medicine is wasted.

In spite of this, I'd choose 2015 medicine at 2015 prices. I personally find walking, sitting, sex positions other than girl on top, and various more vigorous activities, to be a lot of fun. In 1970 those things probably wouldn't be available to me. It's definitely worth the $3k or so I paid in India for it and it'd be worth it at $1M.

Would you give up 1971+ medicine if you could pay 1970 prices?

Almost definitely, yes I would.

1970 medicine, at 1970 prices, available to all, would do far more than all medical gains since.

The main concern I see is that AIDS would be subject to only epidemiological treatment. No antiretrovirals.

As much as I would like to believe that there has been a massive qualitative change in the meaningfulness of GDP caused by the internet, I would like to see a comparison across multiple countries. If that qualitative change is real, then it should be visible elsewhere in the world as well, possibly with some time shift.

Right now, the first two bumps in the graph coincide uncomfortably with two burst bubbles (which does not fully refute the idea, but it means it must be taken with a whole lot of salt).

It's not a coincidence that separation point in the chart begins shortly after the Fed began heavily harming the US dollar and promoting a bubble dependent economy based on asset inflation schemes (the first point of separation represents the real estate bubble and the beginning of the 2005-2007 soft bubble of the stock market). You can also witness the exact same spike in the GDP of every other country on earth when priced in US Dollars, nicely showing off how dramatically the Fed was harming the currency (give it a try, type in: "romania gdp" or "peru gdp" or any country, into google and look at how they all perfectly skyrocket at exactly the same time, in tandem with the USD falling and coinciding with the lift-off in this article's chart).

The huge jump in household assets is the representation of the Fed inflating, which simultaneously debases the median (and below), while increasing in nominal terms the wealth of the top ~10% (who can hedge and dodge inflation for the most part, while worker incomes and basic savings cannot).

Bill Gates is worth $84 billion, right? The rich have gotten a lot richer, right? No they haven't, they've merely kept up with the Fed debasing the dollar. Everyone else has gotten poorer. If you inflation adjust the rich backwards, they're only slightly richer than they were 20 years ago. Gates is lucky if he's worth $40 billion in 1997 terms. Whether we're talking about housing, oil, gold, silver, platinum, copper, milk, eggs, education costs, health care costs, car costs or nearly anything else - you can roughly increase those costs by 70%-100% (at least, more in the case of edu and health care) over 20 years due to Fed inflation.

The author notices the divergence, but he doesn't seem to notice that a new pattern has emerged. Forty years of smooth increase has morphed into to something like a roller coaster. He looks past these chronic spasms to see a secular shift -- "continued exponential growth of household net worth." It turns our that wealth _can_ durably outstrip savings! He doesn't wonder whether another steep (perhaps steeper) plunge of asset values might be in store.[1]

There's nothing mysterious here. For a century it has been well understood how artificial credit expansion inflates asset bubbles causing the boom/bust cycle.[2] Only the intellectual progeny of Keynes continue to find it mysterious and feel compelled to invent exotic new explanations for such "paradoxes."

Why ever would we be surprised at inflating asset prices when it's been Fed policy for a long time. In the words of Bernanke, "...higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."[3] In other words, new paper wealth makes consumers feel richer so they'll stop that harmful saving.[4]

[1] He notes, "The valuation jumps up and down as asset markets re-evaluate what all those real assets are worth." but without wondering why they only started "jumping up and down" in 1999.

[2] https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

[3] http://www.marketwatch.com/story/bernanke-defends-qe-talks-w...

[4] https://mises.org/library/hayek-paradox-saving

This needs more detail about how real estate value changes are counted. Also, how does this account for the transition from fixed-benefit to fixed-contribution pensions?

Of course the savings rate is down. US retail real interest rates are negative. Save now, have less later.

You have it backwards, interest rates are a function of the amount of savings available to be pooled and invested. For a variety of reasons, there is a surplus of savings in the world, hence low interest rates. These reasons involve deficient demand + austerity policies, as well as demographics, and foreign reserve accumulation by emerging economies.

There is too much currency chasing too little capital. If anything, with US savings down in the pits, I think saving is too low. Why is there too little capital for people to invest in? Every time the Federal Reserve lowers the interest rate or launches QE to prevent the economy from experiencing negative growth, companies producing goods the economy would not have wanted without stimulus, stays alive a little longer. As long as these companies stay in the economy, capital tied down to produce those goods cannot be used in a more productive manner. That's why each interest rate cycle has rates go lower and lower, each round of QE bigger and bigger, because the level of mal-investment is consistently growing higher and higher, and as a consequence yield is going lower and lower. Meanwhile through increasing debt and central bank policy there is more and more currency to invest with, in capital that is getting less and less productive because the capital is used for the wrong things. Those ghost cities and loss making subsidised farmers and iron ore mines aren't going to help compound growth because their yield is zero or less. They produce goods nobody really need, perpetuating deflation in goods people don't want, while the pool of goods people do want dwindles and get ever more expensive, for example, bacon.

Interest rates almost everywhere are set by central banks, not markets, as you imply ("there is a surplus of savings in the world, hence low interest rates").

What you are talking about (money chasing already-overpriced assets) is caused by near-zero interest rates, with an elite having access to low-cost leverage looking to invest that money.

There is a huge problem of _debt_ in the world, government debt, private debt (if you include the student loan debt), etc. Not only is it huge, it is also growing quickly [1].

[1] http://www.forbes.com/sites/mikepatton/2014/09/29/the-seven-...

Yes, but they're a slave to the Wicksellian rate, which is a slave to...

oh brother. Let's wake up here. There is a surplus of "savings" in the world because since the crisis 3.5 trillion of debt-soaking cash has been printed at off-market prices by the fed, 1.5 trillion is currently being printed by the ECB, and 3+ trillion will be printed by the BoJ. Let's please not forget those facts, which dominate any of the second/third/fourth order diversions that you've pitched here, conveniently forgetting the elephant in the room.

That's not savings tho, we have defined terms we're using here.

I'm trying to understand better the graphs: if this year a house in Manhattan appreciates in value, it won't reflect in GDP but it would reflect in the asset growth curve?

This might be a cause for the disconnect of the curves. If the economy is building specific surface hot-spots (city centers) that are allowing people to better monetize their job/time, a real estate increase of that (asset bubble or not) will drive assets up without a GDP equivalent increase?

(I understand the real estate goes up because the producing GDP in that area also goes up. But it's like comparing asset price versus rent: the later reflects the GDP but goes up in absolute value much less than the asset value increase)

Technically if it was about shifting asset values and hot-spots, then it would have the equivalent decrease in asset values of assets not in those hot spots. Eg, increase in Manhattan apartments and a decrease in mid-western farms.

That would cause asset prices to remain in sync with GDP as the worker would increase goods trade by producing more value in the hot spot.

To me, this is probably caused by two things: foreign direct investment in property from China and oil princes which increases the demand for assets and boosts prices, along with slower than inflation wage growth allowing for more investment in assets instead of labor. Foreigner investment is obvious, but for the wage issue: if a business pays less of total profit towards workers, the business has more money to spend on assets. The GDP would be pushed down and the asset price would be pushed up.

I'm no economist though. There might be other reasons that are more valid.

In theory an increase in your home's value should reflect in the GDP as an increase in imputed rents. Even though you might not actually pay a rent because you're a home owner, as far as national accounting is concerned you do pay a rent to yourself, and such a rent is part of the GDP.

For all the talk of non-tradeable sectors being undercounted, there has also been a vast overcounting of non-tradeable sectors that became tradeable (but not necessarily "better").

Child care, health care, senior care, security, and education are just some examples - to a much greater extent they used to be handled, untracked, within the context of a household, until they were commercialized.

I'm not an economist, but could tax inversions cause this. Asset values rise, but capital stays offshore and doesn't circulate back into the economy thereby limiting saving.

> The asset markets are wrong. They’re wildly overestimating the value of our existing stock of real assets, and the output/income they’ll deliver in the future. See: “Irrational exuberance.”

Bingo! Massive stock bubble driven by easy money and (more recently) corporations buying back their own stock (with borrowed money) to drive up the price of the stock remaining on the market.

Besides, GDP doesn't represent the total of "real wealth" or productive activity either.

The GDP is inflated because it contains all activity regardless of whether it was actually productive or not. For example, if the government hired a million people to dig ditches and fill them up again, that would raise the GDP, but it sure wouldn't increase the nation's wealth.

They've even changed how the GDP is calculated to make it look bigger: http://seekingalpha.com/article/1368001-u-s-governments-new-...

I find it interesting that when the cost of goods such as food and gas go up, it's called inflation, but when the price of assets go up, it's called a bubble. Sure, there are differences (a bubble assumes the price will go back down), but it's still interesting to me....both are driven by the same thing, the price of money.

I was using the word in an imprecise way. You could say "price inflation" and mean rising prices, or you could say "inflation" and mean an increase in the money supply.

The price of money is the interest rate for borrowing it, but "inflation" in general refers to a decrease in purchasing power (through an increase in the money supply).

My comment was more of a general observation of terms applied to different asset classes, not particular to your comment. Thank you for the clarifications though :-)

>They've even changed how the GDP is calculated to make it look bigger

Only conspiracy theorists would think the purpose of changing the GDP calculation is to "make it bigger". What effect does "making it bigger" have? If it's a contrived figure, the markets will take that into account. Then again, conspiracy theorists always assume they "know" better than everyone else.

I am fine with the new method of calculating GDP, _if_ all the past GDP numbers are adjusted to make comparisons meaningful (the same way you adjust stock prices after splits).

Oh, and careful with name-calling. I used to be like you and call some people "conspiracy theorists" - until Snowden.

> What effect does "making it bigger" have?

It makes the economy look better. In a nutshell, governments want people to think everything is alright, even when it's not.

There's a massive bubble in US stocks, for example, and when (not if) that bursts, it may well take the rest of the economy with it, and then it'll be worse than 2008.

As long as people can be manipulated into believing that the economy is recovering, having to face reality can be postponed.

As for "conspiracy theorists", you've been trained to point and laugh at them, but you shouldn't. For example, how does a hijacked passenger plane crash into the fucking Pentagon without the most powerful military in the world stopping it?

Not without the aforementioned military letting it happen, that's for sure.

Feel free to start questioning everything you're told by the mainstream media any time now..

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