Why your GDP hate is misplaced

When it comes to economics the one single issue that seems to get everyone in a room in agreement is that GDP is trash.  Here is a transcript from a typical conversation between me and an individual who hears I’m an economist:

Individual: “You are an economist!  You must agree that GDP is crap.”

Nolan: “Ahh well, ummm, what question are you asking?”

Individual: “What, it is just crap though, you must agree that it is rubbish”

Nolan: “Well it depends on your question, why are we measur …”

Individual: “Come on, it is just rubbish, everyone agrees it is rubbish.  I mean we care about so many other things”

Nolan: “Ahh so your question is about what we should value. Ok yeah it doesn’t measure all social value but …”

Individual: “Yeah, it’s rubbish, exactly”

I don’t have enough fingers and toes to count the number of times I’ve had this conversation – but in truth GDP is really good at measuring what it is supposed to measure … the problem is that people keep using it as a measure of something else.

But it is hardly the individual’s fault that they have come to this conclusion.  Decades of GDP fetishisation by policy makers combined with economists who spend more time talking about (and in the extreme teaching) the shortcomings of GDP than actually teaching what GDP is supposed to measure has provided this great rule of thumb that people follow to understand what is going on.

So in this post let me do something novel – let me stand up for GDP.

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GDP in three different charts

Flipchart Rick has a post up about Andy Haldane’s speech the other day and, like all Haldane’s work, it’s witty and engaging so you should definitely read it. The subject is the recent slowdown in growth in the developed world and it illustrates how different views of the same data can lead to very different conclusions.

Haldane plots the last 3000 years of GDP to show what a recent phenomenon exponential growth is:

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Alesina on austerity: round 2

Alberto Alesina has returned to the fray with a new paper that shows how tax rises are far more damaging than tax cuts. With a new dataset covering the recessionary years, this is the most up-to-date evidence on fiscal consolidation available. Importantly, they are unable to discern evidence that the ZLB caused the effects of fiscal policy to be greater. Of course, this isn’t the final word and it’s only one piece of evidence, but I’ll be reading it closely over the next few days.

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

The Economist’s misguided lecture to macroeconomists

In a bizarre leader article The Economist praises microeconomists for their use of data to better predict people’s behaviour and recommend macroeconomists do the same:

Macroeconomists are puritans, creating theoretical models before testing them against data. The new breed [of microeconomists] ignore the whiteboard, chucking numbers together and letting computers spot the patterns. And macroeconomists should get out more. The success of micro is its magpie approach, stealing ideas from psychology to artificial intelligence. If macroeconomists mimic some of this they might get some cool back. They might even make better predictions.

I’m tempted to label this as obvious baiting but the misunderstanding is deeper than that. Read more

Merry Christmas from TVHE

Have a great Christmas and we’ll be back in the New Year. If you’re feeling starved of economics over the next ten days The Atlantic has a selection of beautiful Christmas cards to send to your loved ones:

If you need something a little more stimulating then you can catch up on some of the debates you missed on the blogs over the past week. Read more

QOTD: “”I have a dream. It involves a Star Trek chair and a bank of monitors.”

Bank of England Chief Economist Andy Haldane:

“I have a dream. It involves a Star Trek chair and a bank of monitors. It would involve tracking the global flow of funds in close to real time, in much the same way as happens with global weather systems.”

Is the binding constraint on better macroprudential policy a lack of timely information? If they had that information, could a world regulator really have averted the crisis in 2007?

Full speech here.