Bubbles and Economic Potential

[admin]

There was some discussion in another thread a while back (don’t remember which one) about the effect of the housing bubble on GDP. Here’s a good article that brings clarity to some of the confusion:

http://krugman.blogs.nytimes.com/2012/02/11/bubbles-and-economic-potential/

OK, first things first. Capital gains are not counted in GDP. The direct effect of a bursting bubble on measured output is zero. Nor, by the way, is a fall in asset prices counted as a decline in the capital stock, which is in principle measured in physical terms.

Of course the reverse is true also. The effect of asset price increases is is not reflected in GDP, so that arguments that recent GDP growth is somehow “artificial” are simply not true. GDP is a measure of economic output – of actual goods and services produced. (The US annual GDP is about $15 trillion dollars – that’s a helluva lot of real stuff.) GDP is not a perfect measure, but a sensible one (and the best one we’ve got.)

Cue the Krugman bashers – remember to attack the person and not his argument…

[davelj]

Straw man alert!! Krugman tries to convince us that these other economists are counting capital gains as GDP growth… when they’re not. They’re merely (correctly) suggesting that booming house prices led folks to borrow against their houses and… wait for it… “spend”. Which they did. And it’s documented. And last time I checked, “consumption” (aka, “consumer spending”) accounted for about 2/3 of GDP. This is neither controversial nor debatable.

I have no problem with Krugman in general… but it seems like he’s just twisting others’ views in order to nitpick in this article. (Must have been a slow economics news week.)

Contrary to your assertion, I don’t think there’s any confusion on the topic here. The arguments that “recent GDP growth is somehow artificial” has nothing at all to do with “asset price increases”. Rather, it has to do with debt creation driving demand (as opposed to “core,” non-debt driven demand). I’ll be so excited when the economics profession learns how to model debt into the workings of our economy. Until that time, we’ll remain lost in the financial wilderness.

[Anonymous]

[quote=davelj]Contrary to your assertion, I don’t think there’s any confusion on the topic here.[/quote]

You missed the discussion.

I understand your claims about debt – and they are certainly valid – but that’s not the confusion I was referencing.

There was genuine confusion. Specifically, there were claims that the US economy had become “zero sum” in recent years.

[quote][…] borrow against their houses and… wait for it… “spend”. […] “consumption” (aka, “consumer spending”) accounted for about 2/3 of GDP. This is neither controversial nor debatable.[/quote]

Now you are being a bit misleading. You seem to be suggesting that 2/3 of the GDP is driven by people borrowing and spending. There certainly was more borrowing during the bubble, but it didn’t account for 2/3 of economic activity (as measured by GDP.) Not even close.

But the main point is that claims that our entire economy is some sort of capitalist shell game and that there is no actual value being created are simply nonsense.

[Fearful]

[quote=davelj]Straw man alert!! Krugman tries to convince us that these other economists are counting capital gains as GDP growth… when they’re not. They’re merely (correctly) suggesting that booming house prices led folks to borrow against their houses and… wait for it… “spend”. Which they did. And it’s documented. And last time I checked, “consumption” (aka, “consumer spending”) accounted for about 2/3 of GDP. This is neither controversial nor debatable.

I have no problem with Krugman in general… but it seems like he’s just twisting others’ views in order to nitpick in this article. (Must have been a slow economics news week.)

Contrary to your assertion, I don’t think there’s any confusion on the topic here. The arguments that “recent GDP growth is somehow artificial” has nothing at all to do with “asset price increases”. Rather, it has to do with debt creation driving demand (as opposed to “core,” non-debt driven demand). I’ll be so excited when the economics profession learns how to model debt into the workings of our economy. Until that time, we’ll remain lost in the financial wilderness.[/quote]
Not sure how much this adds to the discussion, but: Using the “Mortgage Equity Withdrawal” data from the Fed, I figured out that repaying the “Mortgage ATM” would not drain the economy all that much. Even taking the position that all increase in mortgage debt had to be reduced back to trend line did not result in a substantial decrease in GDP. A recession, to be sure, but no Great Depression. This was in answer to those predicting armageddon. I suspect the explanation for the length and depth of our current recession and slow recovery therefrom lies in other areas.

[EconProf]

The housing bubble inflated people’s personal balance sheet from about 2001 to 2006, and they extracted that growth in equity via HELOC’s and increased their overall spending. From a micro standpoint, they increased their wealth. From society’s standpoint, the total housing stock stayed (about) the same, so in a macro sense the nation was no better off.
The last half-decade has seen everything reversed, in which personal balance sheets have been devastated by the decline in housing values, while liabilities have stayed about the same. This is why the Great Recession has proved so intractable–consumer spending is not only no longer hyped by rising housing values, but is hurt by the evaporation of housing equity.
Krugman, a fervent Keynesian, has demanded more fiscal and monetary stimulus to make up for the lack of consumption. He has claimed that the only problem with the stimulus so far is that it has been too small. Notably, he is big government guy, so instead of the stimulus coming in the form of tax cuts, he has pushed new programs, agencies, and government workers, all of which become entrenched and impossible to remove when (and if) recovery comes.

[Allan from Fallbrook]

[quote=EconProf]
Krugman, a fervent Keynesian, has demanded more fiscal and monetary stimulus to make up for the lack of consumption. He has claimed that the only problem with the stimulus so far is that it has been too small. Notably, he is big government guy, so instead of the stimulus coming in the form of tax cuts, he has pushed new programs, agencies, and government workers, all of which become entrenched and impossible to remove when (and if) recovery comes.[/quote]

As fervent a Keynesian as Krugman purports to be, he also overlooks or ignores Keynes’ admonition regarding excessive debt and that Keynes’ prescription for government spending in times like these is blunted or retarded when excessive debt is present.

Krugman has lost nearly all credibility and now simply stands as a shill for the Left and the Left’s attendant nostrums. He has abandoned all pretense of objectivity and will shrilly attack anyone with the temerity to disagree with him (see his recent tiff with Ken Rogoff as an example).

[Arraya]

We are at peak debt and it’s not going to be pretty.

[EconProf]

Exactly right Allan. Keynes actually proposed, at the onset of the Great Depression, that the government run a deficit only when needed to stimulate the economy, and then to run a surplus during prosperity to “pay it back”. Deficits during good times and bad over the course of business cycles was not in his playbook. Today’s big government advocates like Krugman use Keynes as intellectual justification to push permanent increases in government. If Keynes were alive today he would not approve.

[Anonymous]

[quote=EconProf]This is why the Great Recession has proved so intractable[/quote]

Intractable? The recession ended in 2009. Nearly three years ago!

You do know the definition of recession, professor?

[quote]–consumer spending is not only no longer hyped by rising housing values, but is hurt by the evaporation of housing equity.[/quote]

Double counting. Nice for dramatic effect, but not very helpful otherwise.

[Anonymous]

[quote=Allan from Fallbrook]As fervent a Keynesian as Krugman purports to be, he also overlooks or ignores Keynes’ admonition regarding excessive debt and that Keynes’ prescription for government spending in times like these is blunted or retarded when excessive debt is present.[/quote]

[quote=EconProf]Exactly right Allan. Keynes actually proposed, at the onset of the Great Depression, that the government run a deficit only when needed to stimulate the economy, and then to run a surplus during prosperity to “pay it back”.[/quote]

You two need to get your get your stories straight before launching the partisan attacks. Please show us where Krugman says we should should never run a surplus. We haven’t had a surplus in over a decade and certainly never had an opportunity for one during Obama’s and Krugman’s tenure.

So make up your mind EconProf: Are we in the “intractible Great Recession” or a time of “prosperity” where we should “pay back” the deficits? You seem to want to have it both ways.

BTW:

[quote=pri_dk]Cue the Krugman bashers – remember to attack the person and not his argument…[/quote]
[quote=Allan from Fallbrook]Krugman has lost nearly all credibility and now simply stands as a shill for the Left and the Left’s attendant nostrums.[/quote]

Right on cue, Allan. Did you even read the article?

[Allan from Fallbrook]

[quote=pri_dk][quote=Allan from Fallbrook]As fervent a Keynesian as Krugman purports to be, he also overlooks or ignores Keynes’ admonition regarding excessive debt and that Keynes’ prescription for government spending in times like these is blunted or retarded when excessive debt is present.[/quote]

[quote=EconProf]Exactly right Allan. Keynes actually proposed, at the onset of the Great Depression, that the government run a deficit only when needed to stimulate the economy, and then to run a surplus during prosperity to “pay it back”.[/quote]

You two need to get your get your stories straight before launching the partisan attacks. Please show us where Krugman says we should should never run a surplus. We haven’t had a surplus in over a decade and certainly never had an opportunity for one during Obama’s and Krugman’s tenure.

So make up your mind EconProf: Are we in the “intractible Great Recession” or a time of “prosperity” where we should “pay back” the deficits? You seem to want to have it both ways.

BTW:

[quote=pri_dk]Cue the Krugman bashers – remember to attack the person and not his argument…[/quote]
[quote=Allan from Fallbrook]Krugman has lost nearly all credibility and now simply stands as a shill for the Left and the Left’s attendant nostrums.[/quote]

Right on cue, Allan. Did you even read the article?[/quote]

Pri: Oh, relax. Jesus, you need to start drinking decaf or something. Krugman IS a shill for the Left; I’m not making a partisan attack.

And, yes, I did read the article, thank you. My comment, and EconProf’s response to my comment, was not an attack on Krugman: It was a statement as to what Keynes actually said regarding governmental pump priming.

You’ll note in EconProf’s response that he referenced Keynes and NOT Krugman. He did NOT ascribe any discussion regarding surplus to Krugman: YOU DID.

The points I made in my response were solely regarding Keynes and his recommendations/admonitions, not a one had anything to do with Krugman (or Obama for that matter, who receives glancing entree from you). The only statement which connects Krugman and Keynes is that Krugman is a Keynesian (not a Kenyan, that’s Obama!). Stating that Krugman is a Keynesian is neither a pejorative nor is it some startling revelation.

You have something of a bad habit of going off half-cocked without reading what posters are really saying. You’re trying to act as though EconProf and I are the head of some evil anti-Krugman cabal. Far from it: Krugman discredited himself long ago.

[Anonymous]

[quote=Allan from Fallbrook]Krugman IS a shill for the Left; I’m not making a partisan attack.[/quote]

I’ll just leave that right there.

[quote=Allan from Fallbrook]You’ll note in EconProf’s response that he referenced Keynes and NOT Krugman. He did NOT ascribe any discussion regarding surplus to Krugman: YOU DID.[/quote]

Sure about that?

[quote=EconProf]Today’s big government advocates like Krugman use Keynes as intellectual justification to push permanent increases in government.[/quote]

[quote=Allan from Fallbrook]You have something of a bad habit of going off half-cocked without reading what posters are really saying.[/quote]

I’ll leave that one right there also.

This thread started out as a discussion about the impact of the housing bubble on GDP. Pretty objective stuff about how GDP is measured, and how asset prices affect GDP measurements and economic output.

At some point, somebody went into the territory of partisan pundit-style gossip and name calling:

[quote=Allan from Fallbrook]Krugman has lost nearly all credibility and now simply stands as a shill for the Left and the Left’s attendant nostrums. He has abandoned all pretense of objectivity and will shrilly attack anyone with the temerity to disagree with him (see his recent tiff with Ken Rogoff as an example).[/quote]

Why do you always make so much noise about the messenger, instead of focusing on the message?

Simply declaring someone as “discredited” doesn’t make it so.

Krugman is one of the most widely cited economists alive today. We are still waiting for the title of EconProf’s dissertation.

So do you have anything to say about the subject of Bubbles and Economic Potential, or are we going to hear more about who Krugman hangs out with at cocktail parties?

[Allan from Fallbrook]

[quote=pri_dk]
[quote=Allan from Fallbrook]Krugman has lost nearly all credibility and now simply stands as a shill for the Left and the Left’s attendant nostrums. He has abandoned all pretense of objectivity and will shrilly attack anyone with the temerity to disagree with him (see his recent tiff with Ken Rogoff as an example).[/quote]

Why do you always make so much noise about the messenger, instead of focusing on the message?

Simply declaring someone as “discredited” doesn’t make it so.

Krugman is one of the most widely cited economists alive today. We are still waiting for the title of EconProf’s dissertation.

So do you have anything to say about the subject of Bubbles and Economic Potential, or are we going to hear more about who Krugman hangs out with at cocktail parties?[/quote]

Pri: I’ll stand by what I said regarding Krugman. I’m not the only stating that Krugman has discredited himself: His recent history of attacks on those who disagree with him is both well-known and well documented. As to how often he is cited: What does that matter? Does that confer some Grand Poobah legitimacy upon him? Economists, by and large, are generally wrong (the old saw about predicting 5 of the last 3 recessions) and quite often vague or contradictory (remember Eisenhower’s wish for a one-armed economist?).

When someone like Krugman politicizes his economics (and make no mistake, he has), the messenger becomes as important as the message.

And I’ll leave that right there, because there is zero upside arguing with you, especially when YOU get all partisan. Read what was actually written and try to argue using facts.

[Anonymous]

dup

[Anonymous]

[quote=Allan from Fallbrook]Economists, by and large, are generally wrong […][/quote]

I won’t argue that one.

Allan, my point in starting this thread was not to tout Krugman or his ideas. It was to discredit a much bigger claim that we often hear, particularly from some posters here.

The economic downturn has given rise to the ol’ Marxist claims of “Capitalism had failed.” They use the housing bubble as evidence, claiming that the “capitalists” – real estate flippers, derivatives traders and the like – have overwhelmed our economy and that there is no value being produced. Apparently the only “solution” is to end or suppress these capitalist activities and make everyone an employee of the state, or to reward state run enterprises to such an extent that there would never be any incentive to work in the private sector or start a business (After all, only the state creates value and has the wisdom to properly allocate resources, everyone else is just moving money around and “speculating.”)

The claim is nonsense. The capitalist US economy is simply the greatest economic achievement in history. In the big picture, the system works remarkably well, far better than any alternative.

On my main point I’m pretty sure that you, me, EconProf and anybody else involved in our little squabble are in complete agreement. This thread was never about today’s flavor or Democrat vs. Republican or Obama vs. Romney or even Krugman (the fact that Krugman, who is a liberal, supports my main point really only makes it stronger)

I enjoy discussing today’s politics, and am open to arguments for either side of the American political aisle.

But sophomore-level Marxism is a waste of space.

[Author]

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