Bubbles and Economic Potential

[briansd1]

The economy is getting better despite the lack of contribution from the housing sector (construction, appliances, furniture, etc…).

It’s a good sign, IMHO.

[davelj]

[quote=pri_dk][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]

Let’s get the math straight first. The US economy – and all economies – are n-sum games, at the end of the day, with n = real GDP growth. I would argue that the US economy is not a zero sum game, but it’s certainly not much more than a 1.5%-sum game over the next couple of decades. (And, in fact, it was a negative sum game during the recession.)

[quote=pri_dk][quote=davelj][…] 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.[/quote]

Actually, no, you’re trying to MAKE it look as though my statement was misleading by leaving out the words “led folks to” in place of “…” Here’s what I said (verbatim): “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.”

I’m betting you’re the only person on this blog that read my statement and thought I was suggesting that every dollar of consumption during the boom was the result of home equity borrowing. The fact is that the wealth effect and it’s positive impact (at the time) on GDP during the boom are well-established. There’s a great deal of research on the topic out there, virtually none of it taking the opposite view.

[quote=pri_dk]
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.[/quote]

I never claimed this. There is actual value being created. But, arguably, the value created has been greatly exaggerated over the past 30 years (as a result of debt driving a lot of unsustainable consumption).

[Anonymous]

[quote=davelj]Let’s get the math straight first. The US economy – and all economies – are n-sum games, at the end of the day, with n = real GDP growth. I would argue that the US economy is not a zero sum game, but it’s certainly not much more than a 1.5%-sum game over the next couple of decades. (And, in fact, it was a negative sum game during the recession.)[/quote]

Dave, you are one of the more knowledgeable posters here, but I’m afraid you don’t understand the definition of “zero sum.” And there really is no accepted use of the term “n-sum” such as you are trying to use with “1.5%-sum.”

As best I can tell you are using “n” to mean growth, but that that’s not what the phrase “zero-sum” means.

Zero-sum does not mean zero growth – it means that zero wealth is created in a system (or “game” as the term comes from game-theory) It means that nothing of value is actually produced, that there is a comparable loser for every winner, that stuff is just moved around.

Casinos are zero sum. National economies are not.

[quote]I never claimed this. There is actual value being created. But, arguably, the value created has been greatly exaggerated over the past 30 years (as a result of debt driving a lot of unsustainable consumption).[/quote]

I think we are talking past each other here. I never claimed you claimed it (I was referring to a conversation in another thread.)

But as far as your last sentence goes, you’ll have to back that up with some data.

I remember life from 1982, and a lot of things were different, not just the music. Call me on my cell phone if you need more examples – but I may not answer because I’ll be shopping on the internet. But I’ll answer if I’m in my hybrid car, because it has Bluetooth…

[Fearful]

[quote=pri_dk]Dave, you are one of the more knowledgeable posters here, but I’m afraid you don’t understand the definition of “zero sum.” And there really is no accepted use of the term “n-sum” such as you are trying to use with “1.5%-sum.”[/quote]
Dave’s point is entirely legitimate, and you are babbling about semantics.

Increasing debt (a credit bubble) does not inherently result in any permanent increase in GDP. All it does is pull consumption in from the future. So it’s a “zero sum game” except that GDP productivity increases all the while.

My own analysis showed that the direct effect of “Mortgage Equity Withdrawal” is modest, a few percentage points here and there on the enormous Personal Consumption Expenditures number. Even considering total increase in mortgage debt did not explain the depth and severity of the recession.

Larger effects, such as the “wealth effect” of real estate equity or perhaps ongoing migration of less skilled jobs overseas or displacement by automation, are needed to explain the change.

Krugman is bizarre and frightening; far more bizarre and frightening is how seriously he is taken. He uses misleading graphics and shrill language to make his points; both are unethical and disreputable and hardly in keeping with his supposed stature. But people seem to just love him, perhaps because he is such an outspoken counter balance to the right wing.

[Anonymous]

[quote=Fearful]Dave’s point is entirely legitimate, and you are babbling about semantics.[/quote]

I agree with his point that some of the GDP can be attributed to debt. It was his comments that started on the tangent of redefining zero-sum.

But let’s skip the buzzwords like “wealth effect” and focus on the commonsense point:

– GDP is a measure of economic output.
– US GDP is $15 trillion. Every single year.

Are we borrowing $15 trillion per year? No.

It’s not zero sum. The “sum” is in the trillions. A big, positive number.

The confusion here is that I am talking about the measured value of output (GDP) while you and Dave are talking about the first & second derivatives (growth rate.) The “zero” in zero-sum refers to output. You can call that semantics, but it’s a pretty important distinction.

[quote]Larger effects, such as the “wealth effect” of real estate equity or perhaps ongoing migration of less skilled jobs overseas or displacement by automation, are needed to explain the change.[/quote]

I’m not sure what “the” change you are referencing here is, but I’m pretty sure you aren’t talking about the subject of the original article.

[briansd1]

[quote=Fearful]
Increasing debt (a credit bubble) does not inherently result in any permanent increase in GDP. All it does is pull consumption in from the future. So it’s a “zero sum game” except that GDP productivity increases all the while.
[/quote]

I think that it depends where the debt is being put to use.

It doesn’t matter if it’s government or private sector debt, if the money is well used on productive investments then there will be higher GDP growth.

When interest rates are low, it makes sense for companies to borrow money to build factories and expand, if they forecast demand.

When interest rates are low, it makes sense for government to invest on infrastructure. There is a lack of private demand now, so it makes sense for the government to fill in. That will lead to higher growth later on.

As Krugman said:

Maybe the idea is that the burst bubble reduces demand, and hence leads to lower production. But at that point you’re into a Keynesian world of deficient demand, and you should be talking about ways to close the gap, not accepting it as a fact of life.

If debt is bad, as the right-wingers are arguing, then why do we need bankers?

[davelj]

[quote=pri_dk][quote=davelj]Let’s get the math straight first. The US economy – and all economies – are n-sum games, at the end of the day, with n = real GDP growth. I would argue that the US economy is not a zero sum game, but it’s certainly not much more than a 1.5%-sum game over the next couple of decades. (And, in fact, it was a negative sum game during the recession.)[/quote]

Dave, you are one of the more knowledgeable posters here, but I’m afraid you don’t understand the definition of “zero sum.” And there really is no accepted use of the term “n-sum” such as you are trying to use with “1.5%-sum.”

As best I can tell you are using “n” to mean growth, but that that’s not what the phrase “zero-sum” means.

Zero-sum does not mean zero growth – it means that zero wealth is created in a system (or “game” as the term comes from game-theory) It means that nothing of value is actually produced, that there is a comparable loser for every winner, that stuff is just moved around.

Casinos are zero sum. National economies are not.
[/quote]

National economies can absolutely be zero sum games and, in fact, they are at times. Fortunately, it’s the exception rather than the rule. But allow me to explain the concept of n-sum games using the stock market as an example. (I’ve always used the term n-sum without ever bothering to see if anyone “accepted” such use – it’s common sense, really.) The stock market is what I’d refer to as a “market-sum” game. Simply, this means that whatever the market returns (“n”) in a given year is the aggregate combined performance of all its participants. If it’s up 5%, there may be some up 50% and others down 50% but it all aggregates out to 5%. That 5% is the total (or “sum”) that must be divided among all of the participants. (For more on this concept see: Bogle, John)

Now, back to the economy. If real GDP grows by 2% in a given year, then that 2% is split up among all participants. And (obviously) not equally. If real GDP is 0% in a given year, then FOR THAT YEAR the economy was a zero-sum game – the winners and losers aggregated out to zero gain. There was no growth (just like that casino in which the net winnings were zero but for the house’s vig).

So, I’ll repeat myself: the economy is an n-sum game in that all of the growth must aggregate to “n”. Fortunately, more often than not, n is greater than zero. But that’s not always the case.

[quote=pri_dk][quote=davelj]I never claimed this. There is actual value being created. But, arguably, the value created has been greatly exaggerated over the past 30 years (as a result of debt driving a lot of unsustainable consumption).[/quote]

I think we are talking past each other here. I never claimed you claimed it (I was referring to a conversation in another thread.)

But as far as your last sentence goes, you’ll have to back that up with some data.

I remember life from 1982, and a lot of things were different, not just the music. Call me on my cell phone if you need more examples – but I may not answer because I’ll be shopping on the internet. But I’ll answer if I’m in my hybrid car, because it has Bluetooth…[/quote]

Another straw man alert. I didn’t say GDP growth was “completely” exaggerated; I said it was “greatly exaggerated”. There are a lot of estimates out there suggesting that debt creation added between 50 and 100 basis points to annualized real GDP over the last several decades. Using a base of 300 basis points, that suggests that 17%-33% of GDP growth was fueled by debt – as opposed to fundamentals – over the last several decades. I’d say that qualifies as significant.

[davelj]

[quote=pri_dk]
The confusion here is that I am talking about the measured value of output (GDP) while you and Dave are talking about the first & second derivatives (growth rate.) The “zero” in zero-sum refers to output. You can call that semantics, but it’s a pretty important distinction.
[/quote]

Ah, yes, that’s the confusion. But… YOU decided that “zero-sum” refers to output, not me (or anyone else so far as I can tell). I thought it was completely and intuitively obvious that my n-sum refers to growth, thus I saw no need to clarify further. Now I know…

[Anonymous]

Ok, Dave. It seems you have your own personal economic vernacular, which may be a logical one, but I don’t know it and I don’t think it’s worthwhile for me to sort it out for the purposes of this discussion.

I’m pretty sure the definition of zero-sum is standardized. Wikipedia has a decent explanation:

http://en.wikipedia.org/wiki/Zero_sum#Economics

Where I think we are talking past each other is that you are talking about growth and I am talking about actual output. So we are “summing” different things.

Thanks for the feedback. Peace.

[briansd1]

I see pri_dk’s point about zero sum.

My understanding of zero sum is that the action of, or benefit attributed to one party exactly cancel out the benefit to the other party.

For example, there would be zero sum (or negative sum) if government borrowing prevented the private sector from borrowing and expanding. That is clearly not the case today.

Krugman is right that government debt and spending is contributing a positive sum to GDP, right now. The government could contribute more if it weren’t for political obstruction.

Federal reserve action is also positively contributing to GDP.

[davelj]

[quote=briansd1]I see pri_dk’s point about zero sum. [/quote]

As do I. I just thought it was obvious I was discussing growth. My mistake. Now we’re on the same page (more or less).

[quote=briansd1]
Krugman is right that government debt and spending is contributing a positive sum to GDP, right now. The government could contribute more if it weren’t for political obstruction.
[/quote]

The operative words being “right now”. That debt will have to be paid back one day, thus one day the servicing of that debt will be a drag on “future” GDP. File under: Kick The Can Down The Road, Additional Ways To.

[briansd1]

[quote=davelj]
[quote=briansd1]
Krugman is right that government debt and spending is contributing a positive sum to GDP, right now. The government could contribute more if it weren’t for political obstruction.
[/quote]

The operative words being “right now”. That debt will have to be paid back one day, thus one day the servicing of that debt will be a drag on “future” GDP. File under: Kick The Can Down The Road, Additional Ways To.[/quote]

Yes, “one day the servicing of that debt will be a drag on “future” GDP” but the productive capability we are building today will continue to contribute in the future and will make paying down the debt easier.

There will be a drag on future economy growth, but that drag will be lower than the momentum we are creating today. That will thus result in a positive sum. That’s the magic of debt and capitalism. 😉

[markmax33]

[quote=briansd1][quote=davelj]
[quote=briansd1]
Krugman is right that government debt and spending is contributing a positive sum to GDP, right now. The government could contribute more if it weren’t for political obstruction.
[/quote]

The operative words being “right now”. That debt will have to be paid back one day, thus one day the servicing of that debt will be a drag on “future” GDP. File under: Kick The Can Down The Road, Additional Ways To.[/quote]

Yes, “one day the servicing of that debt will be a drag on “future” GDP” but the productive capability we are building today will continue to contribute in the future and will make paying down the debt easier.

There will be a drag on future economy growth, but that drag will be lower than the momentum we are creating today. That will thus result in a positive sum. That’s the magic of debt and capitalism. ;)[/quote]

Too bad that is nowhere near true. Here’s the debt/GDP chart.

http://www.bearishnews.com/wp-content/uploads/2010/02/total-debt-gdp.jpg

We are on an exponential path to destruction under Obama/Bush/Romney.

[Anonymous]

[quote=briansd1]I think that it depends where the debt is being put to use.[/quote]

Brian brings up a good point about debt and it’s cost (even it it is a little off-subject.)

Since the point of the OP seems to be lost already in this thread, and we’ve already meandered into a Keynesian philosophical debate, I’ll expand on Brian’s point.

It is a common layman’s mistake look at all debt (government, corporate) like household credit-card debt – as if debt was just a reckless spender’s way to pay for today’s stuff with tomorrow’s money.

Not all debt is “bad,” and using debt to finance the right investments can actually lead to a better long-term outcome than not using debt.

The debate comes down to what are the “right” investments – specifically, how do we measure return on investment for government spending? (In other words, when is it spending and when is it investing?)

It’s not an easy thing to do, and there are lots of counter-intuitive situations.

The largest debt the US ever had was during WWII. Now if we take a superficial look at what “investments” were made with that debt, it would seem absurd: We borrowed massive amounts of money, built stuff, and sent that stuff half-way around the world where much of it was destroyed. How could that ever be good for the economy?

The answer, of course, is that all investment choices are relative. Sure, we could have not borrowed anything during WWII and maintained a nice strong balance sheet.

Or we could have borrowed and built stuff here at home – why not give everyone a car instead of sending howitzers to Europe? Wouldn’t that be better for Americans?

Of course the answer is that sending our wealth off to be destroyed during WWII was the best available alternative – by borrowing and spending we averted a disaster that would have likely been far more costly than our debt service.

The question for today’s “crisis:” What would be the cost of doing nothing? If we do borrow, are we getting a good return on relative to the cost of our debt?

What are the choices and what are the outcomes?

There is no single answer. However, we should not let negative perceptions of debt cloud our analysis. The idea that debt is always bad and that more debt is always worse is simply not true.

[davelj]

[quote=briansd1][quote=davelj]
[quote=briansd1]
Krugman is right that government debt and spending is contributing a positive sum to GDP, right now. The government could contribute more if it weren’t for political obstruction.
[/quote]

The operative words being “right now”. That debt will have to be paid back one day, thus one day the servicing of that debt will be a drag on “future” GDP. File under: Kick The Can Down The Road, Additional Ways To.[/quote]

Yes, “one day the servicing of that debt will be a drag on “future” GDP” but the productive capability we are building today will continue to contribute in the future and will make paying down the debt easier.

There will be a drag on future economy growth, but that drag will be lower than the momentum we are creating today. That will thus result in a positive sum. That’s the magic of debt and capitalism. ;)[/quote]

Empirically incorrect. There was a period of time (several decades back) during which, arguably, debt was accretive to GDP – that is every $1 of incremental debt was creating more than $1 of incremental GDP. That relationship broke down… I believe back around 1980 (could’ve been the 1970s, I can’t recall exactly). Now we’re at the point where it takes several dollars of incremental debt to create one additional dollar of GDP (thank you Federal Government). That’s patently obvious in the debt-to-GDP charts that you see so often (even thought they’re typically wrong). We are well beyond the point where we can simply leverage our way out of the current mess – the math is not at all complicated.

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