Sunday, September 22, 2013

The Economist gets it wrong

Sloppy work, and not just at The Economist. I've seen this argument made several times before. Here's how The Economist puts it:
When a bank makes a loan, it credits the money to the borrower’s deposit account. In so doing the loan adds to the money supply. If that money is spent on a new car, factory or other freshly produced good, it contributes to demand, helping the economy to make fuller use of its productive capacity. If the economy is already near full capacity, it will probably just raise prices instead. But either way, the bank lending will add both to debt and to nominal GDP, the money value of economic output, leaving the ratio of debt to GDP largely unchanged.

However, loans can also be spent differently. They can be used to buy existing assets, such as homes, office-blocks or rival firms. Since the asset already exists, its purchase does not add directly to GDP, which measures only the production of new goods and services. As a consequence, debt increases, but GDP does not.

Maybe I shouldn't generalize, but when the wife and I bought our new place, it was ten years old. In order to help us buy it, we sold our old place. And after we bought the new one, the people who sold it to us built themselves a new home. They relied on our buying their old house, just as we relied on the people who bought our old house.

There was a chain of transactions, three that I know of, of which only one was a quote productive unquote transaction that resulted in new construction.

Well yeah, but have you seen the price of housing? Today, a whole chain of transactions is required so that one fellow can afford to put up a new house! So don't tell me that my transaction was non-productive. Call it non-final, if you want.

This whole "buying an existing house is not productive" thing is a meme, spreading like a bad cold. Don't catch it. It's not right.


geerussell said...

The Economist article talks about transactions for existing assets as not helping the economy to make fuller use of its "productive capacity". This seems pretty clear. A ten year old house used "productive capacity" ten years ago and it got counted then.

I could be wrong but the way you say quote productive unquote seems to imply productive in the sense of useful vs useless. That's not what GDP means, not what it counts.

The Arthurian said...

my point being that the guy buying a *new* home these days needs extra help to make it happen: "Today, a whole chain of transactions is required so that one fellow can afford to put up a new house!"