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SilasBarta comments on Open Thread June 2010, Part 3 - Less Wrong
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Good question, not because it's hard to answer, but because of how pervasive the wrong answer is, and the implications for policy for economists getting it wrong.
If your parents prefer you being in their apartment to the forgone income, they benefit; otherwise they don't.
If you prefer being in their apartment to the alternative rental opportunities, you benefit; otherwise, you don't.
If potential renters or the existing ones prefer your parents' unit to the other rental opportunities and they are denied it, they are worse off; otherwise, they aren't.
ANYTHING beyond that -- anything whatsoever -- is Goodhart-laden economist bullsh**. Things like GDP and employment and CPI were picked long ago as a good correlate of general economic health. Today, they are taken to define economic health, irrespective of how well people's wants are being satisfied, which is supposed to be what we mean by a "good economy".
Today, economists equate growing GDP -- irrespective of measuring artifacts that make it deviate from what we want it to measure -- with a good economy. If the economy isn't doing well enough, well, we need more "aggregate demand" -- you see, people aren't buying enough things, which must be bad.
Never once has it occurred to anyone in the mainstream (and very few outside of the mainstream) that it's okay for people to produce less, consume less, and have more leisure. No, instead, we have come to define success by the number of money-based market exchanges, rather than whether people are getting the combination of work, consumption, and leisure (all broadly defined) that they want.
This absurdity reveals itself when you see economists scratching their heads, thinking how we can get people to spend more than they want to, in order to help the economy. Unpack those terms: they want people to hurt themselves, in order to hurt less.
Now, it's true there are prisoner's dilemma-type situations where people have to cooperate and endure some pain to be better off in the aggregate. But the corresponding benefit that economists expect from this collective sacrifice is ... um ... more pointless work that doesn't satisfy real demand .. but hey, it keeps up "aggregate demand", so it must be what a sluggish economy needs.
Are you starting to see how skewed the standard paradigm is? If people found a more efficient, mutualist way to care for their children rather than make cash payments to day care, this would be regarded as a GDP contraction -- despite most people being made better off and efficiency improving. If people work longer hours than they'd like, to produce stuff no one wants, well, that shows up as more GDP, and it's therefore "good".
How the **** did we get into this mindset?
Sorry, [/another rant].
What isn't reflected in the GDP is huge.
There's the underground economy-- I've seen claims about the size of it, but how would you check them?
There's everything people do for each other without it going through the official economy.
And there's what people do for themselves-- every time you turn over in bed, you are presumably increasing value. If you needed paid help, it would be adding to the GDP.
I don't understand where you acquired this view of economists. I am an economist and I assure you economists don't ascribe to the "measured GDP is everything" view you attribute to them.
This is not an accurate portrayal of what Keynesians believe. The Keynesian theory of depressions and recessions is that excessive pessimism leads people to avoid investing or starting businesses, which lowers economic activity further, which promotes more pessimism, and so on.
The goal of stimulus is effectively to trick people into thinking the economy is better than it is, which then becomes a self-fulfilling prophesy; low quality spending by government drives high quality spending by the private sector.
If you wish to be sceptical of this story (I'm fairly dubious about it myself), then fine, but Keynesians aren't arguing what you think they're arguing.
No, that's precisely what I assumed they're arguing, and I believe my points were completely responsive. I will address the position you describe in the context of the criticism in my rant.
Now, unpack the meaning of all of those terms, back to the fundamentals we really care about, and what is all that actually saying? Well, first of all, have you played rationalist taboo with this and tried to phrase everything without economics jargon, so as to fully break down exactly what all the above means at the layperson level? To me, economists seem to talk as if they have not done so.
I would like for you to tell me whether you have done so in the past, and write up the phrasing you get before reading further. You've already tabooed a lot, but I think you need to go further, and remove the terms: recession, depression, stimulus, excessive, pessimism, invest, and economic activity. (What's left? Terms like prefer, satisfaction, wants, market exchange, resources, working, changing actions.)
Now, here's what I get: (bracketed phrases indicate a substitution of standard economic jargon)
"People [believe that future market interactions with others will be less capable of satisfyng their wants], which leads them to [allocate resources so as to anticipate lower gains from such activity]. As people do this, the combined effect of their actions is to make this suspicion true, [increasing the relative benefit of non-market exchanges or unmeasured market exchanges].
"The government should therefore [purchase things on the market] in order to produce a [false signal of the relative merit of selling certain goods], and facilitate production of [goods people don't want at current prices or that they previously couldn't justify asking their government to provide]. This, then, becomes a self-fulfilling prophecy: once people [sell unwanted goods due to this government action], it actually becomes beneficial for others to sell goods people do want on the market, [preventing a different kind of adjustment to conditions from happening]."
Phrased in these terms, does it even make sense? Does it even claim to do something people might want?
That was a very useful exercise since it helped me identify the key point of disagreement between you an Keynesianism. If I'm right, you're coming at this from a goods market perspective i.e. "I, a typical consumer am not interested in any of these goods at these prices, so I'm going to not buy so much", whereas the Keynesians are blaming this kind of attitude: "I, a typical consumer am fearful of the future. While I want to buy stuff, I'd better start saving for the future instead in case I lose my job" and it's the saving that triggers the recession (money flows out of the economy into savings, this fools people into thinking they are poorer and the death spiral begins).
A couple of other contextual points: 1) The monetary stimulus that Keynes recommended was based on governments running deficits, not necessarily spending more. Cutting taxes works just as well
2) Keynes was trying to reduce the magnitude of boom-bust swings, not increase trend economic growth rates. As such he prescribed the opposite behaviour in boom times, have government run surpluses to tamp down consumer exuberance. This is less widely known since politicians only ever talk about Keynes during recessions, when it gives them intellectual cover to spend lots of money.
3) The Keynesian consensus is not universal. Arnold Kling's "recalculation" story is much closer to your picture, and you'll notice he doesn't advocate stimulus, but rather waiting to see how people adjust to the new economic circumstances.
4) GDP is the preoccupation of macroeconomists. Microeconomists (like me) care much more about allocative efficiency, which is to say to what extent are things in the hands of the people who value them most? So there's a whole branch of the profession to which your initial GDP-centrism comment does not apply.
It's points 3 and 4 in particular that lead me to object to your claim that economists are obsessed with GDP. To my way of thinking, it's politicians that are obsessed with GDP because they believe their chances of re-election are tied to economic growth and unemployment figures. So they spend a lot of time asking economists how to increase GDP, and therefore economists more often than not to discuss GDP when they appear in public.
It's still not clear to me that you've done what I asked (taboo your model's predicates down to fundamentals laypeople care about), or that you have the understanding that would result from having done what I asked.
What's the difference between the "goods market" perspective and the "blaming this kind of attitude"/Keynesian perspective? Why is one wrong or less helpful, and what problems would result from using it?
Why is it bad for people to believe they are poorer when they are in fact poorer?
Why is it bad for more money to go into savings? Why does "the economy" entirely hinge on money not doing this?
Until you can answer (or avoid assuming away) those problems, it's not clear to me that your understanding is fully grounded in what we actually care about when we talk about a "good economy", and so you're making the same oversights I mentioned before.
No, I'm not making those oversights because I am a) not a Keynesian and b) not a macroeconomist. My offering defences of this position should not be construed as fundamental agreement that position.
This is quickly turning into a debate about the merits of Keynesianism which is not a debate I am interested in because stabilisation policy is not my field and I don't find it very interesting, I got enough of it at university. I'm going to touch on a few points here, but I'm not going to engage fully with your argument; you really need to talk to a Keynesian macroeconomist if you want to discuss most of this stuff. For one thing my ability to taboo certain words is affected by the fact I don't have a very solid grip on the theory and I don't spend much of my time thinking about high level aggregates like GDP.
Now here's the best I can do on your bullet point questions, sorry if it doesn't help much, but it's all I've got: 1) The difference is that Keynesians believe savings reduce the money supply by taking money out of circulation, this makes them think they are poorer, which makes them act like they're poorer, which makes other people poorer.
2) Because it starts with an illusion of poverty. The first cause of recessions in a Keynesian model is "animal spirits", or in layman's terms, irrational fear of financial collapse. Viewed from this perspective, stimulus is a hack that undoes the irrationality that caused the problem in the first place (and because it's caused by irrationality they can feel confident it is a problem).
3) This is actually one of my biggest problems with Keynesian theory. If it strikes you as counter-intuitive or silly, I'm not going to dissuade you.
One final point: The reason I replied to your initial comment in the first place, was your suggestion that all economists are obsessed with maximising measured GDP over everything else.
But many economists don't deal with GDP at all. When I was learning labour market theory we were taught that once people's wage rate gets high enough, one could expect them to work fewer hours since the demand for leisure time increases with income. There was never a suggestion that this was anything to be concerned about, the goal is utility, not income.
In environmental economics I recall reading a paper by Robert Solow (the seminal figure in the theory of economic growth) arguing that it was important to consider changes in environmental quality along with GDP, to get a better picture of how well off people really are.
I look at what I have been taught in economics, and I simply can't square it with your view of the profession. Some kinds of economists tend to be obsessed with growth, but they tend to be economists who specialise in economic growth. The rest of us have other pursuits, and other obsessions.
Alright, I'll let anyone judge for themselves if the canonical Keynesian replies reveal a truly grounded understanding of what counts as "helping the economy".
Forget Keynesian theory for a minute: I want to know if you have the understanding I expect of whatever theory it is you do endorse. Can you taboo that theory's terminology and ground it layperson level fundamentals? Can you force me to care about whatever jargon you do in fact use?
Because, at risk of sounding rude, I don't think you've acquired this "Level 2" understanding, and I don't think you're atypical among economists in lacking it -- from what I've read of Mankiw, Sumner, and Krugman, they don't have it either.
(btw, you call yourself an economist but don't have a grip on Keynesian theory? Isn't that pretty much required these days?)
Sure -- I only meant that economic policy advocates who are concerned about aggregate economic variables are obsessed with GDP as one of those variables, but that should be assumed from context. Obviously, you're not going to care about GDP in your capacity as a microeconomist of company behavior.
On macro policy I doubt I have level 2 understanding. I had to take papers in macro at university, and I was able to get reasonable grades on them, but level 0 or 1 understanding is sufficient to do that.
My guess is that if you asked a Keynesian why they care, they would say that boom-bust cycles create uncertainty and fear in people because they don't know if they're going to lose their job (and they want their job, or they'd have already quit) and by taming the boom-bust cycle people will have a more certain and therefore more pleasant life).
Equally if you asked a development economist, they would point to the misery in third world countries and for wealthy countries point out that productivity growth means being able to do more with less, and whether you want to have more, or want to do less, that's a win. Unemployed people are by definition people who want a job but don't have one, so concern about unemployment is easy to work out.
And as for me, well the reason I care about allocative efficiency is that allocative efficiency is the attempt to match reality to people's preferences as well as is possible under current constraints. How do we use our resources and knowledge to create the things people want and how do we get them to the people who want them the most?
The market does a pretty good job of this most of the time, but it does fail sometimes. And when it fails there are things government can do to improve matters, but the government can fail too, so you have to balance out the imperfections of the market and the imperfections of government and try to work out which set of imperfections is more problematic. If I succeed, or if people like me succeed then people will have more of what they want, be that flat screen TVs, or cars or clean air or time with their families. Not everything falls within economics' purview of course, love and truth and beauty are things I can't help with. But for everything else, my goal is to help the market to match infinite wants with finite resources, and imperfect information.
Perhaps it should have been, but I failed to assume this. And microeconomics is a lot wider than company behaviour, it covers pretty much everything but GDP and unemployment.
That wasn't the question or contributory thereto, though it shows you can ground one concept.
The question is, whatever model/theory you have of the economy, are its predicates fully grounded in what laypersons care about? You mentioned things people care about, but not how they fit into the model that you advocate.
Allocative efficiency is what I work with. If you asked me why I care about GDP, my response would be, "I don't, particularly".
As for my economic model, I can't give you a full rundown in a comment, but here's the short version: 1) Level 1 is the fully ideal version, unrealistic, but useful for grounding the whole thing in people's preferences. It basically rests on the notion that if you make a battery of assumptions voluntary exchange will result in allocative efficiency, if person A values something more than person B then they will trade, either directly or through side trades until person A has it. Yes there are a lot of reasons this doesn't work in practice, but that's level 2.
2) Level 2 picks at all those assumptions in level 1. Things like externalities (like pollution) imperfect information, irrational behaviour, imperfect competition, transaction costs and other git in the gears. These things cause violations of the assumptions in 1, and therefore prevent potentially efficiency-enhancing trades from occurring. The academic work at level 2 is focused around identifying these problems and considering possible solutions a government could introduce to correct for them.
3) Level 3 looks at the ability of government to effectively implement the policies identified at level 2. Theories like social choice theory (the ability of voting systems to effectively aggregate votes into social preferences) and public choice theory (how well do governments act as agents of the voting public). The academic work at level 3 is focused around identifying the limitations of real world governments, and identifying the side-effects of badly implemented policies.
Level 1 is all about individual preferences, not attempting to measure them directly because you can't, but rather in setting up a system so people can sort it out themselves.
As for how GDP factors in, well they it doesn't directly. Macro and micro aren't integrated, they haven't been since Keynes. You learn about them indifferent courses, people tend not to specialise in both, so there's a gap there. Hence the reason I don't care about GDP per se.
Now productivity I care about, because higher productivity means more resources for people to trade with and more preferences can be satisfied. I care about unemployment because it implies people are willing to make a trade, but unable to do so due to some bug in the system, either a level 2 problem (market failure), or a level 3 problem (government failure).
James_K:
Aside from the standard arguments about the shortcomings of GDP, my principal objection to the way economists use it is the fact that only the nominal GDP figures are a well-defined variable. To make sensible comparisons between the GDP figures for different times and places, you must convert them to "real" figures using price indexes. These indexes, however, are impossible to define meaningfully. They are produced in practice using complicated, but ultimately arbitrary number games (and often additionally slanted due to political and bureaucratic incentives operating in the institutions whose job is to come up with them).
In fact, when economists talk about "nominal" vs. "real" figures, it's a travesty of language. The "nominal" figures are the only ones that measure an actual aspect of reality (even if one that's not particularly interesting per se), while the "real" figures are fictional quantities with only a tenuous connection to reality.
It's pretty easy to get this sort of view just reading books. In my (limited) experience, there are a fair percentage of divergent types that are not like this - and they tend to be the better economists.
You may like Morgenstern's book On the Accuracy of Economic Observations. How I rue the day I saw this in a used bookstore in NY and didn't have the cash to buy it..
EDIT: fixed title name
I'm going through Morgenstern's book right now, and it's really good. It's the first economic text I've ever seen that tries to address, in a systematic and no-nonsense way, the crucial question of whether various sorts of numbers routinely used by economists (and especially macroeconomists) make any sense at all. That this book hasn't become a first-rank classic, and is instead out of print and languishing in near-total obscurity, is an extremely damning fact about the intellectual standards of the economic profession.
I've also looked at some other texts by Morgenstern I found online. I knew about his work in game theory, but I had no idea that he was such an insightful contrarian on the issues of economic statistics and aggregates. He even wrote a scathing critique of the concept ot GNP/GDP (a more readable draft is here). Unfortunately, while this article sets forth numerous valid objections to the use of these numbers, it doesn't discuss the problems with price indexes that I pointed out in this thread.
realitygrill:
Could you please list some examples? Aside from Austrians and a few other fringe contrarians, I almost always see economists talking about the "real" figures derived using various price indexes as if they were physicists talking about some objectively measurable property of the universe that has an existence independent of them and their theories.
Thanks for the pointer! Just a minor correction: apparently, the title of the book is On the Accuracy of Economic Observations. It's out of print, but a PDF scan is available (warning -- 31MB file) in an online collection hosted by the Stanford University.
I just skimmed a few pages, and the book definitely looks promising. Thanks again for the recommendation!
I meant personally - I did my undergrad in economics. I'm extremely skeptical of macroeconomics and currently throw in with the complex adaptive system dynamicists and the behavioral economists (and Hansonian cynicism; that's just me). But, to give an example, Krugman has done quite a bit of work in the complexity arena.
Yeah, you're welcome! The first I heard of that book was someone using the example of calculating in-flows and out-flows of gold. Each country's estimates differed by orders of magnitude or something like that, and even signs.
There are a number of reasonably priced copies on amazon.
Oh good, they certainly weren't that reasonable the last I checked.
It's not so much a matter of being overconfident as it is not listing the disclaimers at every opportunity. The Laspeyres Price Index (the usual type of price index) has well understood limitations (specifically that it overestimates consumer price growth as it doesn't deal with technological improvement and substitution effects very well), but since we don't have anything better, we use it anyway.
"Real" is a term of art in economics. It's used to reflect inflation-adjusted figures because all nominal GDP tells you is how much money is floating around, which isn't all that useful. real GDP may be less certain, but it's more useful.
Bear in mind that everything economists use is an estimate of a sort, even nominal GDP. Believe it or not, they don't actually ask every business in the country how much they produced and / or received in income (which is why the income and expenditure methods of calculating GDP give slightly different numbers although they should give exactly the same result in theory). The reason this may not be readily apparent is that most non-technical audiences start to black out the moment you talk about calculating a price index (hell, it makes me drowsy) and technical audiences already understand the limitations.
James_K:
You're talking about the "real" figures being "less certain," as if there were some objective fact of the matter that these numbers are trying to approximate. But in reality, there is no such thing, since there exists no objective property of the real world that would make one way to calculate the necessary price index correct, and others incorrect.
The most you can say is that some price indexes would be clearly absurd (e.g. one based solely on the price of paperclips), while others look fairly reasonable (primarily those based on a large, plausible-looking basket of goods). However, even if we limit ourselves to those that look reasonable, there is still an infinite number of different procedures that can be used to calculate a price index, all of which will yield different results, and there is no objective way whatsoever to determine which one is "more correct" than others. If all the reasonable-looking procedures led to the same results, that would indeed make these results meaningful, but this is not the case in reality.
Or to put it differently, an "objective" price index is a logical impossibility, for at least two reasons. First, there is no objective way to determine the relevant basket of goods, and different choices yield wildly different numbers. Second, the set of goods and services available in different times and places is always different, and perfect equivalents are normally not available, so different baskets must be used. Therefore, comparisons of "real" variables invariably involve arbitrary and unwarranted assumptions about the relative values of different things to different people. Again, of course, different arbitrary choices of methodology yield different numbers here.
(By the way, I find it funny how neoclassical economists, who hold it as a fundamental axiom that value is subjective, unquestioningly use price indexes without stopping to think that the basic assumption behind the very notion of a price index is that value is objective and measurable after all.)
Very true. A good general measure in human economic systems should NOT merely look at the ease of availability of finished paperclips. It should also include, in the "basket", such things as extrudable metal, equipment for detecting and extracting metal, metallic wire extrusion machines, equipment for maintaining wire extrusion machines, bend radius blocks, and so forth.
Thank you for pointing this out; you are a relatively good human.
That is a very poor inference on their part.
Here's a crude metric I use for gauging the relative goodness of societies as places to live: Immigration vs. emigration.
It's obviously fuzzy-- you can't get exact numbers on illegal migration, and the barriers (physical, legal, and cultural) to relocation matter, but have to be estimated. So does the possibility that one country may be better than another, but a third may be enough better than either of them to get the immigrants.
For example, the evidence suggests that the EU and the US are about equally good places to live.
I don't think that's a good metric. Societies that aren't open to mass immigration can have negligible numbers of immigrants regardless of the quality of life their members enjoy. Japan is the prime example.
Moreover, in the very worst places, emigration can be negligible because people can be too poor to pay for the ticket to move anywhere, or prohibited to leave.
But "given perfect knowledge of all market prices and individual preferences at every time and place, as well as unlimited computing power", you could predict how people would choose if they were not faced with legal and moving-cost barriers - e.g. imagine a philanthropist willing to pay the moving costs. So your objection to this metric seems to be a surmountable one, in principle, assuming perfect knowledge etc. The main remaining barrier to migration may be sentimental attachment - but given perfect knowledge etc. one could predict how the choices would change without that remaining barrier.
Applying this metric to Europa versus Earth, presumably Europans would choose to stay on Europa and humans would choose to stay on Earth even with legal, moving-cost, and sentimental barriers removed, indeed both would pay a great deal to avoid being moved.
In contrast to Europans versus humans, humans-of-one-epoch are not very different from humans-of-another-epoch.
Excellent point -- although I would pay a good deal to move to Europa, given a few days worth of air and heat.
A fair point, though I think societies like that are pretty rare. Any other notable examples?
Off the top of my head, I know that Finland had negligible levels of immigration until a few years ago. Several Eastern European post-Communist countries are pretty decent places to live these days (I have in mind primarily the Czech Republic), but still have no mass immigration. As far as I know, the same holds for South Korea.
Regarding emigration, the prime example were the communist countries, which strictly prohibited emigration for the most part (though, rather than looking at the numbers of emigrants, we could look at the efforts and risks many people were ready to undertake to escape, which often included dodging snipers and crawling through minefields).
The basket used is based on a representation of what people are currently consuming. This means we don't have to second-guess people's preferences. Unique goods like houses pose a problem, but there's not really anything we can do about that, so the normal process is to take an average of existing houses.
Which is a well understood problem. Every economist knows this, but what would you have us do? It is necessary to inflation-adjust certain statistics, and if the choice is between doing it badly and not doing it at all, then we'll do it badly. Just because we don't preface every sentence with this fact doesn't mean we're not aware of it.
Just to avoid confusion among readers, I want to distance myself from part of Vladimir_M's position. While I agree with many of the points he's made, I don't go so far as to say that CPI is a fundamentally flawed concept, and I agree with you that we have to pick some measure and go with it; and that the use of it does not require its caveats to be restated each time.
However, I do think that, for the specific purpose that it is used, it is horribly flawed in noticeable, fixable ways, and that economists don't make these changes because of lost purpose syndrome -- they get so focused on this or that variable that they're disconnected from the fundamental it's supposed to represent. They're doing the economic equivalent of suggesting to generals that their living soldiers be burned to ashes so that the media will stop broadcasting images of dead soldier bodies being brought home.
I wouldn't be in a good position to determine if it's lost purpose syndrome since I'm an insider, but I would suggest that path dependence has a lot to do with it.
Price indices are produced by governments, who are notoriously averse to change. And what's worse the broad methodology is dictated by international standards, so if an economist or some other intelligent person comes up with a better price index they have to convince the body of economists and statisticians that they have a good idea, and then convince the majority of OECD countries (at a minimum) that their method is worth the considerable effort of changing every country's methodology.
That's a high hurdle to cross.
On my blog I suggested using insulin prices as a good proxy for inflation. That should be pretty easy for economists to find, even historical data. One economists could find the historical data for one country and use it as a competing measure. No collective action problem to solve there! Just a research paper to present.
(Though I can't find it on google searches, but economists should be able to get access to the appropriate databases.)
The technology to manufacture insulin has been getting a lot cheaper since the late 1970s when bacteria were first used to synthesize insulin (before that it had to be extracted from animals). That process has become even easier since the process for growing E. coli has become much more efficient.
That's making your inflation rate strongly tied to one particular technology. A breakthrough making insulin synthesis easier, or increased diabetes rates, would affect insulin prices but not the rest of the economy.
Would error bars be a bad thing?
Economists could calculate error bars that would say how closely the calculated aggregate figures approximate their exact values according to definitions. This is normally not done, and as Morgenstern noted in the book discussed elsewhere in the thread, the results would be quite embarrassing, since they'd show that economists regularly talk about changes in the second, third, or even fourth significant digit of numbers whose error bars are well into double-digit percentages.
However, when it comes to the more essential point I've been making, error bars wouldn't make any sense, since the problem is that there is no true value out there in the first place, just different arbitrary conventions that yield different results, neither of which is more "true" than the others.
There's an old joke: "How can you tell macroeconomists have a sense of humour? They use decimal points." I'll admit spurious precision is a problem with a quite a bit of economic reporting. Remember that these statistics are produced by governments, not academics and politicians can have trouble grokking error bars.
Actually, that's not really the case. There is an ideal, it's just you can't do it. If you knew everyone's preferences and information and endowments of income, you could work out how people's consumption would change as real incomes and relative prices changed so you could figure out what the right basket of goods is to use for the index at every point in time (the right bundle is whatever bundle consumers would actually pick in a given situation).
But in practice you can't get the information you'd need to do this, and that information would be constantly changing anyway. In practice what statistical agencies do is develop a basket of goods based on current consumption and review it every decade or so. This means the index overestimates inflation (the estimates I've seen put it at about 1 percentage point per year) because when prices rise, people change their consumption patterns and we can't predict how until it's already happened.
This is a flawed procedure, but it's not arbitrary, its an honest effort to approximate the ideal price index as well as we can, given the resources at our disposal.
James_K:
To the best of my understanding, what you write above seems to concede that even under the assumption of omniscience, when we consider different times and/or places, with different prices, incomes, and preferences of individuals -- and different sets of goods available on the market, though this can be modeled by assigning infinite prices to unavailable goods -- there is, after all, no unique objectively correct way to define equivalent baskets of goods. You could calculate the baskets that would actually be consumed at each time and place, but not the ratio of their true values (whatever that might mean), which would be necessary for their use as the basis for a true and objective price index.
Am I wrong in this conclusion, and if I am, would you be so kind to explain how?
I would be really grateful if you could spell out what exactly you mean by "the ideal price index" when it comes to comparing different times and places, given my above observation. Also, you ignore the question of how exactly baskets are "reviewed," which is a step that requires an arbitrary choice of the new basket that will be declared as equivalent to the old.
Moreover, different kinds of "honest efforts" apparently produce very different figures. The procedures for calculating official price indexes have been changed several times in recent decades in ways that make the numbers look very different compared to what the older methods would yield. (And curiously, the numbers according to the new procedures somehow always end up looking better.) Would you say, realistically, that this is purely because we've been moving closer to the truth thanks to our increasing knowledge and insight?
If some price indexes are "clearly absurd", then they apparently have some value to us - for if they were valueless, then why call any particular one "absurd"? If they yield different results, then so be it - let us simply be open about how the different indexes are defined and what result they yield. The absence of a canonical standard will of course not be useful to people primarily interested in such things as pissing contests between nations, but the results should be useful nonetheless.
We commonly talk about tradeoffs, e.g., "if I do this then I will benefit in one way but lose in another". We can do the same thing with price indexes. "In this respect things have improved but in this other respect things have gotten worse."
Constant:
Sure, but such an approach would deny the validity of all these "real" economic variables that are based on a scalar price index. In particular, it would definitely mean discarding the entire concept of "real GDP" as incoherent. This would mean conceding the criticisms I've been expounding in this thread, and admitting the fundamental unsoundness of much of what passes for science in the field of macroeconomics.
Moreover, disentangling the complete truth about what various price indexes reveal and what they hide is an enormously complex topic that requires lengthy, controversial, and subjective judgments. This is inevitable because, after all, value is subjective.
Take for example two identically built houses located in two places that greatly differ in various aspects of the natural environment, society, culture, technological development, economic infrastructure, and political system. (It can also be the same place in two different time periods.) It makes no sense to treat them as equivalent objects of identical value; you'd have a hard time finding even a single individual who would be indifferent between the two. Now, if you want to discuss what exactly has been neglected by treating them as identical (or reducing their differences to a single universally applicable scalar factor) for the purposes of constructing a price index, you can easily end up writing an enormous treatise that touches on every aspect in which these places differ.
I've heard that the trick works less well each time it's used (perhaps within a limited time period). Is this plausible?
Both of these are contradicted by the fact that no economist, in discussion of the recent economic troubles, has suggested that letting the economy adjust to a lower level of output/work would be an acceptable solution.
Yes, they recognize that leisure is good in the abstract, but when it comes to proposals for "what to do" about the downturn, the implicit, unquestioned assumption is that we must must must get GDP to keep going up, no matter how many make-work projects or useless degrees that involves.
I most certainly am defending it -- by showing the errors in the classification of what counts as a benefit. If the argument is that stimulus will get GDP numbers back up, then yes, I didn't provide counterarguments. But my point was that the effect of the stimulus is to worsen that which we really mean by a "good economy".
The stimulus is getting people to do blow resources doing (mostly) useless things. Whether or not it's effective at getting these numbers where they need to be, the numbers aren't measuring what we really want to know about. Success would mean the useless, make-work jobs eventually lead to jobs satisfying real demand, yet no metric that they focus on captures this.
This is because it isn't. A "lower level of output/work" means that people, on average, are going to be poorer. And the way our economy is set up (in the United States at least), reducing output/work by 1% doesn't mean that each person works 1% less, produces 1% less, and consumes 1% less, it means that 1 in 100 people lose their job, can't find another one, and become poor, while the rest keep going on as they have been. So, when output/work falls, you don't get more leisure, you get more poverty.
And I disagree that most stimulus spending ends up being directed to "worthless" projects. Maybe they're not the best value for money, but even completely worthless make-work projects are still effective at wealth redistribution. Furthermore, if people are willing to lend the government money for really, really low interest rates (as demonstrated by prices of U.S Treasury securities) then isn't that a signal that it's an unusually good time for the U.S. government to borrow and spend - that the economy wants more of what the government produces and less of what private industry produces?
This I think reflects a status-quo bias. When the per capita GDP was lower in 2000, or 1990, the economy managed to employ a higher percentage of people. While you're right that current institutions, inertia, and laws prevent shorter workweeks, that is an argument for removing these barriers, not an argument for trying to game the GDP numbers in the (false) hope that this will somehow translate into sustainable employment because of the historical correlation.
Okay, but that still looks like a case of lost purposes and fake utlity functions. If you're spending money to redistribute, then spend the money to redistribute! Don't spend it on a project that hogs up real resources just to get a small side-effect of transferring money to people you want to help. ("What's your real objection" and all.) If it's important that they feel they earn the paycheck, then require that they take job training.
And the reason I call the projects worthless is this (and it doesn't require an ideological commitment to being against government projects): people couldn't justify asking the government to provide these things before the recession. But if the recession is a contraction of productive capacity, then the projects we commit to should also contract -- it should look like an even worse deal.
The fact that the government can issue debt cheaper doesn't change this fact. The reduced productive capacity is a real (i.e. non-nominal) phenomenon. The greater ease with which government can procure resources does not mean our aggregate ability to produce them has increased; it just means the government can more easily increase its share of the shrinking pie. That still implies that our "choice set" is being reduced, and the newer, larger wastefulness of these projects will have to show up somewhere.
If the fundamental determinant of reduced unemployment is whether the economy has entered into (as Arnold Kling says) sustainable patterns of specialization and trade, then temporary stimulus projects can't accelerate this, because they're by definition not sustainable: after they're over, we'll just have to readjust again.
I must emphasize, as I did in this blog post, that this does not mean we should give suffering families the finger because "it would be inefficient and all" -- the fact that they (under a stimulus project) are working, feeling productive, and getting a paycheck is very significant, and definitely counts as a benefit. It's just that you should help them a way that doesn't inhibit the economy's search for efficient use of factors of production, nor (significantly) favor these families over the ones that are going to be screwed again when the projects have to stop, and the hunt for re-coordination starts anew.
Oh, definitely.
I basically agree with this; if you want to redistribute, then certainly it's better to just redistribute than to "employ" people to do completely useless things. (For example, extending unemployment benefits is a form of redistribution.)
Well, what matters is the opportunity cost. A project that wasn't worth doing before can become worth doing if the better alternatives aren't there anymore; a contraction of productive capacity doesn't have to affect all sectors of the economy equally. For example, people in a country experiencing an oil shortage may find that investing in more expensive, non-oil energy sources has become worthwhile; it's worse than what used to be possible, but it's the best remaining alternative. Given that people are willing to lend to the federal government more cheaply now than before the recession, the new equilibrium might end up involving more "investment in government", not because government has become more productive, but because the alternative investments have gotten worse.
And I'm not necessarily sure that absolute productive capacity went down all that much in the current recession. During the Great Depression, the factories were still there, there were people willing and able to operate the factories, and there people who wanted the goods the factories could produce, yet the factories were idle, the would-be factory workers were unemployed, and the would-be consumers didn't have the goods they wanted. (The Keynesian position is that there was a collapse in aggregate demand, leading to a general glut, followed by a reduced output level.)
Downvote explanation requested. This looks like a reasoned reply to MichaelBishop's criticism, and I'm interested in knowing how it errs and how Michael's comment doesn't, and how this is so obvious.
[Didn't downvote.] This is silly. The 'leisure' of unemployment is concentrated on a few, and comes with elevated rates of low status, depression, suicide, divorce, degradation of employability, etc.
That's a misinterpretation of what I was suggesting as the alternative. Lower output + more leisure doesn't mean the "leisure" is concentrated entirely in a few workers, making them full-time leisurists who starve. Rather, it means that anyone who wants to work for money would work fewer hours and have a lower level of consumption, not zero consumption.
Furthermore, the lower consumption is only consumption of goods purchased with money; with significant restructuring, labor with predictable demand (like babysitting) can be handled by cooperatives that avoid the need to pay for it out of cash reserves.
I don't deny that make-work programs allow workers to show off and practice their skills, retaining employability. I criticize economists who miss this benefit. But if you're going to spend money to get this benefit, you should spend it in a way that directly targets the achievement of this benefit to the workers, rather than on make-work projects that only achieve this benefit as a site effect, and which waste capital goods and distort markets in the process.
Unfortunately, in the United States, you really would end up with much more of the former and less of the latter. Europe would be better off, though, thanks to different labor laws; would you suggest that the United States adopt something like France's maximum 35 hour workweek, or Germany's subsidies to part-time workers?
Currently, hours worked per week is positively correlated with hourly wages; one person working 80 hours a week usually makes more money than two people who both work 40 hours a week. Also, specifically wanting to do part-time work is a bad signal to employers. It signals that you're not committed to your job, that you're probably lazy, and that you're weird. So, absent government intervention, you probably won't see people voluntarily reducing their working hours.
Economists who argue for stimulus spending on Keynesian grounds understand that GDP is not a perfect measure and that the value produced by stimulus projects may be less than the value produced by ordinary spending. See, for instance, this Brad DeLong post, where he estimates the net benefit of the stimulus and counts the useful stuff produced using stimulus money as being only 80% as valuable as the dollar amount would suggest. Or, as he writes:
Well, at least that is 20% closer to the mark!
Nice to see this kind of thinking from a capitalistish.
I'll accept that compliment, backhanded though it might be :-) (I canceled out the downmod you got for that comment -- no offense taken.)
I would appreciate, though, if you could (as best you can) tell me what it was I said that led you to believe I'm capitalistish (in the sense that you meant), or that I would otherwise disagree with my above GDP rant. No need to dig up links, just tell me whatever you remember or can quickly find.
I'm not doing this to make you feel foolish for having said what you did (like I've been known to try with you ...), but because I want to know what it is that gives of these impressions of my views, and whether I should be using different terms to describe them.
As I've said before, I have a love-hate relationship with libertarianism. I believe largely what I did ten years ago about the proper role of government, but much of what self-described libertarians advocate is sharply contrary to what I considered to be my libertarian view.
There could be indirect consequences of the decision in question, resulting from counter-intuitive effects on the existing economic process, on lives of other people not directly involved in the decision. The relevant question is about estimate of those indirect consequences. However imprecise economic indicators are, you can't just replace them with presumption of total lack of consequences, and only consider the obvious.
I didn't ignore the indirect consequences:
To the extent that the indirect effects go beyond this, standard mainstream metrics in economics don't measure them, because they are essentially independent of how well off others have become as a result of these rental decisions.
Well, maybe there are no such consequences (which is not obvious to me), but that's what I meant.