Jacob Assa, 2017

At IDEAS:
Jacob Assa, 2017. "Leveraged Growth: Endogenous Money and Speculative Credit in a Stock-flow Consistent Measure of Output," Working Papers 1727, New School for Social Research, Department of Economics.

Abstract:

Modern Monetary Theory (MMT) as well as Stock-Flow Consistent (SFC) modelling have both had significant implications for economic theory in recent years. Neither, however, had any meaningful impact on the key measurement of output, Gross Domestic Product (GDP). While balance sheets have been nominally included in national accounting systems since 1968, main aggregates such as GDP are still blind to the creation and flow of credit (and hence debt). The financial sector is only presented in GDP as a provider of services, not as a producer of credit and thus money. Following Schumpeter's (and Bezemer's) functional differentiation of credit, this paper separates finance into two parts - credit to the productive sectors and credit for speculation (i.e. for purchasing financial assets and real-estate). The former grows at the same rate as GDP, while the latter grows faster, increasing aggregate leverage. A systemic leverage index is then constructed from flow-of-funds data for the US (1960-2015), and used to render real GDP stock-flow consistent. Debt-adjusted GDP is theoretically and methodologically more consistent than GDP, and also correlates better with aggregate employment. The paper concludes by discussing the implications of debt-adjusted output for the trend and volatility of growth, as well as some thoughts on the gap between measurement and theory in economics.

Jacob Assa, 2016

At IDEAS:
Jacob Assa, 2016. "The Financialization of GDP and its Implications for Macroeconomic Debates," Working Papers 1610, New School for Social Research, Department of Economics.

Abstract:

The large and growing literature on financialization has focused on identifying the expansion of the financial sector into various realms of economies and societies, as well as analysing its effects on economic growth, employment, inequality and democracy, among other variables. Most works in this literature, however, still use standard indicators such as Gross Domestic Product (GDP) for empirically defining and examining the scope of financialization or the extent of its impacts. This paper builds on recent research focusing on the financialization of GDP itself. While the original measure in the 1930s and 1940s was designed to capture the production of measurable output, subsequent updates to the national accounting framework shifted the production boundary (which determines what gets counted in GDP) to cover more services, including those for which there is no direct measure of output. In particular, the ‘value-added’ of financial services is imputed based on banks’ revenues and costs, and the inclusion of such income in GDP has caused a deterioration in its correlation with measures of employment and median income, as well as in its performance as a leading indicator. Using new data and treating financial revenues as a cost to the overall economy, a new measure – Final GDP – performs better than GDP on all three fronts. It also sheds light on several unresolved empirical debates in macroeconomics. First, the phenomenon of the Great Moderation of fluctuations in output appears to be a statistical artefact, as the inclusion of finance in GDP smooths over volatility as well as trends of secular stagnation. Second, the spurious breakdown of Okun’s Law also turns out to be a figment of the data, since GDP by construction has been diverging from employment and aggregate demand. Jobless growth recoveries thus turn out to be merely periods of stagnation when employment growth is naturally subdued. Finally, using in-sample forecasting, FGDP outperforms GDP as a leading indicator, foretelling the Great Recession earlier and more clearly than the standard measure. The paper concludes by assessing some broader implications of the finalization of GDP for economics and politics.

Jacob Assa, 2015

At IDEAS:
Jacob Assa, 2015. "Financial Output as Economic Input: Resolving the Inconsistent Treatment of Financial Services in the National Accounts," Working Papers 1501, New School for Social Research, Department of Economics.

Abstract:

This paper investigates the inconsistent treatment of financial services in the national accounts. While net interest income from financial intermediation is netted out as input to other industries and thus does not affect the overall level and trend of Gross Domestic Product (GDP), fee-based net income from financial services is included as value-added, inflating GDP by the same amount. A new measure of economic activity which resolves this inconsistency is introduced, treating all financial income as a cost or intermediate input to the rest of the economy. The resulting aggregate tracks employment and median income far more closely than GDP.

"The history of national accounting closely tracks the rise of the nation-state" -- Jacob Assa

At ideas.repec.org, Gross Domestic Power: Geopolitical Economy and the History of National Accounts by Jacob Assa. From the Abstract:

Received histories present national accounts as universal, purely economic measures based mostly on theoretical foundations. This paper argues that this is an anachronistic approach to the long and uneven development of these estimates and builds on geopolitical economy to examine national income estimates as quantifications of state power. First, it reveals national income accounts to be historically and geographically contingent rather than universal, suggesting contestation instead of any hegemony or dominance of one central ideology. Second, the economic power and motivations of nation-states, rather than economic theory, are at the core of the design of national income estimates, which are used to promote states’ position in international competition as well as advocate for particular national economic policies. The history of national accounting closely tracks the rise of the nation-state, the unique phase of British hegemony, the two World Wars, the east-west competition of the Cold War, and the north-south competition of the recent two decades. To this day, revisions to national accounting systems reflect the shifting balance of power and incessant international competition.

Put out the FIRE (in GDP)! -- Jacob Assa

Recommended reading: Put out the FIRE (in GDP)! by Jacob Assa.

An excerpt:

By 2009 — even after the onset of the financial crisis — FIRE accounted for over a third of all economic activity included in U.S. GDP. Recent years have witnessed a growing divergence between the economic picture painted by GDP on the one hand, and one suggested by employment figures or standard of living measures such as median income, on the other.
The last three recessions in the U.S., for example, have been followed by “jobless recoveries”: GDP rose while unemployment rates remained high and job-creation stagnated, as shown in Figure 1:

Figure 1. Indices of GDP and Employment for the United States, 1987-2011 (1987=100)
© Jacob Assa

...
Does the inclusion of all FIRE revenues in GDP explain these divergences?
...
Unlike other sectors that produce goods and services, FIRE mostly creates and trades financial assets. In other words, FIRE creates and trades exchange value (money and credit) rather than producing use-value (a good or a service that can be consumed directly). In short, including FIRE in GDP provides an erroneous picture of the amount of goods and services that our economy creates.

Recognizing the error of including all FIRE revenue in GDP calculations also helps to explain why GDP growth in recent years has not translated into job growth...

I disagree with James Hamilton

James Hamilton: Strong GDP growth, weak fundamentals, 26 October 2018


Good graphs. Interesting post. Every time Hamilton says something, he shows it on a graph. I like that approach to econ. Hamilton says recent RGDP growth is better than "the 3.1% average for the U.S. economy over the last 70 years, and is well above the 2.2% average rate since the recovery from the Great Recession began".

He says his Recession Indicator Index is "among the lowest levels we ever see", and our economy "remains clearly in the expansion phase".

And he ruminates on the "fundamentals". Government spending pushed growth up more than half a percentage point, he says. But exports are down. Housing construction is down. And "nonresidential fixed investment was also weak."

Okay, I have a question about government spending. If we go back to Keynes, as I understand it he said to get out of the Depression you need a lot of government spending; and then as the economy comes back to normal growth, you can safely cut back on the government spending. Okay: high government spending makes for growth, and low government spending makes for recession. But if you don't go from high to low, if you go from high to the middle ground, you're not undermining growth. You're just sort of transferring the engine of growth back to the private sector. Maybe I have it all wrong?

I don't think so. I think I've just described the whole idea behind "stimulus": you get the economy going, and then you get out of the way.

I can see GDP growth being above the long-term average because of the high level of government spending. But look at the numbers with me. The economy grew at a 3.5% rate; government spending "contributed 0.6 percentage points" to this. So if we subtract government's part, the economy grew at a 2.9% rate. Below three percent. Not worth writing home about.

But we just went from high to low. We should have gone from high to normal. What's normal government growth, maybe half of that 0.6 number? Add 0.2 to the 2.9% rate and we're at 3.1% -- the long-term RGDP growth rate, exactly. If we add 0.3 instead, we're above the long-term average.

So I'm not sure Jim Hamilton's qualms are well founded. I can see being hesitant, but I can't see being worried.


Hamilton's conclusion:

I conclude that the fiscal stimulus continues to help give us a favorable headline number. But I am concerned about weak investment spending and final sales.

Final sales? If we discourage wage hikes as a way to fight inflation, then we can only boost final sales by increasing borrowing and debt. And nobody wants that. So nobody should be surprised if final sales are weak.

Let's set final sales aside, and consider the "weak investment spending":

Residential (red) and Nonresidential (blue) Fixed Investment as Percent of GDP

The red wiggly shows residential fixed investment relative to GDP. It peaked in 2005 -- giving us two years early warning of what was to come -- and has been running low ever since. Weak investment spending? Yes. The economy may have recovered, but things are not back to normal.

Residential investment has seldom been lower. Still, it is not much lower now than it was in the mid-1990s, 1994-98. And those years were good.

The blue wiggly shows nonresidential fixed investment relative to GDP. Nonresidential investment has seldom been higher. Weak investment spending? Nay.

The dashed lines show the most recent values, Q3 2018.

Wiggly blue is Private Nonresidential Fixed Investment (PNFI); Wiggly red is Private Residential Fixed Investment (PRFI); both of them shown as percent of Gross Domestic Product (GDP). I created a "Page short URL" link to the graph at FRED, as usual, but it is garbage, thanks to the recent update of their FRED Graph system.

It's not surprising that residential investment is weak in the wake of a housing crisis. But it's a misreading of the data, I think, to say that nonresidential fixed investment is low.


One more thing. After Hamilton says investment is weak, and before his concluding paragraph, he writes:

Most of the growth came from inventory build-up. GDP measures what is produced. If goods are produced but not purchased, inventories accumulate, so GDP can look strong even though spending is weak. Subtracting off inventories, real final sales were only up at a 1.4% annual rate in the third quarter.

"Most of the growth came from inventory build-up."

Okay, but look at inventory relative to GDP:

Total Business Inventories as a Percent of GDP

Except in the aftermath of the Great Recession, inventories have never been lower. Hamilton says they went up. I say, so what?

Creating inventory puts people to work, right? It increases income, right? Maybe in the next accounting period the stats will show people spending that income. Creating inventory can boost the economy just like government stimulus spending. Maybe it will. Maybe it is.

Or maybe Hamilton is right to worry, and two consecutive quarters of above-average growth is all we can expect.

Hang in there. We'll find out soon enough.

West of FantAsia

I don't know who these people are, but I don't much like em.

The European Community Organizing Network (ECON)
no link on purpose

"The rise of xenophopic and nationalist forces in all parts of Europe, and the erosion -- or collapse -- of the traditional political consensus, present difficult terrain for all of us involved in building civil society on the continent."

They're telling me that we don't need nations, we need superstates. They're saying that people who still think in terms of nations are bad people, and people who think in terms of Europe as superstate are okay.

For most of the people who accept that view, it is a fantasy. We have no actual experience with superstates. On the other hand, the only thing that's obvious is that when you have a near-superstate, like the USA or the EU, it only wants to get bigger.

That's what NAFTA was, a move in the direction of greater integration and consolidation of nations. And that's what the European Coal and Steel Community was for Europe in 1951, and the European Economic Community in 1957, the Common Market. And the 1973 enlargement, and the 1986 enlargement, and the European Union in 1993, and the subsequent enlargements of that union.

For that matter, that's what the World Trade Organization is, a move in the direction of greater integration and consolidation of nations.

Oh, it all starts out innocently enough, sold to people as a way to improve economic conditions. But to really accomplish what they promise would take more than hand-holding and economic fantasy.