Spain Is Doomed
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GDP is not income, it's a sum of flows. The classic illustrative example is a man marrying his maid:
Unmarried: Man earns $200k/year, pays his maid $25k/year. GDP = $225k.
Married: Man earns $200k/year, pays his wife $0. GDP = $200k.
In both cases, the ability of this pair of humans to service debt and purchase goods and services remains the same. Both couples are equally wealthy, you've just tweaked an accounting identity.
In countries where tax evasion is high enough, the standard of living can be fairly high while the government is failing see Italy and Greece.
But I am simply an observer. I love watching smart people argue about stuff, so economics fascinates me. One thing is for sure, there is a ton of diverging opinions about the Euro and the sovereign debt crisis.
My only surprise is that so many people are unaware of it. The government's income is indexed to the real inflation (by being an essentially constant proportion of salaries/profit), and expenditures are indexed to a computation the government is able to redefine at will. Is it a surprise that it is, in fact, redefined often, and that it always makes the government look better?
http://delong.typepad.com/sdj/2011/12/james-hamilton-on-shad...
E.g., the modern definition of unemployment is indeed very different from the definition of 40 years ago, which would yield something like 20%-25% today (compared to 12% or so today). And yet, everyone assumes it is the same statistic. Same with inflation.
Personally, my 3 biggest expenses (rent, food, energy, in that order) have been going up at almost 10%/year over the last 3-4 years. I don't see a reason to doubt the shadowstats CPI metric.
You're welcome to trust BLS data. Just be aware that you can't trust them when they are published [ http://www.zerohedge.com/article/visualizing-propaganda-erro... ] and given that 90% of the values are revised to be worse within a month, their methodology cannot be considered statistically sound.
edit: added "almost" to 10%. Just checked, and rent was "only" 8%/year.
Implying that something is dishonest because it is different than it was in the past is a non sequitur.
"Personally, my 3 biggest expenses (rent, food, energy, in that order) have been going up at almost 10%/year over the last 3-4 years. I don't see a reason to doubt the shadowstats CPI metric."
What was that you were saying about sound statistics ;)
I do not think that, and I do not think that I implied that anywhere.
Rather, almost no one outside the BLS collects this information in the US on a scale that allows you to contest official numbers - so that BLS gets to claim whatever they want, and most economists in the US take that as gospel (and are wrong because they are misled, not because they are dishonest).
> Implying that something is dishonest because it is different than it was in the past is a non sequitur.
Appeal to authority ("obviously, the BLS/Fed had their legitimate reasons to revise the calculations") is a fallacy. And I did give the reasoning, so let me repeat amd expand that in case you missed:
Government gets income indexed to real inflation (by virtue of being a percentage of wages/profits/transactions) - so it is not affected by accuracy of inflation numbers.
Government expenditure (salaries, social security) is indexed to a computation controlled by the government. Furthermore, if this computation results in a number 0%-3%, everyone is happy, even if this is not supported by the underlying facts.
Said computation has been revised several times in the last 40 years, where new computation always and consistently results in a number lower than it would have been had you used earlier formulas.
Now, what do you find more plausible: Everyone in government (and extended government - the Fed) was trying their best to understand the economy, and it just happens that all revisions make government look better - or that these revisions were made because they make government look better, despite underlying facts?
Oh, and take into account that government and the fed is actually full of career politicians (bernanke campaigned to become fed chief).
At some point I factchecked government stats and actions for a living. My conclusion is that it is all fudged, nothing can be trusted, mistakes get made to make the government look better 90% of the time. Law enforcement (especially in case of the SEC) is very selectively applied. I can cite numerous examples, but I'm tired. Do your own research (karl deninger, zerohedge, michael shedlock are good starting points), or keep watching the CNN / CNBC government mouthpieces and believe all is well.
Is the BPP index faked as well? Is krugman dishonest or mislead, or maybe incompetent?
This can also be a difference of opinion, that we can settle with lot's time. But I still dislike your original implication that people asserting a different number for inflation are dishonest.
Did you notice that between 1-Jul-2010 and 31-dec-2010 the BPP was >=2.3 (closer to 3% most of the time) while the official CPI was at <1.3% (closer to 1% most of the time)?
The BPP was constructed to be similar to the CPI. If you constructed it to be close to the CPI of 30 years ago, it would have been higher.
> But I still dislike your original implication that people asserting a different number for inflation are dishonest.
It's not arbitrary people. The number of people who decide the CPI formula is ridiculously small - there might be 20 economists working on it, but ultimately it is a political decision by a handful of politically motivated people at the BLS to switch to a new computation, and the entire economic profession just accepts it as gospel.
And I stand by my assertion that these politically motivated decisions do not have any "scientific purity" (whatever that might mean) or the people's well being in mind -- it has specific goals in mind, which end up harmful (through no direct malice)
> so the BPP people are part of this conspiracy too?
You insist on not reading what you are replying to. I see no point in this discussion.
Example: You assert that the CPI is essentially fraudulent, and chosen for political gains and that their is a conspiracy afoot. I point out that the BPP shows numbers much closer to the CPI than to shadowstats. You reply that it's constructed to be similar to CPI. This implies something, right? It either implies that it's part of the conspiracy, or the people are incompetent, or something ... but I don't know what your point is. Also, your point doesn't mean that it's wrong.
Also, can you please show some evidence that the BPP was constructed to be similar to CPI. Right now we have 3 sets of numbers, two of them roughly agree. I'm inclined to believe that the BPP and CPI are more likely right than shadowstats given their agreement and the fact that they use different data sources.
Also, this http://www.bogleheads.org/forum/viewtopic.php?f=10&t=884...
I try not to imply anything, but I do assume that you have some background, formal or informal, in statistics and economics (if you don't, I'm surprised by how strong your opinions are given that you would be missing the tools to evaluate them).
For example:
> can you please show some evidence that the BPP was constructed to be similar to CPI
CPI and BPP are both a weighted average over a list of prices (several thousands or millions of them, with CPI averaging only a few carefully selected hundreds, and BPP supposedly averaging a few tens of thousands or millions).
Statistically, it is impossible for these two averages to be in such close correlation as they are, unless: a) essentially _all_ billion numbers sampled from have the same exponential evolution (that is, they all increase by 0.1%+/-0.01% per month, every single month) -- which is demonstrably false (oil prices have gone up and down several times last years, food prices have only gone up), or b) these averages were constructed to track each other (or a common underlying, but the CPI is defined to track some abstract underlying which is often revised and not perfectly documented or repeatable, so it has to be that BPP tracks CPI).
The probability that the BPP index was independently constructed and yet tracks the CPI so low that one would need evidence to believe it. That's how statistics works, and you're welcome to consult a stats person if you don't believe me.
What I'm saying is not that they are trying to do the same thing that CPI is doing. What I'm saying is that they did a regression of the prices they collect against the CPI officially published CPI, and as a result, they have a good approximation to the officially published CPI, without ever having to have an opinion of whether the official CPI is a good way to gauge customer expenditures.
> You assert that the CPI is essentially fraudulent
Yes, I assert that, as a measure of the growth of consumer expenditures, it is wrong (in the sense that it is inaccurate), and that it is fraudulent (in the sense that it is underestimating the price increases, and that it is intentional).
> their is a conspiracy afoot
These are your words, not mine. The thing is, your belief that there needs to be a large number of conspiring people in order to mislead others (intentionally or unintentionally) is not supported by evidence. Take medicine for example - for tens of years, long after the "evidence based medicine" came around, 99.9% of doctors (scientists! with diplomas!) believed stomach ulcers were caused by stress. Warren's claim that it is caused by a virus was considered craziness to the point that he had to infect and heal himself for others to take him seriously (later earning him a nobel prize in medicine). A recent survey showed that 40% of US doctors still believe the ulcers are caused by stress, despite never seeing any evidence for that and having evidence that it is caused by a virus.
Now, how do you explain that? Were all those doctors, 99% of practitioners in the US and elsewhere, dishonest? No. Just misled. And I can assure you it didn't take more than 5 people a century or two ago to establish that "ulcers come from stress" for that to be accepted. Do you see the analogy? [And if you find that interesting, you're welcome to ask doctors, and then look for evidence, that salt intake increases your blood pressure, or that cholesterol intake increases your serum cholesterol, or that serum cholesterol is bad for you for that matter. You'd be amazed at what doctors believe without any evidence, and often evidence to the contrary. And they are not dishonest, they are just misled]
> This implies something, right? It either implies that it's part of the conspiracy, or the people are incompetent, or something ... but I don't know what your point is. Also, your point doesn't mean that it's wrong.
No. It does not imply anything other than what I said: it was constructed to track the CPI (the officially published number called "CPI", not anything else). It is not wrong in that sense that it IS a good approximation to the CPI, derived from independent other sources. And it does not make anyone who works on it part of a conspiracy, or incompetent. But it does mean they accept the CPI as gospel (which I explicitly claimed). Is there any reason to believe the BPP tracks the average growth of consumer expenditures? (averaged over consumers, of course)?
> I'm inclined to believe that the BPP and CPI are more likely right than shadowstats given their agreement and the fact that they use different data sources.
As I mentioned, from a statistical point of view, these can only agree if they are constructed to agree, so they shouldn't be considered independent. If you want the economic reasoning for that:
The CPI switched in 1983 from including real estate home prices to using "owner equivalent rent". While one may argue whether this is justified, it definitely changes the meaning of CPI in many more ways than you'd expect (e.g. home prices were based on sales, OER is completely speculative). If you kept the old computation for just this component, this is how 2000-2010 would have looked: http://seekingalpha.com/article/45720-how-owner-s-equivalent... (which is much closer to shadowstats - and remember, this is just reverting one component back to 1983 computation, everything else the same); If you look at the BLS faq http://www.bls.gov/cpi/cpiqa.htm#Question_2 , they quote NAR data to show the BLS are saints. If you actually follow the NAR data, you'd be laughing at using it as reference.
If the BPP used house prices, things would look very different. They cannot use speculative OER at all because only the BLS have that data. The fact that BPP agrees with CPI indicates that they try to track it, rather than figure out a true "basket".
Furthermore, even if you take CPI as gospel, the BPP has 1% difference over 3.7 years it exists. Assuming that this difference remains, in 50 years, your government adjustment benefits will buy 15% less than what they officially should be able to buy.
If you are really interested in challenging your world view, read Karl Deninger's blog for a month (the market ticker). Stuff you'll never see in the New York Times, CNN or CNBC.
Of course, there is a giant different between your analogy and what we are debating. You guys haven't proven beyond a doubt that inflation is significantly higher than the BPP or CPI. You are also accusing BPP of fudging their numbers, and admittedly they aren't open about their data sources, but here's the rub.
You could easily create your own BPP type index, make it open with the code in the public domain, and show some real numbers to prove that the BPP is fudged. Right?
side note: shadowstats is not transparent either. They haven't produced the data sources plus the code that generates their numbers.
I have not done that anywhere yet. On the contrary, I keep assuming you have them; perhaps I should stop, as you ignore what I write, and your only arguments are "but CPI=BPP, and even krugman says so", completely disregarding everything I write. Is my explanation that CPI can only equal BPP if they were constructed to be so wrong in any way?
> but you are the one who used the anecdote of your personal purchases as evidence.
No, I brought this up as anecdote. I did bring independent evidence (from a seekingalpha author) that agrees with shadowstats analysis - which you conveniently ignore.
> For every case like this, there are 100 where the professional consensus was right, and the lone dissenter was simply a quack.
This is a meaningless statement of appeal to authority. I'm not debating thousands of cases. I'm debating one case, with some support, which you conveniently ignore.
> You guys haven't proven beyond a doub
Who are "you guys?"
> You are also accusing BPP of fudging their numbers, and admittedly they aren't open about their data sources, but here's the rub.
Sorry sir, you apparently lack both statistical skills and reading skills. I am not accusing BPP of anything of the sort. I would urge you to reread what I wrote, but I have done that already, and that is useless.
For the benefit of others who actually read (if anyone still is) - the BPP index cannot have been constructed other than to have a value similar to the CPI. They do not have to be fudging or part of a conspiracy to be wrong (a fact jshen conveniently ignores)
> You could easily create your own BPP type index, make it open with the code in the public domain, and show some real numbers to prove that the BPP is fudged. Right?
"Easily?" Are you aware that BPP is the only (semi-)independent source of this data, and when they were about to close down there was a lot of outrage at the lack of any alternative.
In fact, there are millions of dollars to be made in knowing the difference between the officially published CPI and the "analyst estimate consensus". If you think it's easy, do that and you can retire on the first time your CPI collection disagrees with estimate consensus. Similarly for NFP numbers, PPI and others.
"Easily?" - one of us is living in lala-land, and it isn't me.
> side note: shadowstats is not transparent either. They haven't produced the data sources plus the code that generates their numbers.
Neither does the BLS, by the way, only very vague descriptions, and parts of the data are based on interviews asking people to speculate "if you were to do this, how much do you think you could earn / how much would it cost".
There is NO WAY for anyone to independently verify significant components of the BLS' CPI number.
Here is their own explanation: "Data collection: our data are collected every day from online retailers using a software that scans the underlying code in public webpages and stores the relevant price information in a database. The resulting dataset contains daily prices on the full array of products sold by these retailers. Our data include information on product descriptions, package sizes, brands, special characteristics (e.g. “organic”), and whether the item is on sale or price control."
That isn't hard to do in my mind. Why do you believe it is so hard?
Let's be clear. You are claiming that inflation is significantly higher than the CPI or BPP. You can talk until your blue in the face about the "problems" with those two, but you have to also provide some alternative data/math which is transparent. shadowstats is not transparent. It seems rather easy to me to make a price index, make the data public, and make the code public. I'm happy to help out on the coding side if you're up for it.
> Why is it so hard to create an index of online prices, which is what BPP is.
Why is it so hard to create a searchable index of the internet, which is all Google Search Engine is?
An index of online prices is much much smaller, say "just" 1% of the effort, so doing it dependably would cost "only" $5M/year or so to produce and maintain if you paid market prices (BPP has cheap student labor, I would guess, that makes their cost much lower; also, they can get away with not being robust). It's not just about crawling retailers - you have to be able to pull the prices and canonicalize products properly, and account for site layout changes. I actually did that in a former startup of mine. Doing it reliably is damn hard; embarrassingly parallel -- you could do it quickly by just throwing more money at it, but a ridiculously large amount of detail is involved.
Yes, yegg has been able to pull DDG with much, much less, but the talented people at Cuil were unable to pull with much, much more. If you're as good as yegg at this, I bet this is more rewarding (both financially and otherwise) than your job now. I know I can't pull a robust price index for less than a few $M.
> That isn't hard to do in my mind. Why do you believe it is so hard?
Because I live in the real world, and not in your mind. I actually did it in 1999-2001 for a startup. Technology has made it easier since, but not much easier. We developed a web scraper back then that was on par with everything available today (and is still ahead of many modern web automators like selenium).
Sites like pricegrabber are worth tens of millions if not hundreds of millions (meaning, if you were a company wanting to do that, you would either build-your-own or buy one for such a sum - so it's a good estimate of the costs, to within an order of magnitude), and all they do is create an index of online prices. In 2000, MySimon was sold for $700m for being nothing more than a price index. It wasn't a good deal for the buyer, but $70m today is probably a steal for a good, up-to-date price index of the web.
> That isn't hard to do in my mind.
I'm done here. I don't know what your real world experience is like, but it apparently doesn't help understand the involved statistics, economics, business and operational complexities. You demand details but you ignore them when given. I guess it's really a nice place in your mind.
> but you have to also provide some alternative data/math which is transparent.
BLS data is not transparent, and more than 30% of the value is officially based on speculation (a fact you conveniently ignore ignore). Ben Bernanke says it's accurate so it must be so. In the same way Europe is contained (as he said in 2008, 2009 and 2010), the mortgage crisis is contained (as he said in 2008 up until 2011), there is no chance whatsoever the US will be downgraded (as himself and Tim Geithner have repeatedly said when asked, up until the point it happened), etc.
If you actually read the data in http://www.bloomberg.com/news/2012-04-19/cpi-conspiracy-theo... you'd note that (a) there actually are no broad checks involved despite the title, and (b) while the BLS is not the only one using said methodologies, they are not universally accepted (not more than 40% of comparable countries use them) as it is claimed. Hedonics adjustments are more recent than the "recent" review of 1989 -- a review which was conducted with the implied target of finding that the BLS overstates consumer price inflation (by virtue of being commissioned by a congress quest to cut budget -- and what do you know, that's exactly what they found out!).
> It seems rather easy to me to make a price index, make the data public, and make the code public. I'm happy to help out on the coding side if you're up for it.
Since you live in your mind, and I live in the real world, it would be hard to bridge the gap and work as a team.
One of my close friends worked at pricegrabber for years, and the statement "all they do is create an index of online prices" is completely false.
Your continual use of ad hominem speaks volumes, and is your attempt to hide a lack of hard numbers.
Questioning your reading skills you ignore given hard numbers that you've requested is perfectly reasonable. Questioning your math or economics skills when you insist that BPP and CPI are independent when you admit to not knowning how they are derived is perfectly reasonable. You might want to check what ad hominem actually means (beyond the latin translation), you might be enlightened. Alternatively, you can just ignore anything that contradicts your world view, as you have done before.
Further, there is no free market, supply and demand never works like it "should", and the emperor has no clothes.
Markets are all artificial and manipulated by those who have the most to gain. Very relevant: US wireless ISPs ("telcos".) Their product is bandwidth since everything is digital now, yet we still have "minutes", "SMS", "mms", and "3G"/"4g" (and the inherent ambiguity in those terms deserves another article entirely...)
Make no mistake, you are being conned, you are being lied to, you are being manipulated...every day, for the profit of the ultra-rich. People die and generations are enslaved so a few thousand sick bastards can be kings in the "free world".
It has nothing to do with "immaturity", and all to do with your theory of understanding the world. A lot of theories of political economy --and they cannot just be dismissed a priori-- say that rich people are rich because of taking advantage of other people, societal imbalances, and, on top of this, that most "primary amassment" of capital in a society involves actual crimes.
So, it's only "immature" in some specific theories of economy/society, not all of them. That it happens to be considered "god given fact" in the society you might live in, is no proof that it is right. Contrarian theories are also quite common elsewhere.
Doesn't inspire confidence, and shouldn't.
they cannot just be dismissed a priori
Correct. They can (and should) be dismissed by observing that they contradict reality.
That it happens to be considered "god given fact" in the society you might live in, is no proof that it is right.
Don't know why you assume I'm just parroting something I've heard elsewhere. And it's not considered a "god-given fact" in the society I live in, anyway.
Contrarian theories are also quite common elsewhere.
Again, the standard of truth is not how many people hold a view, but whether ot not it is correct.
The guy was alleging that there exists a small cabal of uber-rich who control the world. That's pretty clearly not the case.
Having qualified university expertise on something should inspire SOME confidence, all else being equal.
But I wrote that for another reason: to show that one doesn't have to be an "idiot" to argue that, as the parent implied.
>Correct. They can (and should) be dismissed by observing that they contradict reality.
They should be dismissed IF they are found to contradict reality. And that's not as clear cut as the existence of gravity or the water becoming ice at 0 oC.
>The guy was alleging that there exists a small cabal of uber-rich who control the world. That's pretty clearly not the case.
Well, it depends on your definition of "small" and of "control". If I remember correctly, a small number of people do have a disproportionate amount of the total wealth, in the US and globally. A power-law distribution basically, right? And that wealth surely asserts lots of control. Surely SOPA and PIPA, for example, weren't proposed/passed with the insistence and for the benefit of Joe Sixpack or Joe Hacker.
Thank you. I've been evolving my own thinking along these lines for the past few years. Very happy to find someone who's been working along similar lines.
I'm resonating especially with the Wikipeidia article's decription that "it was never possible to separate economics from politics." That's been a key observation of mine for quite a while. Along with the observation that libertarianism is the fundamental inability to accept that money is power.
By GDP, Luxembourg and Lichtenstein are the worst countries in the world - with national debt ratios of $10M+ per person.
It even effects large economies, one of the (many) reason for the UK not joining the Euro was that the size of London's financial industry meant that it's debt/GDP figures would never meet the requirements even if the government never borrowed a penny.
Probably disastrous for both sides.
I suspect that David Cameron would be delighted to be free of the Scots but can't say so, meanwhile I suspect the Scottish Nationalists are probably horrified at the idea of actually getting independence but obviously can't say this either.
NB I'm a mostly pro-Union Scot - the only area that would make me vote for independence is if it meant closing the Trident submarine bases on the Clyde, which I can't see being an option that we are allowed to vote for.
ps. note British tongue firmly in cheek ;-)
Actually, the problem is that people infer terms to mean things that they don't mean, oftentimes because the terminology is (regrettably) overloaded, even when the technical meaning is very precise and limited. Understandably, people interpret these terms literally, which sometimes leads to conclusions that seem paradoxical or impractical[1].
Remember that economics is really just the study of choices: choices in the small (microeconomics) or choices in the large (macroeconomics). Choices may involve money, but money is not inherent in economics - it just so happens that there are many advantages to a monetary system, which is why most economies develop some form of currency, and which is also why many (but not all!) economists deal with money. Even though it uses similar terminology, macroeconomics is fundamentally different[2] from microeconomics at its core. One is the study of individual decisions on a small scale, and the other is the study of the non-random patterns of many independent decisions.
GDP is not the perfect measure of what it's meant to gauge (macroeconomic economic 'health', which is itself a problematic term). GDP systematically overestimates the health of oil-backed economies with huge wealth disparities, for example. That said, there's no metric that's much better for the general case - all have similar systematic flaws in some way.
Furthermore, GDP has the advantage that it's completely unambiguously defined. That doesn't mean it can be measured perfectly, but having an unambiguous definition is a key step. When you start talking about these contrived indices (the 'happiness' index, the 'corruption' index, etc.), you get the problem that there's little underlying justification for the way that the model is constructed, so even if the end results are useful for a particular domain-specific application, they don't generalize well. GDP, on the other hand, can be derived quite easily from first principles, so it generalizes very nicely. Furthermore, GDP happens to correlate very well with most things that we would classify as 'good' (quality of life, corruption, happiness, etc.), so it's a nice proxy for these intangible 'goods' (no pun intended), which are more difficult to measure precisely.
So back to your question: maybe the measurements themselves are rigged - that just gets at the question of who is actually doing the analysis. But the construction of the model is no more 'rigged' than any other model. You just have to be careful to know that, like all models, its application is still very limited, even if it's one that we happen to use quite frequently.
As George Box says, 'All models are wrong, but some models are useful'. GDP is 'wrong', but it also happens to be by far the most useful way of describing the patterns choices on a large scale.
[1] This is by no means specific to economics: it happens in statistics as well, and (to a lesser extent) in computer science.
[2] That is to say, they aren't mutually exclusive, but they are based on completely separate assumptions, so principles from the small do not necessarily carry over into the large scale.
My comment was about the discussion around economics, not economics itself. Of course mathematical models are more or less useful and all of that, but if the same English term is used in multiple arguments where it has a slightly different meaning each time? One columnist uses GDP as a stand-in for "size of the economy". Another uses it for something more akin to cash flows. That's not a problem with models, that's a problem with common usage of terms.
Secondly, and related, is the use of the term "useful" There's a lot of wiggle room in "useful". You could drive a truck through it. :) Useful to whom? In what context?
There's a larger and deeper discussion about the Wittgenstein-ian problems with networks of terms -- I believe it may be more accurate to say that GDP is a structured observation, not a metric. It's a subtle difference, but I believe it has a huge impact on the study of economics in general. But hey, like I said, I'm just an observer.
The problem here is that you are building a conceptual model of economics before you measure anything. It's backwards. If I buy a candy bar, am I trading an hour of my wages for food? I'm using money, but how did I get the money? Am I trading an equal amount of gold that represents the perceived valued I provided the rest of the economy? What is the real definition of the thing taking place here? I'd wager that there is no universal definition that applies to all economic transactions. It's something more like cellular automata with multiple dimensions, not a causality chain built of little blocks.
You want to measure something, and you're immediately knee-deep into abstract terms and aggregate numbers. So you come up with an abstract model for measuring aggregation before you even begin to measure anything. It's never going to work. You're never going to be able to construct a reproducible model with high fidelity like that.
So if you want to talk GDP, you can say you observed this amount of cash moving around. I'm okay with that. But if you say the economy grew or some such, it doesn't work. You are presupposing the thing you are trying to describe. Each transaction involving that measurement had it's own value and definition. You're taking an aggregate of a fudge of a bunch of smoke. At the end you get a number, sure, and you can take it and plug it in to various models and get something kinda/sorta useful. It's heuristics for mathematicians, not science (as we understand it)
If I'm actually on to something here and am not just being a crackpot, the implications could be that economics as a science can probably be only understood in a causal way by really complex computer models very carefully and rigorously constructed.
Hmm, try this. Money is water. Ok that is pretty opaque :-) An economy is a system, and like any system it produces a variety of outputs, the outputs are then consumed. If you have a commute, I really recommend the audio course on Economics by Dr. Tim Taylor of Standford [1].
Economics is a system build not by measurement but by observation. Not all economies have the same rules that run them, different governments put different variations in the ability for the system to adapt. You may find, as I did, that conceptual 'money' is simply an exchange mechanism for work done in the system, and it need not be coins or gold, the fabulous example from the lectures is 'large rocks' as money.[2]
From your comments it sounds like you are thinking of money in terms of something of 'value' or as a counter, which it is in the micro sense but it is a non-entity in the macro sense where you are trying to compute how much work a system (or economy) can get done in any given time.
"But if you say the economy grew or some such, it doesn't work."
Ah but it does, just as one can measure the efficiency of a textile mill in terms of joules, even though the people working there rarely think about how many joules are in the food they just ate.
The original article touches on, but doesn't really express, the 'real' problem Europe is having which is that giving up sovereignty over the currency you use means that you cannot lie to yourself or others about how efficient or inefficient your economy is.
Lets look at it this way, let's say you live next to guy who has a nice 3 bedroom single family home, a couple of kids in private school, he and his wife drive cars that are less than 3 years old, they vacation in various trendy spots, and go out to dinner at nice places a couple of times a week. You have every reason to believe they are successful upper middle class folks living the good life.
You on the other hand haven't been able to afford to replace a car except maybe every 5 or 6 years, you're kids go to public school, and its a big treat for you to go out with the wife. When you vacation you go camping rather than to Disney World.
Now lets say for some reason you enter into this weird agreement where everyone in your neighborhood turns over their finances to the Homeowners Organization, you and your neighbor both have your income and credit card bills go through them and if you want to get a loan you go to them first and they go to banks on your behalf. Now when this happens you discover that your neighbor earns less than you do.
Now to resolve the dichotomy between your lifestyle and theirs you dig into the financials a bit, and discover your neighbor is maxing out their credit cards, saving nothing for their kids college funds, much less for a rainy day, they lease their cars and have numerous complaints about late or missed payments, and they are currently trying to negotiate a tax payment plan with the IRS. BLAM! Because everyone shares financial information they can't 'lie' about their situation any more than you can.
So lets take this back to Europe. When a nation prints their own money, runs their own banks, and reports their own numbers. They can be like your neighbor and paint a very rosy picture about themselves even when it isn't true. When they can't print their own money so their output production is measured by a common value, they also can't lie about their situation. That becomes a 'crisis' because they really are insanely poorly managed.
Often times these folks deceive even themselves about the problems. It's a human weakness. And fundamentally governments have no money. Its always amazing when people talk about "the Government is paying for ..." when they should say "the Government is going to take an additional $x from citizens to give to pay for ..." and when you look at it that way, you have to understand that 'tax payers' are a finite resource. And in places like Greece where 'not paying taxes' appears to be a national pastime (I'm sure it isn't but the Economist paints it that way) that resource is further diminished.
So dialing all of that back to the notion of GDP. The simplest way to explain GDP to someone who has a limited knowledge of economics, is to pretend its like a persons salary. They spend their time working, playing, sleeping, living and they are paid some salary. The sum total of things they can do is nominally limited by that salary, and if they have more salary they can do more, less and they can't do quite so much. Through credit they can trade some future salary for stuff today, but they make a bet that they will have a bigger salary later so it won't be as painful to spend that money then as it is now. If people paid themselves their own salary in their own dollars they could decide to pay themselves what ever they wanted. So I could pay myself a million chuck dollars a year, and try to buy things with other people who pay themselves their own salaries. When I want to buy a loaf of bread from you I have to decide how many Chuck Dollars I'm willing to pay, you have decide what its worth in Dan Dollars or your currency. If you sell me bread for four Chuck Dollars and then find out one Chuck Dollar is only really worth about 10 Dan Cents then you will stop selling me bread so there is some incentive to keep it close to rational. Sometimes we will fail and I'll be stuck paying a five hundred Chuck Dollars for bread which seems excessive so I'll give my self a raise to 10 million Chuck Dollars a year. Now the bread is reasonably priced (for me) at 500 Chuck Dollars until you figure it out and start charging 2,500 Chuck Dollars for a loaf.
None of those games and problems are possible when we share a common currency. But we lose the ability to 'give our self a raise' as well.
Some of Europe's economies have lived, like the fictional neighbor, way beyond their actual means and covered up that fact with loose fiscal policy. Going with a common, centrally managed currency, has exposed those games and brought reality crashing down. What is sad is that this 'step' (going to the Euro) was a looooooooong time in coming and the various nations knew it was coming, and if they had been honest could have started ramping back then, but they did not. Reality hurts. It hurts a lot. And when you have been lying to your citizens about things for a long time, and now you have to tell them the truth, well that gets politicians kicked right to the curb. But the new guys and gals coming in, can't change reality. They can't go backwards to the 'good old days' of lying about things. They need to face facts, roll up their sleeves. downsize their outlays and upsize their tax rates to a point where everyone is back on board and then start the hard work of becoming better managed countries. It sucks, it sucks big time, but that it sucks unfortunately does nothing to fix it. Austerity is a 'program' like 'amputation' is a treatment for gangrene. Antibiotics and better hygiene early on might have saved your limb, but once you've got gangrene the choices become much more limited. Once folks get past the anger of losing the limb, hopefully they can process the changes they have to make to prevent it from happening again. Between now and then, pretty much non stop whining and lamenting.
[1] http://www.thegreatcourses.com/tgc/courses/course_detail.asp... (note don't let the price get you down they have sales all the time for like 80% off, and you can sometimes check them out from your public library)
I think we're fine here. I understand and agree with everything you've said. My comment was about the larger problem of creating the same kind of mathematical model for economics that we have for physics. We certainly have a lot of general models that work great and do all sorts of useful things. These things have their limits, though. But none of that has to do with Spain or the Euro. I was just referring to the foundations of economics itself, not this particular situation.
Looking forward to the course!
By the way, for any other readers who are diving down this far in the comments, there was also a great series of cassette tapes (I believe they're on CD now?) about economics and philosophy that I listened to back in the 80s from Knowledge Products. Great intro-level material. The Austrian economics and overview of Marx were especially good.
EDIT: Tip for TTC courses: never buy them at full price. They periodically have tremendous sales, and they're sufficiently expensive that you could easily save a hundred or two by waiting.
Basically, by changing the way you look at the numbers, the story changes from "The middle class has disappeared over the last 30 years" to "The middle class has done great and become wealthy over the last 30 years"
GDP measures the value of all the stuff and services we produce. Which shows how much income we earned. So, you're wrong.
Welfare has improved - the husband and wife have all the same goods and services as before (a house paid for by the man, which is cleaned by the woman), and they are now having sex (which is presumably welfare improving). Yet GDP has gone down $25k.
GDP measures the value of all the stuff and services we produce.
No, it doesn't. If you believe it does, I have a great stimulus package: ban joint bank accounts for married couples and require the higher income partner to pay a salary to the lower income partner.
This will certainly increase GDP. Could you explain how this would have any effect on anything else?
Your example is flawed for the reasons I mentioned. You have to include the opportunity cost.
For a problem like unemployment, the question to ask is why the market isn't clearing. There might be a lack of demand for labor, but why haven't prices fallen until supply meets demand? The answer isn't as simple as "not enough GDP."
So there is a negative incentive to keep old employees and not hire anyone new, due to the instant severance required at termination.
It is kinda of like paying 150% for only 100% of a good.
Employment policy has far more to due with unemployment than any other metric. The instant increase in youth UE was due to a huge percentage of youth workers being in the construction industry that took one of the hardest hits in the downturn, and the fact that replacement cost of any full time employee is to high to attempt fiscally.
The answer is that employment policy does not have more to do with unemployment than any other metric. This is a story about a huge housing bubble and an awful currency union.
Spain has become a victim of the "perfect storm" in regards to internal and external forces.
Edit: And the reason Spain's overall unemployment rate is even worse than Greece is probably as you say due to the fact that they've suffered more than most from the housing and construction bust (since it accounted for such a large section of their economy).
Edit 2: I think that both my argument and yours are overly simplistic. There are so many other factors at play which make it difficult (impossible) to point a finger at one particular cause. Examples: corruption, over reliance on tourism, lack of focussed structural investment (e.g. infrastructure), byzantine business laws and regulations, large sections of society regarding tax evasion as socially acceptable (with equally lax enforcement from the government) etc. Also, in Spain's case, there's also the dynamics of the Catalan and Basque issues to consider (which have economic impacts as well).
For unjustified firing, the employer has to pay 33 days of salary for each worked year (was 45 before the recent labor law reform)[1]
Not even the unemployment subsidy, which is given by the social security and paid for workers with taxes on their monthly pay, is that big (4 months for the first year, and 2 months more every 6 additional months worked, with a limit of 24 months).
[1] http://www.eitb.com/en/news/detail/828511/austerity-measures...
I know I wouldn't hire anyone in Spain if I were a business, because there's no demand in Spain. If my sales aren't growing, there is simply no need, full stop.
Businesses hire employees when they need them to make more money. If it is possible to serve their customers and their growth without more employees, they'd have no need to hire any employees, regardless of taxes, regulations, employment policies, etc.
As long as it is possible to make more profit with another employee, they will hire another employee.
So unless regulations/taxes/laws haven't become trivially broken -- where it's impossible to make money as a business with employees -- employment policy is simply not something that's going to impact the decision.
No demand? Really? Spaniard's won't pay $0.25 euro's to have their house cleaned, or $0.50 for a restaurant meal? Demand is not completely inelastic at 0.
The reason there is unemployment is because something is preventing markets from clearing. For example, it's possible that the government pays people more not to work than employers are willing to pay them to work.
Incidentally, there are plenty of reasons I might hire even if sales aren't growing in my sector of the economy. For example, I might want to increase my market share.
No. But wages and prices are sticky. And they've been noted as such since before there was unemployment or any employment policies of note. So it seems silly to further some notion that they may be the factors behind the stickiness and thus the failing demand.
furthermore, labour legislation changed 4 weeks ago, and it's at par with the rest of Europe now.
At a 10% income tax rate: First case is $22.5K/yr, second case is $20K/yr.
So yes: GDP is the same as income for the gov't for practical purposes.
2. IIRC, GDP includes government spending, which means that those tax dollars also go towards the GDP number (which are also less in the second case).
Also, anything that the gov't spends then counts as income for the other party = more income for the gov't.
It is why debt-to-GDP is a very important ratio. It is also why the PIIGS were obvious candidates for financial meltdowns.
[1] Added the important word "not".
> reduced spending should [...] transferring the
> money back to the people
Unless you're implying that investors worried that Spain my default before they personally get paid will pump money into Spain's private economy the moment their personal stake is clear. But panicky investors seem like the last people who would throw money into an economy with dodgy prospects.
And in general, the private economy has shown no real desire to do anything with its money other than hand it to stable governments or sit on it, despite very little return in either case.
So even as bonds mature, the money is not going into the private market at appreciable rates. And, in cases like Spain's, it also isn't likely to be handed directly back to the Spanish government keeping rates low.
It's going to either demand higher rates, sustaining the problematic higher rates, or run screaming for safer harbor.
In short, if investors had any intention of spending their money in Spain's private economy, there'd be no crisis. They would already be doing so, GDP prospects wouldn't be so awful and Spain's ability to meet its obligations wouldn't be in such doubt.
[1] Actually government spending does affect the balance of non-government supply and demand, an observation that is a fundamental part of the Keynesian school. But that's a second-order effect, not a first order one.
If Spain was pulling in $2-billion in taxes, and spending $4-billion by borrowing the deficit, then how does a reduction in spending down to $2-billion give money back to the people? It stops the bleeding of money into debt, but it doesn't give money back to people to then spend on goods/services.
True, but that's not the only pointless transaction one can make that would raise GDP.
Here is another: taxing some people and using the proceeds to pay others to do valueless work (e.g., digging holes and filling them in). A well designed austerity measure will attempt to reduce such payments. This will reduce GDP, but not welfare.
(That's not to say a poorly designed austerity measure can't be welfare reducing, I'm just pointing out that you need to dig deep into the specifics to make that determination.)
If you want to argue against austerity, explain why it's welfare reducing. Pointing out that it might reduce GDP just doesn't cut it.
I think that if they're intelligent in their austerity, then it'll be this non-productive stuff that gets cut. And what the big-government Keynesians so frequently miss is that the government spending crowds out the private sector. If the government frees up those resources (people, money, etc.), then the private sector can use it to produce something that people want to pay for.
But even if Spain isn't so intelligent in their austerity, well, just because something needs to be done doesn't mean that it's the government that must do it. There will still be every opportunity for private industry, or even Spain's underground economy, to fill in the void.
I generally agree with this: http://www.nationalaffairs.com/publications/detail/re-target...
EDIT: Of course, the EU monetary authority doesn't have a dual mandate like the Fed, and it seems to be run according to the needs of northern rather than southern Europe anyways. A lot of economists who were saying that the Euro was doomed are saying "I told you so" now. I don't see this crisis ending without either more fiscal integration or the dissolution of the Euro, and I think the later is more likely.
Digging up money is an obvious waste of time. In suggesting it, Keynes was making fun of people like Andrew Carnegie who advocated letting market forces "liquidate stocks, liquidate farmers, liquidate real estate... [and] purge the rottenness out of the system". Under market forces, deflation would have increased the value of gold, pushing the private sector to increase gold production and bring the economy back into equilibrium by paying people to... dig holes in the ground and produce more money.
The point of the parable may be less obvious today since no-one seriously advocates the restoration of the gold standard anymore, but the core insight Keynes had remains as valid today as it was then: when you are in a liquidity trap marked by deflation and insufficient demand, there is a huge free lunch to be had simply by printing money and spending it to direct unemployed labor into productive activities. This brings the economy back into equilibrium and is the reason austerity is welfare reducing. Because you advocate forcing the private sector to undertake a senseless course of painful adjustment that could be avoided simply by printing enough money to avert deflation. And whatever you spent your newly-printed money building would be a net positive, and ideally something with practical economic value driving long-term growth: a high-speed national rail-line, new schools, hospitals, etc.
Put more simply, Keynes' point was that the most senseless economic act you can imagine (paying people to dig holes in the ground) was still at worst merely equivalent to what the liquidationists were proposing in the 1930s.
But I wanted to take the opportunity to point out to other readers why they should be skeptical of the Keynesian prescription.
First, Keynes oversimplifies the system by assuming that everything is one big commodity. Everything is considered in terms of aggregate demand. The thing is, we don't have an aggregate demand problem in this recession: in aggregate, we're doing fine, and have been for some time. The problem is that we've got over-investment in some areas (like housing), and the need to shed that excess, and redirect it into sectors that have greater demand, is painful in any case. But the government's efforts to prop up housing costs is actually interfering with that process. And putting people to work on infrastructure projects as a stimulus doesn't do anything to help. Keynes's model assumes that demand (again, let me remind you that his terminology is "aggregate demand") is one homogeneous thing.
Second, inflation can't be used so effectively as a tool. Milton Friedman demonstrated pretty conclusively that such manipulations can't be effective, except in the very short term. The people aren't stupid, they can see that the government is inflating the currency, and then they take action to protect themselves from the losses that it would engender. The result is that the market will stymie the government's effort to benefit from inflation (not that the market will stop the inflation, but that it will interfere with any good that it might have done).
Further, inflation turns out to be a vehicle for redistributing wealth -- in the wrong direction. Before the inflationary pressure is felt, the first ones who get their hands on the new specie will enjoy its full value. And those people are the bankers. Do we want to make the banking sector the beneficiary of all that extra buying power?
And I'm not sure why you think that Milton Friedman was opposed to monetary stimulus in general. In fact, he rather explicitly was calling for monetary stimulus during Japan's crisis in the late 90s[1]. Yes, the fact that investors form expectations means that the Philip's Curve doesn't describe an economy with an active central bank, but this is very different from saying that monetary policy is ineffective. In fact, the idea that monetary policy won't work now is the typically Keynesian position (see "Zero Bound").
[1]http://www.hoover.org/publications/hoover-digest/article/654...
I don't mean to entirely torpedo the idea. I'm just trying to say that it's not to be treated as gospel: it's just a useful way to conceptualize some problems.
(And I may have been stumbling in my explication, since I'm really a professional software engineer, and only an amateur economist.)
If you want me to take a position on the United States - sure - I'll believe the US isn't facing a problem with weak aggregate demand when borrowing rates increase, inflation picks up or unemployment comes down. Right now the American economy looks a lot like the Japanese economy in the 1990s, a flight to safety among investors reflecting a preference for liquid assets over real investment. The most vehement critics of Keynesian models tell us this is wrong, but they've been predicting soaring inflation and spiking interest rates for FOUR of the last FOUR years. And these were also generally the same folk trying to invent a debt crisis at a time when the US was unarguably in a liquidity trap and could essentially borrow for the long-term at zero percent.
It is hard to escape the conclusion that right-wingers hate Keynes because they associate his ideas with some vague notion of socialism, and most aren't educated or well-read enough to understand what he is actually saying. I'm not putting you in this category since you clearly state you don't believe the United States is in a liquidity trap and that removes any unambiguous point of contention between you and Keynes as far as I can tell, but I also don't think your critique is necessarily on-topic since you seem to have something against Keynesianism and I can't tell why: Keynes never advocates inflation and doesn't advocate subsidizing bankers. It sounds like you're bothered much more by monetary policy than anything else.
I also don't think your critique is necessarily on-topic since you seem to have something against Keynesianism and I can't tell why
Number 1: What I know about it seems too simplistic, and it contradicts other models that I already know much more about.
Number 2: Not an argument against Keynesianism itself, but it's application. As you note, many on the right "associate his ideas with some vague notion of socialism". I think that's because Keynes's ideas are misappropriated by big-government types (primarily but not exclusively on the Left) and used incorrectly as justification for what they wanted to do anyway.
As I've noted elsewhere in this thread, a proper reading of Keynes would give us a plan for the entire business cycle: yes, we need to spend to stimulate in the bust; but the other side of that coin is that we need to save during the boom so that we've got something to use to stimulate with. The very same advocates of the Keynesian approach to solving the bust are unanimously uninterested in following through with the other half of his prescription. This reveals to me that they're intellectually bankrupt, and just using a convenient egghead as cover to allow them to continue their game plan of pandering for votes by promising favors to all.
Who are these ghost economists? Brad DeLong? Paul Krugman? Christina Romer? Larry Summers? I can't think of a single non-right-wing economist who advocates anything close to this. If anything, the orthodox position since the 1970s has been an overwhelming preference for monetarism, originally by targeting growth in the money supply (see Friedman's "we are all Keynesians now") and then by inflation targeting once the former didn't work. Fiscal stimulus is advocated only at the lower bound, when it becomes impossible to lower interest rates further since they are already at zero. Fiscal restraint is preferred since government spending is perceived to be dangerous and people want ammunition for bad times.
And where is the hypocrisy? The last period of fiscal sanity in the US came during the Summers period under Clinton, which put the national budget in surplus and put the country well on track to eliminate the debt. The intellectual tradition which destroyed this came from supply-side Republicans economists like Mankiw who helped ram through a series of top-heavy tax cuts, expanded military spending and eventually pushed through a medicare giveaway to big pharma. So perhaps the intellectual traditional of "pandering for votes by promising favors to all" is not the one you think it is.
I'm not talking about economists, I'm talking about politicians who know nothing about economics, but use it as a convenient excuse (although I'd like to single out Krugman for becoming a complete political hack and eschewing so much of what he personally wrote as an economist).
The last period of fiscal sanity in the US came during the Summers period under Clinton
That's certainly true, and in retrospect I commend Clinton for it (though I have to confess to being a detractor at the time). But a President does not define a party or an ideology. Recall how much arm-twisting Clinton needed to do in order to get welfare reforms passed.
And I believe I said that both parties are guilty, so don't read my comments as a defense of Conservatism by any means. With very few exceptions, the legislators on both sides of the aisle have little interest in fiscal restraint, even (especially?) in boom times.
Yes, I oppose military increases, Medicare Part D. But I also oppose their Liberal counterparts. While given our current fiscal mess, taxes -- perhaps even tax hikes -- need to be part of the solution, in the long run the whole thing needs to be scaled back drastically (Ryan is barely a warm-up), and that should allow for lower taxes in the long run.
In the first case he has 175 of investments (I) and 25 of consume (C).
In the second case he has 200 of investments.
If some of the downvoters can please explain in those terms where I am wrong, it would be nice. Please, show me where the +25 come from in the 1st case.
Before marriage: 175 I + 50 of consume (the man consumes 25 in the form of a clean home, his maid consumes 25 to buy shoes) = 225.
After marriage: 175I + 25 of consume (the 25 consumed by the wife to buy shoes) = 200.
By the way, your question is good, and I really wish HN wouldn't reflexively downvote stuff they don't agree with.
When they get married, the man's income stays the same. The woman's income evaporates. She's not getting paid anymore. So their combined income is now 200K.
But the situation is exactly the same! The same amount of work is being done.
GDP works exactly the same way. It's an account of money flows, not production or actual economic activity.
Again, you are looking at the GDP of the man, not of the pair of people.
Because the man first spends 25k, and then the maid spends 25k again, the 25k is counted twice in GDP statistics. In the second case, it is counted once.
This is why GDP != Income.
When the maid gets married, money is no longer spent on consuming her services, and that's the end of the story. Everything else is just accounting. In this example, the 25k of spending in the first case is counted one time extra because it passes through the maid on the way to some other saving or spending.
In the real world, the money doesn't go under a mattress, of course. It gets spent, invested, etc. Your example doesn't represent reality at all, because both men, whether giving money to the maid or not, add way more than $200k to the economy, because by buying goods and services they are basically giving fractions of jobs to workers all across the economy.
GDP tries to measure the economic activity of a nation. Saying it's a bad measure of individual wealth, while true, is completely beside the point. It was never meant to measure that. Someone who puts themselves into debt building a business will have a negative net wealth for quite a while. Doesn't mean they aren't adding value to the economy.
Why? If the man sticks money under the mattress, he reduces inflation (slightly) and increases the buying power of the rest of the world. In practical terms, a person who was a marginal purchaser of maid services is now able to have a clean home.
I.e. for simplicity suppose there were 1000 people willing to buy maid service for $25k, 1 person willing to buy at $24,999 (the marginal purchaser) and 1000 maids. If the man becomes a miser, the price of maid service drops to $24,999 and the marginal purchaser has a clean home.
Saying it's a bad measure of individual wealth, while true, is completely beside the point. It was never meant to measure that.
Tell that to whoever wrote the article. You and I seem to be in complete agreement.
Because the money under the mattress doesn't produce a good or service. The maid does. By spending money you increase the number of goods and services available to the world. That's the way our economy tends to work. You spend money to get goods and services, which encourages the production of goods and services. Money in motion leads to more stuff. Money not in motion means people are sitting idle, not producing the goods and services they otherwise would. Whatever good the money under the mattress does for the inflation rate, it's more than counterbalanced by the fact that the world has less stuff to spend its money on.
If prices drop and she works for the marginal purchaser, she produces the exact same service: a clean house.
If you want to claim fewer goods/services are produced, you need to postulate another mechanism.
See this article defending Scrooge: http://www.slate.com/articles/life/holidays/2004/12/what_i_l...
What I objected to way back in the initial post was your example: A person spending the money giving someone a job vs. not spending the money. That doesn't illustrate why GDP is messed up at all.
Saving money is great, because it allows you to more/better goods+services for your buck. Getting more stuff is what the economy is about. But you will help the economy much more if you take the money you saved and buy more stuff, or invest it, or whatever, than if you put it under the mattress.
A boom is when the money is in motion. A recession is when the money isn't. Even if the size of the economy shrinks, the number of actual dollars hasn't. They've just stopped moving around, causing the prices of things, like stocks, or labor (wages), to plummet.
I render a service to yummyfajitas for $10M; say, sending a text message "you rock!" yummyfajitas renders similar service to me for $10M; say, sending a text message "you sock!" back.
GDP = $20M+$0.20 (cost of text messages). Net change to economy: 0
You can (and indeed, countries do) inflate GDP for various reasons, such as GDP/debt requirements.
I just gave an example in which the GDP is 100,000,000 times larger then the observable transaction outside us two people ($20M vs. $0.20). It is perfectly ok from legal and tax perspectives (income and expenses cancel out; accounts were netted).
Now, given how easy that is to do, why would you assume that prices properly reflect value?
As an example, the GAP and Banana republic will sell you everything at 50% discount if you know what you are doing (there is a 40%-or-so discount window for "loyal customers" every week, and other coupons and rebates that stack up). What price should Banana Republic consider their inventory in? The higher price, or the lower price?
Now, when they transfer this to Banana Republic UK, what are the prices (and values) they should use?
This is all ripe for perversion, and it is this "flexibility" that allows Google and Microsoft and other multinational corps to pay 3% tax on one hand, and companies to present arbitrary GDP numbers on the other.
Prices and values only reflect each other in efficient markets -- but those are almost nowhere to be found.
I don't think we disagree as much as it would seem from our debate on HN.
I know HN has a libertarian, small-government bent, but there's a reason public spending is included in GDP: it's expansionary. The government pays people to do things, then those people buy things. This spurs growth. As with many things, it's a spectrum and going too far in either direction (austerity v. public ownership of economy) is a bad thing.
What is clear is that, when you have a quarter of your country out of work and fully half your future workforce untrained and non-contributing, you don't further reduce the consumptive power of your population. Unpopular an idea though it may be in these parts, Keynesian economics works in regards to recovering from recessions and depressions; disciples of the Austrian School have yet to show any ability to do so and their policies look set to spell the end of the Euro.
The private sector is fundamentally better and healthier in the long run for a nation's economy than its public counterpart, but when the private sector is depressed and getting worse through negative feedback loops, the public sector has to step in. It's the growth driver of last resort.
Public (gov't) spending "counts" in GDP, not because it's "expansionary", but because it's an expenditure on final goods and services. Even if government spending was contractionary, it would count towards GDP. That's just how GDP works.
Likewise, there are reasonable arguments that government spending is/can-be contractionary. (I won't try to show that such spending _is_ contractionary, just that it may be).
All that needs to happen for it to be contractionary is for each dollar of government spending to reduce (crowd out) private spending and/or investment by more than a dollar. Harvard economist Robert J. Barro has been arguing this is the case.
Libertarian (by way of Austrian) economics failed in this recession. Period. That's not to say that they don't lead to greater growth in the good times, but when the chips are down you want Keynes. You want large government intervention. Every successful recovery has rested on this principle, and every policy in opposition to it looks set to fail.
A rational government would apply the appropriate models in the correct situations; we are, unfortunately, stuck with self-serving idiots.
Spain is grim BUT it's important to understand how big the black economy is here. A lot of the unemployment numbers are colored by people actually working on the side while putting the dole in their pockets.
Also GDP debt is not that bad and the government seems able to actually push through reforms in comparison to Italy or Greece.
I would prefer to see the percentage of people on the "ajuda" that is the only thing available after you loose the unemployment benefits.
Living here there is one massive obvious issue. The property prices have not dropped as massively as in the states. My theory is that the banks are not selling property as they don't have to mark to market. If they had to write the market value of all that property I figure the whole Spanish banking system would be bankrupt.
As for property prices, banks aren't lending either. What I see is that people aren't buying or selling; they are moving into old family homes (la casa del campo) and moving in together or back with their parents.
The real pain is how bad the situation is and how shameless the politicians are.
Spanish society isn't up in arms precisely because of the black economy, rendering unemployment indicators really ineffective.
I was in Spain in the early 2000s, and there was a huge Real Estate bubble. People came in droves into the country, illegal immigrants made 3000 euro per month (~5000 US$) tax free without any qualifications, and they couldn't come fast enough. Even then, when demand for workers was IMMENSE, official unemployment figures never came under 9%. That's pretty much the bottom over there.
Rajoy already introduced a less protective employment legislation and he will have to lower the barriers to make contracts further.
No doom and gloom. Hardship, yes. The biggest hurdles are already being taken upon in just about 100 days since the socialists left power:
- forcing banks to re-provision on their massive mortgage leverage. Basically, take the hit and admit that housing prices need to FALL big, and they will have to take a big hit.
- reform in sacred areas like education, healthcare and - most importantly - standard contracts.
There are 5,27 million of unemployed in Spain. 3 million of them receive unemployment benefits of some sort which leaves 43% without any sort of benefits. The two million that do not receive anything at the moment could become 2.5 million by the end of the year.
Of the 3 million with unemployment benefits, 53% receive 426 euros (557 USD).
N.B. I live in Tenerife, Canary Islands (Spain).
Sure, but how many of those people were unemployed before this mess? I live on the mainland, and honestly there are a lot of people "working", if you know what I mean. No benefits, no real job, but money comes in. The worst part is when they admit to it (or working illegally and collecting benefits) and laugh it off, then follow with "we know its wrong, its just the way we are". THEN they complain about the politicians? Who are... Just like them, but at a bigger scale?
Iceland seems to have fixed the problem the correct way: default.
Greece just did the equivalent of a credit card balance transfer while converting the loan to a secured transaction. In the name of "saving" the banks of Europe, Greece has been financially raped. Spain is next.
Oh, and Japan and the United States aren't too far behind.
On one side of the coin, people see that investment in US debt isn't so safe as they thought. Thus, borrowing becomes more expensive for the USA.
On the other side of that coin, America will have mostly escaped the really bad consequences of its behavior. I submit that we will not learn our lesson from it, and won't alter our behavior in any meaningful way.
I see those two things combining in a really vicious cycle.
Why default when you control the currency that all your foreign debt is denominated in? The us has an option other countries in this position do not.
This is the part that dumbfounds me, Iceland ignored the common wisdom when they common wisdom said that very bad things would happen to them if they did not listen to the "smart" people. They went ahead and did it, and none of the bad things happened, further things got a lot better. But somehow we allow everyone to convince us to ignore the blatant evidence that Iceland presented that those saying don't default are pretty much lying through their teeth, because they have a conflict of interests.
That's not true. The "smart people" understand Keynesian economics and said that pretty much any policy was better then austerity.
Unfortunately, there seem to be social pressures that seem to encourage the very thing that will make things worse during a recession. How many times have you heard things like "everyone is suffering and the government must share that pain and tighten its belt too"? In fact, the "smart people" are screaming to do the opposite!
http://www.npr.org/blogs/money/2012/04/13/150586792/should-i...
How about the reality of the situation: Spain was a paragon of fiscal virtue prior to the crisis:
http://krugman.blogs.nytimes.com/2012/04/15/insane-in-spain/
Spain had low debt and a large budget surplus.
It turns out though that the private debt of large banks is a form of public debt in disguise, at least as far the "solutions" to the debt problem have been implemented by every country with the exception of Iceland (i.e. the public purse has been used to bail out the catastrophically over-indebted banks directly or indirectly).
http://www.cepr.net/index.php/blogs/beat-the-press/spain-did...
If our model will fail there will be to reconsider a lot of things, but if it will survive this crisis it will show that it is possible to create developed nations where a decent level of public health care, school, and services are possible in the long run.
"So if you're poor and you get sick you just... die?" "Pretty much."
Usually you end up in a lot of debt. But it is actually illegal in the US (last I checked) to actually turn away a dying person at the emergency room because of a lack of coverage.
Now, they may wish they had died when they get the bill, but that's another argument.
Suppose you have cancer. An operation costs $100,000. If you get it within six weeks, you live, otherwise, it metastasizes and you die. If you haven't got the $100K in the U.S., they won't operate, and are under no obligation to do so. It's not an emergent condition.
Now, 16 weeks later when you're dying, they'll put you in a hospital bed, give you oxygen and morphine, and try to ease you into death - regardless of your ability to pay (though they'll try to get paid from your assets and your family, of course). But that "guaranteed" care is perhaps not as comforting as getting the operation and staying alive would have been.
This looks as efficient to hospitals as writing a bill to a rock or a tree
Hospitals over-charge a lot. If you call hospital billing and negotiate a bit, you can get a much lower bill.
If you can spend the rest of your life paying off your hospital stay, you will.
Well this part, I'm OK with. I will gladly take credit on my future earning in exchange for a shot at having future earnings.
Edit: Clarification
My sister has cancer, hardly counts as rich, yet she got the chemo she needed. The bills are huge, but so far we have been able to pay them. I'm not closing the door to anything different from what we have, just saying that it's probably not as bad as you might think it is.
If you are completely poor, you are 'almost' OK. Hospitals don't actually dump people on the street (well a few did). The problem is that the costs for everyone else are hugely inflated to pay for this.
So if you have a job and go to hospital and your insurance doesn't cover you - for some administrative reason, or you just changed job and the insurance doesn't kick in, or it's an existing condition and your new insurance doesn't cover it. Then you are really screwed - you are looking at the price of a new car for a relatively minor case (broken leg, appendix) or your house for anything major.
The major problem (and the reason the US has a 3rd world life expectancy) is that the system really doesn't fit for any sort of preventative medicine. Vaccinations, healthy lifestyle stuff and especially screening are a fraction of what they would be in Europe.
No it doesn't.
http://en.wikipedia.org/wiki/List_of_countries_by_life_expec...
(Not disagreeing with your overall point.)
But diet, pre/post natal care and screening for eg. cancer are the things that make a HUGE difference to life expectancy - not high-tech scanners and specialist brain surgeons. And these aren't things that are addressed by the US system.
I've been in both situations when I didn't have insurance. Economically, it would be much better off if we had universal health insurance, so major sickness wasn't so crushing economically, but we don't "just die".
What is true is that people die sometimes because they don't have insurance and can't afford preventative treatment for conditions they don't know about until it is too late.
Spain did not run up high public debt.
http://www.cepr.net/index.php/blogs/beat-the-press/spain-did...
http://www.cepr.net/index.php/blogs/beat-the-press/spains-qd...
Things that actually caused the crisis: a flawed shared currency system that lacks risk sharing mechanisms, an unregulated government bond market riddled with moral hazard, state corruption.
What about family, friends, hobbies, etc. There's plenty of people not willing to move to a different town/city/village in their own country for a job, yet alone to a different country.
That said, another out of work neighbor started a small business and my wife and I built him a small website and bootstrapped it a bit with an adwords 75 euro card. I wish more folks were like him...
We actually were looking for IT people in Malaga, but it seems that people don't really want to work. I know enough companies from 'the north' looking for people in the south; people are just not applying and if they do they mostly ask for weird conditions... I know dev jobs for at least 100 people at different companies which cannot be filled in Malaga.
The problem is that emigrating requires money and mobility, and Germany is looking for qualified people. Hence many of the emigrants have university degrees, and only the lesser qualified remain, which is not exactly helping much, economically.
Besides, it's not like Germany is paradise either. The official unemployment numbers are low compared to other Eurozone countries, but (a) that hides a lot of underemployment such as in part-time jobs and (b) even those "low" numbers are still pretty high.
Besides, the people being offered jobs abroad are capable of getting a job in Spain.
Usually, people forget about the natural unemployment rate of Spain, which has always been really high. That includes underground economy.
So, yes, there's an alarming problem with unemployment, but numbers shown are imprecise.
Right now, and for the first time since Franco times, Spain will be a net emigrant country (2011 stats to be released soon). Germany is a popular destination. UK as well.
N.B. I live in Spain.
But there is a problem. Many of the young people unemployed come from the construction. People who stopped studying when they finished the ESO (secondary education, from 12 to 16 years old) or even before that, and consequently they don't have any specific formation (and very few know german language). In this situation, they can't migrate to another country, there is no job for them here neither in Germany.
Of course, this is causing a problem on the long term. High-qualified people is migrating. Low-qualified people is staying. Spain can't keep a sustainable economy with this situation. This crisis would not had affected Spain so much if the Real Estate boom had been stopped early and the inversions in education had been increased significantly, and with this panorama the country won't be able to correct the situation, and we will be vulnerable to another crisis like this one.
This Keynesian conversation is going to be very interesting to watch over the next few years. Lots of countries trying different things. I imagine no matter how it turns out, there will be quite a bit of spin, though. But still, it's better to have examples than just listen to theory, even if the examples are murky.
From what I hear, more QE is coming from the ECB. That might have a generally good effect on many economies. Or it might just be fun to blow through for a few months. We'll see.
As you indicate, Keynes by-the-book does not. He would have us actually save during booms, so that we can pump up the economy in the busts.
However, in practice, those in power who follow Keynes seem to be doing so not because of any belief in the economics, but because it justifies their wish to buy greater power by wielding more money. Thus, they don't follow the invest-when-booming part of the model. The result is that the government spending is at best balanced, and much more often it's in deficit.
How does this columnist then believe that he understands the economy if policymakers are so clueless? If Spain's economic problems were so easy to fix that everybody could just read this article and solve them, they probably wouldn't exist in the first place.
-F.A. Hayek
The author isn't claiming they know how to manage it better. He's just suggesting that their management, or philosophy of management isn't correct. (But maybe I'm giving the author too much credit!)
... and explain why again this is a problem? Unfortunately, the majority of commentators just take "high debt = bad" as a given, because they confuse their own situation (private household, currency user) with that of the US government (currency issuer).
The US situation basically boils down to: the rest of the world has been crazy for US$ for some time and is therefore willing to send real goods to the US in exchange for numbers in a computer system. This is certainly going to change in the long run. That will drive down US imports and make imported goods more expensive for US residents, but that's only fair. It won't lead to collapse. In fact, if it is semi-intelligently managed, it could lead to a rebirth of US industry.
And because while you and I have no problem with the idea of saving for retirement, saving and buying that car in a few years, creating a college fund for the children before they are even born, etc, the US is run by politicians and politicians don't give the rear-end of that prostitute they are fucking about what happens after the next election.
So they will spend the money on frevious things.
The further you draw the analogy out, the more ridiculous the idea of equating government finances with household finances become. It's just folk economics. And that's ideology-neutral: you can be a Keynesian, monetarist, goldbug, whatever and still should reject that position.
There is no sense in which the government can save money like you and I, because the government is the currency issuer. It has an infinite stockpile of potential money anyway, adding to that stockpile is entirely useless.
Keynesian is saving money during booms and spending money during recessions. Yet during booms the money saved is too little and during recessions the money spent is too much. The debt will get bigger and eventually you either revert back to monetarism and pay down your debt or you default on it by not paying/printing money, the latter latter choice leading to hyperinflation, while the latter former choice means you're reverting back to Monetarism because no one is going to lend you money anymore.
But remember, the purpose of Keynesian approach was to smooth out booms and busts in the economy, yet what we're seeing is making them lasting longer and falling harder.
During a boom, I think the mentality of politicians goes something like "We have money to spend on buying votes but instead, we are saving it? Insanity!?"
When you're forced to spend lots of money for the sake of spending money, the money is likely to be inefficiently allocated, investing in stuff that leads to more spending (like $900 handouts to each citizen) rather than investing in stuff that increases production in the long run (like building a fast railway network between cities, which require years of planning).
Monetarists would balance the budget and make careful measured investments in the economy. Yes there will be boom and busts but even in recessions the economy is still fundamentally sound, and thus will be sure to recover. See Germany for example.
Other developed countries (Canada[1], Australia[2]) followed Keynesian economics and had budget surpluses during period leading up to 2008.
The US, OTOH had expanding deficits. It is time people stopped blaming "the system", and assigned the blame where it should lay. It is the fault of one administration, and one administration only that the US economy is in the state that it is.
This isn't about progressive vs conservative politics either: Australia & the US both had conservative leaders in this time period, while Canada had a (center left) Liberal government. Only one country ran deficits.
[1] http://www.canadahistory.com/sections/eras/moderncanada/budg...
Really? The best Keynesians in the world managed to save 20 billion during good times and needed to spend 100 billion to prop up the economy when times are bad? Oh and the government estimates we will spend another $200 billion before we start saving again.
I doubt they will be able to save $320 billion to get back to where we started, before the next recession.
How is that sustainable? We'll be fine for the next 10 years. But seriously... "Don't blame Keynesian economics for the failings of the politicians" is like saying "Don't blame Communism for the failings of the people".
I'm not blaming the system. Just need to vote for the party that is going to keep the budget balanced. The system works fine, I just voted for the wrong party last election.
If you read the wikipedia article you'll note that net debt is only $80 billion, not $320 billion.
It's sustainable because when the economy grows the debt becomes a lower proportion of the total budget which makes it simpler to pay off.
I don't think either Australian party is proposing a balanced budget. The (current, left wing) Labor party is getting criticized for trying to bring the budget back to surplus next year. It's unclear exactly what the oppositions proposed budget position would be, but it is likely they would follow similar policies.
If you read my comment more thoroughly you'll note I said net debt is -$80 billion and that $300 billion is an estimate from 2009 (which wikipedia agrees).
"It's sustainable because when the economy grows the debt becomes a lower proportion of the total budget which makes it simpler to pay off."
No it's not. Yes it's a lower proportion, by what, one percentage point a year, or maybe even negative one depending on the interest on the bonds (growth - interest). I'll bet next recession they'll be at something like -$10 billion, the next one after that -$35 billion and it just rolls downhill from there.
"I don't think either Australian party is proposing a balanced budget."
You're right, maybe I'm too optimistic. The system is no good at all. I would really hope some day I will be able to participate in a direct democracy government.
"The (current, left wing) Labor party is getting criticised"
The government is getting criticised for everything it does. And?
Reply to earlier comment: "The US, OTOH had expanding deficits. It is time people stopped blaming "the system", and assigned the blame where it should lay. It is the fault of one administration, and one administration only that the US economy is in the state that it is."
Okay it's Bush's fault, what now?
Too little or too much with respect to what?
you (...) pay down your debt by (...) printing money
There is a misunderstanding underlying this sentence which probably explains most of the hyperinflation-phobia that is going on. The truth of the matter is this: both physical money and treasuries (government debt) are liabilities of the government. There are only two differences between them: (a) coupon (interest payment) and (b) maturity.
Paying back the debt by "printing money" is just exchanging one maturity for a different one. There is nothing inflationary or defaulting about that. Heck, the US government could just stop issuing bonds with long maturities altogether and it wouldn't change a thing (except for altering the maturity/interest structure of the financial assets held by the private sector). All this debt you're seeing is money that has already been spent.
But remember, the purpose of Keynesian approach was to smooth out booms and busts in the economy, yet what we're seeing is making them lasting longer and falling harder.
This may be your personal impression, but if you look objectively at the actual data, you'll see that it is incorrect. Whether it can be attributed to Keynes or not, both the frequency and the magnitude of recessions have been much lower since WWII than before. Just before the GFC, some economists even had the hubris to proclaim the business cycle dead.
The current austerity measures combined with unemployment mean the markets at large do not expect Spain to remain stable enough to invest in. With extremely high unemployment, especially among youth, comes social instability. This kind of instability frightens governments, which typically point to the private sector as the source of all ills and nationalize swaths of industry in order to feed populist sentiment.
This fear is being reflected now, and I tend to agree that I don't expect the mid-term to be kind to Spain. However, in the longer term it may come out better off, provided Germany continues to hold the Eurozone with an iron-wallet.
Germany does (mostly) control the EU by proxy anyway (~ '-')~
There's a thing called the law of supply and demand. Price fluctuates to keep both roughly equal.
But when you hold the price artificially high, you get more supply than demand, especially when supply is not easily changed, as is the case with labor.
There is no mystery here. Just people adopting policies whose effects they do not or will not understand.
http://www.google.com/publicdata/explore?ds=ml9s8a132hlg_...
Unemployment here is also higher than in the mainland since there's not much of an economy. There was construction but that bubble burst. There's tourism... and nothing else.
The interesting bit is that you don't really see the effects of the economic crisis, not directly. Most everyone drives nice cars, the parking lot at the mall is full, etc.
You do see indirect effects, though. There are more security guards at the mall and the supermarket within. One of the cafes installed two video cameras. The pharmacy posted a note that stating that no refunds will be offered on medicine or unused prescriptions.
Oh yes, the property prices here are behind the mainland adjustment-wise. Must be due to our awesome weather.
Yes. The managerial class. Banksters need reckless spending in order to put more people and nations into debt servitude. If austerity works, people might (gasp) start to look to the free market for answers to economic woes, and start damming the banks and governments for their mis-management of economic matters.
So, generally speaking, this should make moving to Spain and working remotely from there pretty attractive, shouldn't it? Can anyone from Spain comment on how the life is like there at the moment (assuming the 100K USD income level)?
I make a third of that (a fourth after taxes) and live happily in a coastal town (Vilassar de Mar, if you want to GoogleMap it :)) 25 minutes by train from Barcelona, with my girldfriend (no income). So, yes, with 100K USD you'll be fine ;)
Crime rates are low, so no security problems neither. Cities like Madrid and Barcelona offer all kind of services and their public transportation is great (you don't even need a car). And, of course, our climate is really great.
In short: Spain is a good country to live in. Although all the news you can hear with "Spain is sinking, Spain is doomed" we still live (I'm talking from my experience) very well.
It simply shows 3sets of countries.:
Spain/Greece/Portugal it's presumably very easy to claim unemployment and 50% of those 50% listed are also working for cash
Italy/UK/France it's relatively harder to claim unemployment while working and most of the 15% are actually unemployed
Germany has a much smaller youth population and managed to absorb more of them in youth-training-schemes. And it got doubly lucky that birth rates fell fastest in the east where the unemployment is. It's as if in the mid80s the UK had persuaded everyone outside the M25 to stop having kids.
Maybe it's just that seeing it from the inside doesn't render it that bad.