GDP

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The Vollrath Debate

I am about to begin reading Dietrich Vollrath’s “Fully Grown — Why a Stagnant Economy Is a Sign of Success”

Before I embark I thought I would collect a few of my own observations to provide a framework for thinking about his thesis.

The big issues are those talked about by Baumol.  For some reason I cannot avoid looking at current discussions about the slower rate of productivity growth without thinking of Baumol.  We have moved from increasing productivity in agriculture through to doing the same in manufacturing and become used to the growth that such a journey can provide.  We have used our machines to augment and then replace our own effort.  The consequence has been monumental.  We live within immense prosperity.  The bounty of applying machinery has produced far more than we ever imagined possible.

Not only this, but the constant fear of an ever growing surplus of unemployed people has never arrived.  The journey wasn’t simple or without stress.  But it was worth it.  And the true naysayers have all been wrong.  We are better off.  

As we think about what comes next we must also recall that this is all very recent history.  Our rush into modern prosperity only began back in the late 1880s.  DeLong and others would argue that it is only since 1870 that we have truly been on this path.  In that context much of what we take as solid or traditional is actually only ephemeral and shallow rooted.  Growth as we think of it today is an artifact of very recent modernity.  We ought not take it as something permanent or lasting. 

That, in turn, ought give us pause.  Modern society and our current social arrangements might be more transient than we would wish.  Our re-shaping of traditions is still underway.  The journey is incomplete.  What does stagnation imply for the rest of the journery?

That this modern cornucopia has come without costs is, of course, nonsense.  Our environment is paying a heavy price.  There might be limits to what we can do.  Our issue is that we are addicted to prosperity.  Advocates of slowing down are unable to explain how we de-escalate our progress without sacrificing the political progress that came along with that prosperity.  After all, without greater prosperity the perspective that history provides is that we would plunge back into authoritarian living.  Democratic freedom and expression are the products of abundance.  Rich people don’t like sharing.  Elites protect their position.  There was a reason early economists assumed wages for the majority would tend towards subsistence.  If we slow growth the tension that prosperity has reduced will return.  Power will matter even more than usual.  And the elite will prevail.  Subsistence, but at a higher level, would also return as the norm for most.

This journey has taken us through two economics sectors.  It has dumped us in the third.  That is Baumol territory.

We know how to feed ourselves in abundance.  We know how to mass produce the artifacts we enjoy.  What about service?  How do we provide services within a productivity driven framework?  By definition we prize “service” as an unproductive activity.  We cherish the one-on-one provision of those activities we cluster under the name of services.  After all “personal service” is something we aspire to experience.  How do we mass produce the personal experience in the same manner wemass produce food and physical things?  Isn’t there a basic contradiction in the very idea?

So, as we become a much more service oriented economy, Baumol suggests we should expect slowing productivity gains and thus growth.  A stagnant economy might just be the triumphant end point for our journey.

Perhaps artificial intelligence can help.  But who gets to decide that?  And are we capable of measuring its impact?  Most of our measures of growth were developed in the heyday of mass production.  They were intensely industrial in their origins and influence.  Are they appropriate for the digital age?

The same can be said for our economic institutions.  Our major business firms are all constructed along lines fit for an industrial age.  They have not been re-invented for a digital age.  One look at the so-called controversy created by work-at-home during the pandemic illustrates the gap between what is taken as “proper” organization and what is possible under a digital regime.  The organization of work, indeed even the definition of work, needs to be re-evaluated.  We have an abundance of buildings that housed industrial era activity.  Do we really need them for digital activity?

This leads us to an even larger discussion.  Society itself has been re-built to accommodate industry.  Wasn’t that the entire issue that gave rise to economics and its variants in the 1800s?    Whither society as the machines came to dominate activity?  The degradation of life in those early periods of change produced provocative counterpoints as different as Marx and Polanyi.  Where are our modern equivalents?  Social reconstruction brought with it the political changes I noted above.  Will democracy as we know it, child that it is of the industrial era, survive into the digital era?

A digital world is one of free-flowing information.  Physical boundaries are irrelevant in such a context.  Yet our boundaries appear important to us.  How do we reconcile this?  Globalization of production was to the benefit of the owners of the capital necessary in mass production.  So we are currently re-evaluating its worth in light of the effects it had within our boundaries.  We appear to be hesitant about further globalization.  Yet a digital economy must surely be global.  Information and digital experience seem impossible to prevent from flooding across borders.  So is it simply economic institutions that need too be revamped for the future.  Perhaps our political institutions do also.

This raises another important point: who gets to decide?   Do we really want to leave the reconstruction of society in the hands of those who own the machines?

Which returns me to stagnation.

Unless we find a way to maintain growth in wealth by reinventing our services, we appear doomed to slower growth and thus political tension.  In particular the perennial argument over the distribution of wealth will re-appear as the most potent driver of politics.  The owners of machines are not to be trusted in such an argument.  Perhaps that’s why they are racing to get ahead of our out-of-date political systems in the discussion over how power will be apportioned in future.

And we have already had a taste of what the rich actually feel about sharing power: the entire neoliberal reaction to the New Deal here in America tells you all you need to know.  They hate sharing.  They thus hate democracy and the redistribution it implies.

Oh, and where will economics fit in such a discussion?  After all modern economics has been purged of history and power precisely to sanitize it and make it useful in defense of the status quo as determined by the powerful.

So, I suppose, that’s what I will be looking for in Vollrath’s book.  How do we square democracy with stagnation?  Where will power reside?

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Addendum:

I have seen some people define some areas of the service economy as being “low value”.  This is an indicator of our problem.  They are “low value” in the context of our attempt to increase productivity in mass production or agriculture.  They are “low value” only in the sense that we cannot place a value on such a subjective phenomenon as the experience of watching a Shakespeare play.  We can only value it in our current methodologies in terms of measurable things like prices of entry, wages to actors, costs of production etc.  But is that a Shakespeare play’s true “value”?  This is a perennial question.  Measurability determines valuation.  The digital era elevates the immeasurable.  What does that mean for “value”?  For the economy?  For resource allocation?  For economics itself?  

We have a clue already in one of my favorite topics: total factor productivity.  That’s the black box that allows us to reconcile the traditional inputs to growth with the observed outcomes.  Information matters such more than economics takes into account.  Information that is, not in terms of messaging, but in terms of design and technique.  Information is in the way in which we get things done as well as in the way we talk about it.

Given a proper answer to this conundrum and perhaps we will not stagnate in a broader sense of “value” but only in the narrower sense of what we can measure.  It’s a computational and definitional problem. Does that matter?

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Budget Fog and Budget Clarity

On a clear day we can dream of being free from the farce and incompetence that is Trump. Meanhwile back in reality …

The Trump budget released this week is both indescribably foggy and clear as a bright spring day. It is a perfect statement of ‘Trumpism’ from its devastation of the poor, through its privilege for the rich, and its arrogance towards and ignorance of process. Let’s not get carried away though: this budget, like all presidential budgets is symbolic. It has no meaning other than as an indication of Trump’s personal priorities, which, apparently, are entirely plutocratic in tenor. The American budgetary process is convoluted and ultimate authority resides in Congress. So while a future Federal budget might ultimately embody many of Trump’s ideas, the document released this week is simply a starting point.

Further, given the arcane bureaucracy that is Congress, the budget will be subject to obscure procedural rules, particularly in the Senate where the much discussed reconciliation process will come into play. The Republicans are in a rush to slash taxes for the rich, and they want to destroy health care for the poor, both of which efforts are using up slots in the reconciliation calendar. This means that Congress will be very slow to take up a budget debate and will have to wait for the Congressional Budget Office to score those other efforts before it can start in earnest on budget matters.

With that all said, let’s take a look at Trump’s wish list.

First the clarity.

He wants to slash spending on the poor. And I mean slash. His budget aims at eliminating the deficit in ten years. To do that he takes sharp aim at Medicaid, which he wants to halve; he hammers the Supplemental Nutrition Assistance Program (aka Food Stamps); and, contrary to his campaign promises, he reduces parts of Medicare. These programs combine to be the backbone of support for tens of millions of low income Americans. Attacking them in this way will heighten poverty, increase insecurity, and cost the lives of many who no longer will receive health care of any kind. This part of his program is pure right wing callousness unadorned and direct.

He also wants to slash government. He proposes cuts in the departmental budgets of most, if not all, government departments. Some, like the Environmental Protection Agency, will be cut by upwards of 30%. The State Department, too, gets gutted. Neither of these is a surprise. Two of Trump’s major supporters have been lobbying hard for the cuts. The big oil and coal producers want to gut environmental laws, and Russia simply hates the State Department and all that ‘soft power’ money it slops around the world to entice nations into falling for the allure of democracy. At least Trump is being honest about how much in thrall to Putin he is.

Then, this being a pretty straightforward Republican budget, comes the obligatory increase in offense spending and in national security generally. This includes a big dollop of money for Trump’s wall along the Mexican border. There is no indication as yet about how he intends to get Mexico to pay for this. I guess we will have to wait on that.

That’s the clarity: you will notice that the goal for a balanced budget has no reference to the part the rich will play. Presumably they will benefit but not have to sacrifice. As I said: pure plutocracy.

Next comes the fog:

Given that the Republicans want to cut taxes for the rich, even theses draconian cuts in social programs don’t balance the budget in the desired timeframe. So Trump’s budget assumes a 3% annual growth rate in the economy. This is absurd. In an era of slowing population growth, weak productivity growth, and demographic shifts such as the massive wave of baby-boomer retirement, annual growth of 3% is a pipe dream. It is a fantasy. To add to the stupidity of the assumption is the realization that the Trump team began with it as a foundation for their budget process. It wasn’t an outcome of their budget priorities, it was an input from the very beginning. So the minions putting the budget together had to take the fantasy into account no matter how ridiculous it is.

Now for the good bit: the budget includes the impact of the tax reform Trump has already announced. In the budget those tax cuts, which cut a swathe out of Federal revenues, are treated as revenue neutral. In other words whilst they cut revenues because they are tax cuts, they are assumed to ‘pay for themselves’ by stimulating growth sufficiently for the government to earn extra tax revenues. The government, Trump argues, will make the loss up in volume. This is laughable, but is accepted amongst Republican policy makers who all want to deny blowing the deficit wide open.

Wait for it …

Then, when these tax cuts are included in the budget they are assumed to work this miracle all over again. Yes, you read that correctly. The tax cuts not only ‘pay for themselves’ as tax cuts, but they then repeat the process and stimulate growth to allow the budget to arrive at a balance ten years out.

I have never seen anything so brazenly stupid. Nor as plain dumb. This isn’t the sort of double entry bookkeeping I was taught way back in my accounting days. This is way more imaginativetive. It is a triple entry at a minimum, with more entries to come as the Trump administration flounders about in a mess of its own making.

Trump is inventing growth to cover the brutal insanity of his budget. Even the Republicans are repulsed at his plans. Not that they are much better.

Just as a brief indicator of how the Republican’s various policy goals are contradictory, think about the impact of population growth on the budget. Trump is virulently anti-immigrant. By slowing down the influx of immigrants he is, coincidentally, reducing the increase in the working age population. That acts as a significant drag on growth. Yet this is ignored by the Republican hierarchy. Where is the workforce needed to get growth up to 3% to come from? Are they building a time machine to go back to the 1990’s and boost the birthrate?

As I said fog!

One last thing: normal presidents have decent enough relationships with Congress that their budget proposals conform closely with Congressional political possibilities. This is especially true when the president is lucky enough to have a Congress dominated by his (or her?) own party. In Trump’s case he seems not to care. He has simply dumped this budget without any fanfare in the lap of Congress and walked away. Doubtless he will brag about it when he returns from abroad, but his total disregard for the niceties of political relationship building could not be on more public display. He simply doesn’t give a damn about Congress. Like most want-to-be autocrats he has nothing but disdain for the democratic process. But democracy is a pain. It bites back.

Which is why Trump’s budget will go nowhere.

Fortunately. Because it’s horrendous.

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Economy Base Level

We are, no doubt, about to be barraged by a torrent of alternative facts concerning the economy and economic growth under our new leader. So let’s get a few facts on the table in order to set a base level for future reference. Let’s start with growth during the past six presidencies:

So, no, Obama was not the disaster Trump and the Republicans are trying to paint him as. The economy during Obama’s term outperformed that of his predecessor. This includes the enormous difficulty of digging out of the Great Recession without much help from Congress.

Average growth through all that last six presidencies is around 2.8% a year, so boosting it to, and then maintaining it at, the 4.0% promised by Trump will take some extraordinary efforts, not to mention a defiance of history and is thus unlikely to occur.

More likely Trump will benefit from the current relatively good pace of growth, and then be able to add a little to it by introducing some deficit spending related to infrastructure. We must, though, be cautious about making that forecast: as of now we have no idea what team Trump has in store for us. We do know that the Republicans have, since Reagan, opposed infrastructure spending financed by increasing the Federal deficit. They had no problem blowing a hole in the Federal budget under Reagan — we all recall Dick Cheney telling us that, in his words:  “deficits don’t matter” — but since the rise of the Tea Party the GOP has been dominated by a austerity hawk policy bias that has stymied any attempt to boost growth using government spending.

Given this, I imagine growth will accelerate this year — the economy has healed well even if the distribution of all this newfound prosperity is appallingly distributed — so look for GDP growth of about 3%. Next year it could be higher if Trump gets some sort of deficit spending through Congress. But after that I doubt this higher pace could be maintained, and I would expect GDOP to slide back towards the slower pattern of recent years.

I am only mentioning any of this so we can be clear about the facts and the base from which we are about to start. Presidents have remarkably little direct impact on the course of the economy so I am leery of associating growth with presidencies in principle. The policies of earlier presidents have a nasty habit of echoing in unexpected ways through time. Reagan, for instance, is responsible for the rapid uptake of the anti-social policy making that was carried on by Clinton. And the awful switch in corporate activity towards the pre-eminence of shareholder value as a key metric of management success was clearly a product of the neoliberal shift Reagan’s election heralded. He did not advocate such corporate behavior, but he undoubtedly set the stage for it. And history has shown that his administration marks the beginning of the slide in standards for the middle class and especially for workers in the lower income strata. Reagan himself, in terms of policies, may not have been responsible for that slide, but there is no doubt his ideological leadership was.

The question for us is, then, does Trump’s election mark the beginning of a new era and the rejection of the past forty years? Or is it simply an interlude dominated by a series of futile and short lived injections of energy that will rapidly dissipate and leave the economy basically unchanged? Will he tackle inequality? I doubt it. Will he introduce institutional changes to deal with the asymmetries of risk piled upon the shoulders of workers by the corporate led changes in the nature of work? Maybe, but that assumes he understands those changes. The evidence for that is thin: he looks very much like an old fashioned pro-business trickle down plutocrat. So don’t expect much other than  lot of hoopla, fanfare, and then not much else.

Let’s hope I am wrong, our workers need all the help they can get, but there’s no sign of Trump being their savior. His administration is packed with other plutocrats whose basic understanding of the how we arrived where we are is, to put it politely, next to zero. The next few years are more likely to be a cloud of dust than a step forward. And the bigger risks — such as mismanagement — are on the downside not the upside.

Caveat emptor.

 

 

 

 

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GDP and Other Complex Numbers

When investment advisors want to justify their expensive and ineffective advice they look for red herrings to batter their clients with. One such example surfaced in, of all places, Pieria last week. It was an article sourced from Schroders about how misleading GDP is  as a measure of economic wellbeing. The article is one of three dedicated to telling investors that they ought to ignore GDP as an indicator worthy of informing their investing. Instead, presumably, they ought to pay Schroders lots of money for its ‘value-investing’ based advice.

Well, I happen to agree that GDP is a bit of a farce. It ignores all sorts of useful stuff and includes all sorts of silly stuff. It totally ignores domestic work as if it didn’t exist, and puts the consequences of socially negative events – the reconstruction after an earthquake – on an equal footing with activity generated by socially positive events.

The problem, at heart, with GDP is that it includes only things that are easy to measure. Easy, that is, being described as having a market price or a convenient cost that the economists and accountants compiling the numbers can identify.

Since the economy is vast and complicated getting hold of even this kind of information can take months. This means that GDP figures are pretty much always revised. The so-called first release is never where the final numbers end up, so no one ought get too excited over it.

But people do.

We live in a short term society, where numbers of various kinds flood our attention, and where we are inured to using them as the basis for conversation, argument, and even policy action.

But they are invariably inaccurate.

This is what the Pieria article bases its argument on. The economy is too complex to be banged into one number. The number always shifts about providing no bedrock on which to stand, and, besides, who can trust numbers that consume and army of technicians to compile?

And tinker with: clearly the author gets upset over technical ideas like ‘chain weighted’ indices and ‘hedonic pricing’. I get that. They are a tad complicated and are easily attacked. But they are also useful. They help add to the numbers. They make things a little more consistent. And consistency is the great goal of all number crunchers.

Being written by someone steeped in the private sector, in finance and investing no less, the article – actually all three in the series – smells a bit of anti-government sentiment. Those GDP numbers cannot be trusted because the economy’s complexity eludes the government simpletons, all thousands of them, trying to distill it into GDP releases.

This is very Hayekian. The essence of Hayek’s extreme position was that the economy is essentially inscrutable. It is unknowable. It is so vast and difficult that it lays beyond our ability to comprehend, calculate, and thus manage. Central planning, under such circumstances, is thus a fool’s errand. At best it has no effect, at worst it makes things a lot worse. It is, therefore, better to leave the economy to itself and the so-called self-adjusting capabilities of the marketplace. If you believe in such magic of course.

To anyone who has striven away in the bowels of big business this exact same notion will sound familiar. The accounts of a large bank are only loosely related to the actual economic position that the bank occupies. Likewise any business. The accounts are simply an indication of what’s going on, their relevance is useful only in the context of skillful interpretation. They are no more or less ‘real’ than any of the numbers we see for the national economy. All such accounting, even with the best intentions, is a vague representation of reality. And, as such reality will always elude us. It isn’t measurable. Besides we can’t even agree on what to count.

So if a Schroders customer cannot trust GDP, and ought not invest on the basis of the numbers, then they ought not trust any other number compiled by armies of technicians. Such as corporate balance sheets and income statements. That means we would be left with nothing but the guesswork of ‘experts’.

And chicken entrails perhaps? That’s an interesting twist on ‘value investing’.

 

 

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Greece

So we reach the end. Good. Let democracy and popular government prevail. The entire Euro project was conceived by a small group of elitist technocrats, then foisted on national peoples often without any ability on the part of the people to veto it.

The crisis in Europe is an echo of the crisis here in the US. America’s banks went on an unsustainable binge of greedy excess. They generated, accumulated, mixed, and then sold mortgages in an ever increasing frenzy driven by the knowledge that as long as they moved the pile fast enough they could reward themselves handsomely and not suffer the consequences of their descent into the depths of outright fraud.

And it was a fraud.

Maybe not in the narrow and legally provable sense, but in the broader and more applicable ethical sense. The banks sought to rip us off to enrich themselves. They knew how compliant our governments all were. They knew that, in the end, they would be bailed out. So there was never a brake on their acceleration over the edge.

This we all know. All except, apparently, for those few who cling to the delusion that it was the US government’s fault for “forcing” the banks to lend to marginally creditworthy borrowers in the name of some equality program. This trope still pops up now and again. It is utter rubbish, but serves to fog up the post-crisis debate just enough that we have never sought proper compensation from the banks. They still exist, absent one or two of the real fringe players, and are bigger and more dangerous than ever.

So the sudden realization that all that highly rated paper spewing from the Wall Street spigot, was just toxic junk, overturned the world’s finances. The Euro zone immediately fell into disarray. Its banks had gathered debts with reckless abandon and needed help. That help took the form, by and large, of moving the debts from private balance sheets onto public balance sheets. Meaning the taxpayers and not shareholders were now responsible for piles of useless assets that they had no responsibility for creating.

Add in the burden of providing support to those thrown into unemployment by the inevitable recession the bank crisis gave life to and government budgets everywhere were thrown into disarray. Debt piled up.

So governments suddenly faced their own debt management crises. And true to the immutable laws of capitalism, the bankers began to decry the increasing piles of debt accumulated from their own vice. Those bankers and their friends in orthodox economics began to talk ominously of impending confidence crises wherein nations would be unable to access the credit markets and so continue to fund the recovery from the bank induced horror.

The ratio of debt to GDP, we were told, had risen to crisis levels and needed to be reduced. Instead of increasing GDP the advocated approach was to reduce debt.

Now any fool with even a modest education could have understood that reducing debt ratios by cutting spending would also cut GDP meaning that the risk was high that the ratio might never fall even with substantial cuts. Worse: the risk was higher that cuts would actually reduce GDP faster than it would allow debt to be reduced, thus the ratio would deteriorate.

But that doesn’t happen in orthodox textbooks. And it doesn’t fit the banker’s narrative.

So austerity was invented and doomed to fail from the beginning.

You and I told them so, but you and I don’t count. The voice of democracy has been stifled. Popular government has been subverted and re-tooled as government for the benefit of a few.

And they want to be repaid. Despite having started the crisis. Despite having made bad decision after bad decision. Despite being so-called “experts” at risk assessment. Despite the 25% unemployment. Despite the 25% decline in GDP. And despite the humanitarian catastrophe that their greed unleashed on perfectly innocent people.

That a whole slew of north European politicians have cast their lot with the bankers is testimony to the grip that plutocracy and economic orthodoxy have combined to exert. It is an insanity. It is a delirium from which Europe, or rather the Euro project, probably will not recover.

Deservedly so.

When you ask an orthodox economist what a market is comprised of they rarely mention people. When you ask a banker what constitutes a debtor nation they will not talk about human beings. They do not care about real lives. Or real consequences. Reality in all its manifest aspects is expunged from their respective analyses. Instead they speak in a language specifically constructed to dehumanize their thoughts. This is to protect them from the ethical responsibility for their ideas and actions.

Well no more. Maybe.

Democracy has spoken up.

Let us not rejoice just yet though. There is work to do.

The Greeks have resisted more plunder. But can they rebuild?

I hope so.

 

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