Tuesday, May 26, 2015

Again, the "natural" rate of output


Which part of this graph would you say shows "natural" output?

GDP Growth Over the Very Long Run
Max Roser (2014) – ‘GDP Growth Over the Very Long Run’. Published online at OurWorldInData.org. Retrieved from: http://ourworldindata.org/data/growth-and-distribution-of-prosperity/gdp-growth-over-the-very-long-run/ [Online Resource]

Before you answer let me say I think there must have been a similar peak in the time of ancient Rome. Smaller than ours, but no less temporary. And probably others.

When a peak rises like that, it's not "natural". It's the result of economic management, coddling, encouragement, and stuff like that. And finance. Not only technology. Probably not primarily technology.

Maybe it's all natural, the extended low, the rise to peak, and the fall back. But then, the rise and fall is only a momentary blip on the screen.

Here's another look, with some old MeasuringWorth data that's no longer available:

Graph #2
This graph only goes back to 1688. The first graph goes back to year one.

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The graph of MeasuringWorth data is from 2010 maybe or 2011. It's a Google Docs spreadsheet graph, I recognize it. So I searched my old Google Docs files and found it. Exported it to XLS format, added some current UK GDP data for comparison -- the new and old datasets differ! -- and provided a link to the older data that MeasuringWorth no longer provides.

Might not be worth anything: The current dataset begins with 1820. The old dataset contains only five values before that date: 1300, 1688, 1759, 1801, and 1811.

Huh. I wonder why they didn't have a number for 1086. From the Domesday book.

Monday, May 25, 2015

The natural rate of output


Okay, so when I googled it I got 180 million results for the natural rate of output. I thought maybe I'd show them all here. (chuckle chuckle)

Number one on the list, from SparkNotes:

Natural Rate of Output - The rate of output when the factors of production, capital and labor, are used at their normal rates.

"Normal rates". Number one on the list. Plus they had big colorful circles, and pictures of cute girls and stuff.

From one extreme to the other, the second of those 180 million results is from Wikipedia:

In economics, potential output (also referred to as "natural gross domestic product") refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints. If actual GDP rises and stays above potential output, then (in the absence of wage and price controls) inflation tends to increase as demand for factors of production exceeds supply. This is because of the limited supply of workers and their time, capital equipment, and natural resources, along with the limits of our technology and our management skills.

More than I wanted to know. (If the wikiparagraph seems unfocused, that's probably because it's a compromise written by people who disagree with each other. Everybody gets to say a little of what they want to say.)

So, per Wikipedia, when Sumner writes

... monetary stimulus that boosts output closer to the natural rate.

I should read

... monetary stimulus that boosts output closer to potential.

That makes more sense to me.

I worked with a guy years back who said that if the progress of the world had depended on him, we'd all still be living in caves. I always took him to mean he didn't think of himself as part of what Arnold J. Toynbee called "the creative minority". But anyway: Living like cave men, that's natural. I have no trouble with "potential output" as an economic concept, but I don't think you want to equate it with the cave man rate of output.

Oh, and I didn't bring this up in the earlier post, but what is that awkward construction supposed to mean? "The natural rate of output." Rate of output growth? You'd think. But if Sumner meant "boosts output closer to potential" then I think he means the level, not the rate. But he said "rate". That's just casual conversation, sloppy ... natural conversation.

Sloppy conversation is out of place in a post like Sumner's. Unless he meant the whole thing as a joke.

Hm.

Nah. My response to Sumner, my whole response was a joke, because his argument didn't deserve to be taken seriously; that was my whole point. But Sumner wasn't making joke. He was having a serious disagreement with Rajan, with Nick Rowe, and others.

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What else we got?

The third hit of those 182 million is from the Fed. That's good. They often have the best answer.

Well, they offer two definitions:

  •  potential output: "the level of output that would prevail under perfect competition"
  •  natural output: "the level of output that would prevail with flexible prices and wages"

I'm not comfortable with either of those definitions. That's how you know when people are economists: They use definitions and terms and names that are supposed to have definite and particular meaning, and nobody outside the clique knows what the fuck they're talking about. Pardon my French.

The fourth hit is for the natural rate of unemployment. So we're done here.

Sunday, May 24, 2015

The natural rate of painting himself into a corner


The most interesting part of Scott Sumner's no such thing post was this right here:

And when those economies are artificially depressed by a combination of low NGDP and sticky wages, then the rest of the world benefits from monetary stimulus that boosts output closer to the natural rate.

The natural rate of output. I never heard of that one. Well... I heard of the natural rate of unemployment. I suppose the two are related by Okun's law: There's a tight relation between employment and output. But that doesn't prove there's any such thing as the natural rate of output.

If you have a natural rate of unemployment, I guess you could have a natural rate of output growth. So the question is: Do we really have a natural rate of unemployment?

I'm not touching that one.

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Sumner expresses the idea that an economy might be "artificially depressed" by "low NGDP and sticky wages". Well, I'm not an economist so I don't have to have an opinion on whether wages are sticky. But if wages are sticky, that's a natural phenomenon. Not an "artificial" one.

Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages...

If wages are sticky, it is because of human nature. That's not "artificial". And if NGDP is low, that's not what makes the economy depressed. It's what we measure so we can tell if the economy is depressed. Sumner depends a lot on his own popularity instead of on clear thinking these days. He used to be better than that.

I agree with Auburn Parks. It is as if Sumner has painted himself into a corner by his prior argument. And now he is stuck having to say stupid things to prop up his entire conceptual framework for understanding the modern economy.

Saturday, May 23, 2015

Two, not of the same kind


Sumner says "There is no such thing as 'global aggregate demand'".

He doesn't say global aggregate demand cannot be measured. He says there isn't any.

That's idiotic.

Sumner also said "Aggregate demand is fundamentally a monetary concept". That's interesting. Keynes complained that "The National Dividend, as defined by Marshall and Professor Pigou, measures the volume of current output or real income and not the value of output or money-income." So, Sumner is child of Keynes on this point: Keynes said we ought to consider nominal demand, and Sumner does.

Keynes also pointed out that "the community’s output of goods and services is a non-homogeneous complex which cannot be measured ... except in certain special cases".

But he didn't say there isn't any.

The Cobb-Douglas production function


At Twenty-Cent Paradigms, Bill C presents the Cobb-Douglas production function at origin, "in a 1928 AER article, 'A Theory of Production,' by Charles Cobb and Paul Douglas." 27-page PDF.

Bill's post is very good. I didn't tackle the PDF yet.

Friday, May 22, 2015

There is no such thing as Scott Sumner (because if there was, this would be ad hominem)


At There is no such thing as "global aggregate demand", someone pretending to be Scott Sumner quotes Raghuram Rajan

I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it

and reacts defensively -- as one might if one's only good idea were suddenly put at risk. Sumner would never do that.

How does the false Sumner respond? He takes the concept of Aggregate Demand and dumbs it down -- all the way down to pure bullshit:

Rajan seems to imply there is such a thing as global AD, that it's a pie that countries can take a larger piece of by engaging in beggar-thy-neighbor policies, such as monetary stimulus. This is almost entirely wrong. There is no such thing as global AD

Dick.

Demand is measured by what we spend. Aggregate demand is measured by totaling up demand. If some demand is expressed (or spent) in dollars, and some in euros, so what? You can't add dollars and euros, but you can do exchange rate calculations that let you aggregate the numbers. Sumner is just being a dick.

Oh, right, it can't be Sumner. Because there's no such thing.

Thursday, May 21, 2015

Massaging egos and getting to the point


Keynes, from the Preface:

Massaging egos:

Those, who are strongly wedded to what I shall call “the classical theory”, will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new. It is for others to determine if either of these or the third alternative is right. My controversial passages are aimed at providing some material for an answer; and I must ask forgiveness if, in the pursuit of sharp distinctions, my controversy is itself too keen. I myself held with conviction for many years the theories which I now attack, and I am not, I think, ignorant of their strong points.

The matters at issue are of an importance which cannot be exaggerated. But, if my explanations are right, it is my fellow economists, not the general public, whom I must first convince. At this stage of the argument the general public, though welcome at the debate, are only eavesdroppers...

Getting to the point:

... eavesdroppers at an attempt by an economist to bring to an issue the deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory, and will, until they are resolved, continue to do so.

Wednesday, May 20, 2015

"This is the danger..."


Keynes, quoted in The Moral Philosophy of Management: From Quesnay to Keynes:


Tuesday, May 19, 2015

I wonder how the Farm Sector did in the Goldilocks years


Goo-glit.

I found this, for starters, from USDA:

Farm Business Net Cash Income Forecast To Decline in 2015:
Farm businesses are defined as operations with gross cash farm income of over $350,000 (labeled "commercial") or smaller operations where farming is reported as the operator's primary occupation (labeled "intermediate"). Approximately 11 percent of U.S. farms are commercial and 33 percent are intermediate. "Residence farms" comprise the remaining 55 percent of operations. These are small farms operated by those whose primary occupation is something other than farming.

Interesting. Also, they give the distribution of farms by financial size, but fail to state the total income for each of those groups. It would have been more interesting if they provided that extra bit of information.

I also find it quite interesting that they didn't provide that information.

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This is useful: From the U.S. Census Bureau, a page of links to data in Excel and PDF formats. In the Farm Income and Balance Sheet section I found

840 - Farm Sector Output and Value Added [Excel 70k] | [PDF 61k]

and downloaded the 12s0840.xls file, which covers the years 1929-2009.


Oh! Ignoring component subcategories, the spreadsheet lists
1. Farm output
2. Less: Intermediate goods and services consumed
3. Equals: Gross farm value added
4. Less: Consumption of fixed capital
5. Equals: Net farm value added

Since #4 is Consumption of fixed capital, I'd say #3 must be the farm component of GDP, and #5 must be the farm component of Net Domestic Product. So then #1, Farm output, is gross farm output. But farmers (like other producers) consume in the process of producing. So you have to subtract #2, intermediate consumption, to arrive at #3, the GDP component.

This goes back to what I was looking at a while back, the UNSNA stuff. Wait, a better link is my "Gross Domestic Spending" is not "Gross Output". Let me quote again the bit I quoted there, from Wikipedia's Intermediate consumption page:

Conceptually, the aggregate "intermediate consumption" is equal to the amount of the difference between Gross Output (roughly, the total sales value) and Net output (gross value added or GDP). In the US economy, total intermediate consumption represents about 45% of Gross Output.

We're so used to thinking of GDP as "total economic activity" because that's what the media always says. But it's not even close. Gross Domestic Product is what's left after the process of production consumes some 45% of gross output.

I'm gonna use the "Gross farm value added" number from the 12s0840.xls spreadsheet as the Farm Sector component of GDP.

Graph #1: Farm Sector Share of GDP

Graph #2: Ditto

Graph #3: Ditto. Pretty quiet in 1998, 1999, 2000, 2001

Graph #4: Year-on-Year change in Gross Farm Value Added
The farming sector looks to be more volatile than GPDI.

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How did the Farm Sector do in the Goldilocks years?

The U.S. economy of the mid- to late-1990s was considered a Goldilocks economy because it was "not too hot, not too cold, but just right."

Say 1995-2000.

Graph #5: Year-on-Year change in Gross Farm Value Added, 1980-2009

Looks like the latter 1990s & early 2000s were the longest, least volatile period in quite some time. And more below zero than above.