So much for the notion that "trend real growth" is stable.

I went to MeasuringWorth and got annual data for U.S. Real GDP, 1800-2016. Added a Hodrick-Prescott trend line with a smoothing factor of 10,000. Changed the vertical axis to a log scale. It looks like this:

Graph #1: RGDP and Trend  (Vertical Scale is "Millions of 2009 Dollars")

I think I see arches in that thing. Actually, I'm not sure what I see. For a closer look I figured growth rates for 20-year periods, from 1820 to 2016. Looks like this:

Graph #2: 20-Year Trend RGDP Growth (1820 is 140% more than 1800, etc.)

Yup, arches. So much for the notion that "trend real growth" is stable.

Part 1 of 4

Kitov's warning

This is the most interesting econ topic I have seen in some time.

Ivan Kitov:

In this blog, we have discussed already [here and here] the incompatibility of real GDP data caused by the change in definition of the GDP deflator... in the USA - in 1977... One can see that the CPI inflation rate is approximately equal to the rate of the GDP deflator change multiplied by a factor of 1.22 since 1978...

Kitov adds:

This observation naturally leads to the assumption that real GDP in the United States is biased by the change in definition of the GDP deflator.

Yes. The data called "nominal" is based on actual prices. If you take "nominal GDP" and divide by the GDP Deflator, you get the so-called "real" values. And if you change the Deflator, you also change "real GDP".

The deflator is the price component of nominal GDP, and "real GDP" is the output component. If you make the price component bigger, the output component gets smaller. Oh, but that's not what we want! Making the price component bigger tells everyone that prices went up more than we thought, and output grew less. That's not what we want.

If you make the price component smaller, you're saying prices went up less than we thought, and output grew more. Yeah, that's better. That's what we want.

Guess which way the Deflator changed.


Okay. In Long-term economic growth is linear (10/24/14) Kitov refers to "the change in definition of the GDP deflator... in 1977".

In Is real GDP correct? (12/24/10) he says "All in all, the notion of real GDP is a virtual one and is highly biased by the change in its definition in 1979."

And in Real GDP is NOT correct (10/22/11) he refers to "the change in real GDP definition in 1978."

He's a little iffy on the date.

I don't know Kitov. But I do know that the methods for calculating inflation and unemployment have changed, and I know it is hard to find information on such changes, even on the internet. I remember a change in the calculation of the CPI back around Reagan's time, or maybe Clinton's. But my memory is fuzzy: It could have been the Deflator that changed, and maybe it was before Reagan. So I cannot dismiss Kitov's warning.

I see him saying

There is no direct statement about the reasons of the change in definitions in [Concepts and Methods of the U.S. NIPA], but we might guess that this is likely related to the introduction of a new methodology to evaluate the overall price inflation.

This bothers me. I need something definite. I cannot proceed based on a guess.

Kitov also says

there is no such macroeconomic measurable parameter as real GDP (see Concepts and Methods of the U.S. NIPA for details). There are two actually measured variables: nominal GDP and GDP deflator (price index). Real GDP is estimated using nominal GDP less the change in prices.

Yeah, that's what I thought; and I think it is how things once were. But Nick Rowe put doubt in my brain about how things are now. And there may have been changes in methodology such that Kitov is no longer correct on this point. I wish I could be sure.


In Is real GDP correct?, Kitov links to Concepts and Methods of the U.S. NIPA. The link brings up a list of Methodology Papers. The "Concepts and Methods" item is on the list. Also listed (with no link) is "A Guide to the National Income and Product Accounts of the United States", which, we are told, was replaced by the "concepts and methods" paper.

I remember the Guide. I remember making fun of the filename -- nipaguid.pdf -- for being DOS-compatible.

Under the heading Real Output and Related Measures on page 15 of the nipaguid (or page 16 of 28 in Adobe Reader) we read:

In addition to estimating the current-dollar market value of GDP, BEA estimates “real,” or inflation-adjusted, GDP and its components.

Yeh. But this gets v.e.r.y interesting:

The annual changes in quantities and prices in the NIPAs are calculated using a Fisher formula that incorporates weights from 2 adjacent years. For example, the 2003–04 change in real GDP uses prices for 2003 and 2004 as weights, and the 2003–04 change in prices uses quantities for 2003 and 2004 as weights.

There is a footnote attached to that last sentence, which says:

Because the source data available for most components of GDP are measured in dollars rather than in units, the quantities of most of the detailed components used to calculate percent changes are obtained by deflation. For deflation, quantities are approximated by real values (expressed, at present, with 2000 as the reference year) that are calculated by dividing the current-dollar value of the component by its price index, where the price index uses 2000 as the reference year.

They put it in the sentence twice, but the year they were using as the "reference year" is not the important thing. The important thing is that, for most components of GDP, the quantity numbers are figured by dividing the nominal value by the price index. RGDP is figured from the Deflator, not the other way around. Kitov is right.


Granted, the 28-page nipaguid has been replaced by the 447-page "Concepts and Methods" PDF. Yeah, yeah, nice.

On page 4-17 and 4-18 of the new PDF, they say that the "chain-type" index that they started using in 1996 is better than the older method, except it is "not additive". This seems to mean that if you add up the numbers, you get the wrong answer. Nice!

Get back on topic, Art. From the last paragraph on page 4-18:

For real GDP and its major components, BEA provides tables that present accurate estimates of contributions to growth rates that are based on chain-type quantity indexes rather than on the chained-dollar estimates (see the appendix).

Yeah, they said something like that in the nipaguid, too. I wonder if they still admit that the chain-type quantity indexes are "obtained by deflation".

They do! Page 4-19:

For most NIPA components, estimates of physical quantities are not available. Instead, “real” estimates—that is, estimates that exclude the effects of price change—are derived by “deflating” (dividing) the current-dollar value by appropriate price indexes.

They use chaining, rather than the pre-1996 method, to figure the price indexes. So, okay. But they're still doing all the work in prices, and converting to quantities. So remember: When they say their estimates of Real GDP are "based on chain-type quantity indexes": Yeah sure, but the quantity indexes are derived by “deflating” the current-dollar value by using price indexes.

They tell you again and again that "Real GDP" is based on quantities. But the fact remains that they figure the quantities by working backwards from actual prices and price indexes.

In follow-up comments to those linked above, Nick Rowe focuses intently on the calculations that are used:

I had thought that StatsCan uses the "Chain Laspeyres" index for GDP (see page 32). That's what I described above. But it sounds like they are maybe using Fisher, which is a geometric average of Laspeyres and Paasche.
...
In Laspeyres you first multiply today's vector of quantities by yesterday's vector of prices, to get real GDP today. Then you divide NGDP by RGDP to get the price index. (That's what I had thought they all did, so that RGDP comes before P.)

In Paasche you first multiply today's vector of prices by yesterday's vector of quantities to get a price index. Then you divide NGDP by P to get RGDP. (Which is the opposite).

And Fisher takes a geometric average of those two methods.

Okay. And I can see I'm going to have to put some numbers in Excel and see how those calculations work. (Not today.)

But notice that Nick takes the "vector of quantities" as a given. It is rarely a given: For "most" of the components of GDP, they figure the quantities by working backwards from actual prices and price indexes. And that's according to both the nipaguid and the "Concepts and Methods" PDF.

That's how I read it, but I'll leave a door open: If I have it wrong, let me know.

But don't focus on the smoke and mirrors of Laspeyres and Fisher and Paasche. Go back to the start. Go back before the part where they use "quantity indexes rather than chained-dollar estimates". Go back to where the quantity indexes are "derived by “deflating” the current-dollar value by appropriate price indexes". In most cases, the price indexes come before the quantity indexes.

Nick says:

I'm now starting to think that this is a non-question. Like debating whether the chicken or the egg comes first. You can do the math either way around. You can calculate P first, or you can calculate RGDP first. It doesn't matter.

It matters, Nick, because you can't use numbers you don't have.

I'm not saying we should avoid using quantity information, when we have it. I'm saying we don't usually have it.

And when the quantity information is calculated by working backwards from price information, let's not pretend that it really is quantity information.

So let's don't say the price index is figured by dividing nominal GDP by real GDP when, in most cases, if you trace things back far enough, it is real GDP that is figured by dividing nominal GDP by the price index.

Almost every case, I would bet.


I opened this discussion by observing that this concern of Ivan Kitov's is the most interesting econ thing I've come across in a long time.

But I had reservations about Kitov. I don't know him or his work.

I was concerned that he was "iffy" about his dates. I now understand that the change occurred in the 1990s, and data was changed for what were even then years past, back into the 1970s. So I'm no longer troubled to see that Kitov does not pin down the date precisely. That's the least important issue raised today.

I was concerned because Kitov was guessing about "the introduction of a new methodology", and I could not proceed based on a guess. I resolved this concern by checking the nipaguid and the "Concepts and Methods" PDF. Yes: The introduction of the "chain-type" calculation is the new methodology. I'll have to test that myself to prove to myself that the old methodology slash new methodology difference is the cause of the Deflator discrepancy that Kitov finds. But I'm good for now.

I was concerned that Kitov might be wrong when he said "Real GDP is estimated using nominal GDP less the change in prices." Because Nick Rowe challenged me on exactly that issue some than five years ago, and doubt lingered in my mind ever since. But I have now resolved this concern, barring a new challenge, by looking into the nipaguid and the other PDF.

I was concerned that my weak memory, which supported Kitov's argument, was weak and possibly flawed. I can resolve that concern right now:

Graph #1: The CPI and Five Vintages of GDPDEF, the GDP Deflator

The thin black line that extends all the way to the right is the Consumer Price Index (CPI). This is the one that the GDP Deflator formerly matched, according to Ivan Kitov. The other five lines on the graph all show the GDP Deflator, as it was at different dates in the past.  You can click the graph to see it bigger. Or you can click the text "Graph #1" in the caption below the graph to see the source page at ALFRED.

The blue line that extends all the way to the right is the most recent version of the Deflator. You can get some idea which line is which not only from the color, but also from the date where the line ends. Other than the CPI and this Deflator line, there are four other Deflator lines on the graph. These end in 1991, 1995, 1996, and 2000.

The fat red line that starts around 1960 and ends in 1991 (vintage 1991-12-04). This is the earliest "vintage" of the GDPDEF Deflator data available at the ALFRED site. It runs close to the CPI all the way to the end in 1991.

The bright blue line (vintage 1995-01-27) closely follows the fat red one and the CPI. The line ends in 1995.

The brown line (vintage 1996-01-19) was the first issue of 1996 data. You can see it reaches just a little past the end of the bright blue line. You can also see that it is lower than the 1995-01 vintage data -- but only back to about 1977 or so, apparently. As Kitov pointed out.

Note that the data issued in 1996 is different from the data issued in 1995, all the way back to the 1970s.

Not on the graph, the first-vintage data for the years 1997, 1998, and 1999 all follow the same path as the 1996 data shown.

The green line (vintage 2000-01-28) is the first year where the first vintage of the year has moved downward again, near to the path of the most recent vintage of the Deflator (blue).

In sum, the GDPDEF data follows the CPI until January 1995 (or possibly later that year). From 1996 to 1999 the data follows a "mid way" path, lower than the CPI but higher than the recent path of the Deflator. And since 2000, the data path is low, like the recent Deflator.

So Ivan Kitov is correct in saying the Deflator seems to depart the path of the CPI  in the latter 1970s. However, the change which caused that departure did not occur until 1996 or thereabouts. And then there was another change, in the year 2000.

So here's a question: If the change in the Deflator was caused by the change in methodology that required using "chain-type" calculations, then why do we see two changes, one around 1996 and one around 2000?

Dunno, buddy. Maybe later.


So much for the most interesting econ thing I've seen in a long time.

The most interesting non-econ thing I've seen recently? Stephanie Martini's eyes in Prime Suspect: Tennison.

Did Google Search just get stupid?

Could be a coincidence. Or maybe it's me. But it looks like Google Search no longer understands some of the things I expect it to understand. Some of the things that make it useful.

For example, yesterday I found by accident an article that noted a change in the way the GDP Deflator is calculated, a change that occurred around 1977 the guy said. A detail like that will sometimes grab my attention, and this one did. So this morning I sat down and Googled the change in definition of the GDP deflator.

Google turned up a definition of the Deflator from Investopedia, and one from Wikipedia, another from MyAccountingCourse.com, from study.com, from thoughtco.com, and, apparently, from another 533,995 sources. Yeah, because a definition is obviously the same as a change in definition. At least in the mind of Google Search.


Something very similar occurred with Google Search only yesterday. I thought it was odd then, but I figured it was probably me. But when it happens twice in two days, I no longer think it's me.

One day I ask for "trend growth" and it tries to give me "each year" growth data, and idle chatter on that. And the next day I ask for information about a change of definition, and it gives me half a million reps of a dumbed down definition. Nothing on how the definition or the calculation might have changed. Nothing historical.

So I have to ask: Did Google Search just get stupid?

When did we start using GDP?

I googled GDP trend since 1947. It gave me yearly growth rates. Google doesn't seem to understand the difference between "growth" and "trend". How can this be?

I'm trying to find info on long-term trend rates of growth, with little success so far. But I did find this:

There are more questions, but you get the idea.

That first question caught my eye: When did we start using GDP? Because if you read stuff from the 1970s and '80s they use GNP, not GDP. If you started doing econ in 1977 like me, that was before GDP, far as I'm concerned. But "GNP" does sound funny, these days.

The change occurred in the 1990s, 1996 I think. Maybe 1992. I clicked to see the answer to the question:

1695?

"... developed the method further in 1695." Before 1695? Yeah thanks, google.

Grain of salt.


The Atlantic says "In 1991 the government switched from the old GNP to the GDP".

Better yet, see the Survey of Current Business from August 1991, page 8:

Beginning with the upcoming comprehensive revision of the national income and product accounts (NIPA’s), BEA will feature gross domestic product (GDP), rather than gross national product (GNP), as the primary measure of U.S. production. This change in emphasis recognizes that GDP is more appropriate for many purposes for which an aggregate measure of the Nation’s production is used. GNP will remain a key aggregate in the NIPA’s and will continue to be published regularly.

Under the heading Why feature GDP? they explain:

GDP refers to production taking place in the United States. It is, therefore, the appropriate measure...

Why? Because it is appropriate. Of course. The bullshit is deep, some days.

Elect the Poor

Two stories are told. One is that government must help people. The other is that government must get out of the way.

Both stories are told by the wealthy.

Noah Smith still thinks financial crisis is a "random event"

"Failure to understand the cause" does not mean "These things occur at random". However, it may seem to mean that if you fail to understand the cause.

Noah Smith: Don't Forget What Causes a Recession

Why has the economy been growing uninterrupted for so long? Part of the reason is surely due to the severity of the Great Recession itself, coupled with the slowness of the subsequent recovery...

But there’s another reason too. The U.S. simply hasn’t been hit with any of the random events -- what economists call shocks -- that tend to tip countries into recession.

The first kind of shock, obviously, is a financial crisis.

Financial crisis = shock, Noah says, and shock = random event. Noah still thinks financial crisis is a "random event".

If Netflix was down as often as the government, they'd be out of business

RE: government shutdown.

The primary objective has two indivisible parts:

1. Put on a good face. Even if it goes against everything you stand for, you keep the government open.
2. Figure out where the problem is. We've been trying to eliminate the Federal deficit since Reagan. Since Nixon, probably. But we haven't been able to do it. Maybe we fail because we have the wrong solution.

If the power goes down, even momentarily, it is a problem: More people lose respect for government. More people see Fall-of-Rome as our destiny. More people expect the worst.

From the Washington Post:

Rand Paul thinks he is a man of principle. Yeah: principle without good judgement. If he's so concerned, then he more than anyone should be looking for a better solution. Alone in the Senate, he was willing to shut down the government:

... the federal government shut down when Sen. Rand Paul (R-Ky.) delayed the vote past midnight to complain about the budget deficit.

Don't do that to my country.


Again, the Washington Post:

The latest congressional breakdown came amid dispute over the spending deal, which earlier in the week had appeared primed for easy passage...

But it began to run into trouble Thursday, as House conservatives rebelled over excessive deficit spending and House liberals fumed that this bill, too, failed to protect “dreamers” who face losing deportation protections under the Trump administration.

I don't care what your objections are. You don't do that to my country.

Then, as an expected vote approached in the Senate, Paul began to throw up roadblocks...

“I can’t in all good honesty, in all good faith, just look the other way because my party is now complicit in the deficits,” Paul said on the Senate floor as evening pushed into night.

Paul himself made no apologies as he delivered one floor speech after another, casting himself as a lone defender of fiscal austerity...

A lone defender of fiscal austerity, with an ego bigger than the Federal debt. And no solution to the problem of deficits.

Pardon my French, but the man is an ass. He thinks we have deficits because B is greater than A, spending is greater than revenue. But that's only the arithmetic of deficits. It's not the cause.

To a man, economists will tell you the economy is too complicated for hobbyists like me to talk about. But the economists who set policy, they all buy the sadly simplistic "B is greater than A" story.

That story obviously does not explain the problem, as in 50 years of trying we have not solved the problem. Things only get worse.