"Our greatest responsibility is to be good ancestors."

-Jonas Salk

Tuesday, June 14, 2011

GDP Path

This is something of an aside from my economics multi-part essay. I found a graph I've been looking for in the context of the discussion about employment as a design goal for an economy.

Now as context, note that the US historically returns to baseline after a recession

So the expectation in Serious Circles is an eventual return to the "normalcy" expectations set in the 20th century. (Note that the recovery to baseline is not universal in other countries.

As I understand it, normalcy in the job market lags normalcy in GDP growth. The following graph is the one I mentioned in a recent comment. It should clarify that the drop in GDP over the Bush recession was so sharp and severe, that even a "normal" recovery will take a long time. Obama deserves none of the blame for the slow recovery in employment, even in conventional economic terms.

Since the graph was plotted, the US GDP has flattened out a bit as I understand it (and the UK is in an unambiguous double dip.) So things look even worse.

The point here is that, even if the limits to growth scenario hasn't really arrived yet, nobody should be holding their breath about a return of the missing jobs. The growth rate required to get back to baseline in a few years is extraordinarily high, because the Bush screw-up was so spectacularly deep. That is, we require a sustained period of substantially above average growth to get back to "normal" which would amount to rehiring most of the laid off folks.

Given that any short-run return to growth will run into the crunch of inelastic petroleum demand meeting inelastic petroleum supply, this isn't in the cards on a time scale short compared to the replacement time of transportation infrastructure.

So, let's face it. Obama will not get things back to "normal" this term and he or his successor will be very lucky to manage it in the following term. There's enough "peak oil" phenomenology in the mix to clinch this. I suspect few countries, unless they are oil-rich, will sustain GDP growth in the near future. (Canada's horrifying defection from climate governance shows that at least one government sees the writing on the wall, albeit cynically and maliciously.)

It's my belief that this kick may well turn out large enough to be seen by history as the inflection point in the overall growth curve. In the long run this may not be a bad thing, but much depends on whether the societies living through it can see it in perspective.


David B. Benson said...

GDP is the wrong measure.

Also, consider the similarities to the Japanese economy after their real estate mania crashed.

Alexander Ac said...


while I agree on Japanese debt-deflation and potential comparison to US (or Europe), do not also forget that Japan was helped to "export its way out of deflation", which is not possible anymore, since now the limits to growth have been hit globally, not locally.

Social unrest is on the rise in China, and there is not even deflation there (yet)...

ZeroHedge.com is highly recommended in these topics..

peak oil = peak real GDP - but not neccesarily peak CO2 emissions, but this may follow in few years. Also check this: http://trillionthtonne.org/


Anonymous said...

Reminds me of the unit root discussion at my blog last year.

The graph you showed for the US would indicate no unit root, whereas others (incl "VS" as I recall) argue that in general GDP has a unit root (and he claimed that global avg temp does as well)

From wiki:
"Some economists[11] argue that GDP has a unit root or structural break, implying that economic downturns result in permanently lower GDP levels in the long run. Other economists argue that GDP is trend-stationary: That is, when GDP dips below trend during a downturn it later returns to the level implied by the trend so that there is no permanent decrease in output."



Rich Puchalsky said...

"Given that any short-run return to growth will run into the crunch of inelastic petroleum demand meeting inelastic petroleum supply, this isn't in the cards on a time scale short compared to the replacement time of transportation infrastructure."

That just isn't right. You're mixing up what is politically easy with what is economically or physically possible. If we're not doing what we need to to employ people, it has nothing to do (in the short term) with supplies of petroleum. The end effect is to make this one of those series of posts in which someone takes any X (in this case, economic turndown) and blames it on their favored Y (in this case, petroleum supply) with no real connection between them. Do that often enough and people stop reading.

Imagine that Obama reacted as FDR did, and that many, many people were hired by the government to go out and fix roads, build things, set up solar panels and wind turbines, paint roofs etc. Would petroleum supply prevent this from happening in any way? No. The additional petroleum used is dwarfed by the amount already used just through normal American automobile usage -- for which petroleum has not run out.

Would the country run out of money to hire people with? No. They can just print it. Yes, that's inflationary, but a period of modest inflation is how you get out of these things. What's happening at the lowest, physical level is that people are being sent out to work, and there is as yet no global limit that prevents that.

Now, you could say that the chances of America's political system permitting this to be done are slim. But that's because America is a declining empire, not because of global limits. Our political system is schlerotic and may well prevent us from taking any sustained action in the right direction. But again -- nothing there about global limits.

Can you blame Obama for not being FDR? Well, yes. He was the person most in charge when something needed to be done, and he failed to do it.

Michael Tobis said...

Look, from the point of view of growth economics, it's obvious that given crumbling infrastructure and uncomfortable levels of unemployment and a slow economy, increased spending would have been sensible. The Republicans would not let Obama get away with it once the actual emergency ended. (An emergency they caused which they are now happily pretending never happened, grrr...)

But from my point of view, given that Fukushima has killed the nuclear option and that we have no viable scalable carbon capture/sequestration technology, the sooner we start adjusting to zero growth (and eventually a period of somewhat negative growth) in the the most profligate countries, the better. So this ongoing low-growth and "underemployment" is the only little bit of good news I see on an unrelentingly disastrous landscape.

I suspect low-growth will persist worldwide as long as the transportation infrastructure is based on petroleum. It's a small part of the energy picture but it's a big part of business as usual. I don't think this will go on forever, though.

Michael Tobis said...

Bart, thanks for the Wikipedia ref. I had thought it was something like that.

Economists do not actually believe growth is a "unit root" process, because then growth would be linear, whereas they seem to believe that growth RATE is fixed, which in dynamics terms means a >1 root or what any engineer would call an unstable system.

Note that the first graph is on logarithmic coordinates, grossly inconsistent with unit root.

The idea that climate works this way is just totally physics-starved but a bit mathematics-starved as well, by the way. Such behavior in a physically realizable system occurs with zero probability. Worrying about a zero root in the climate system is like worrying about tossing a playing card and having it land balanced on its edge.

Rich Puchalsky said...

"But from my point of view, given that Fukushima has killed the nuclear option and that we have no viable scalable carbon capture/sequestration technology, the sooner we start adjusting to zero growth (and eventually a period of somewhat negative growth) in the the most profligate countries, the better."

But that's completely different than saying that the reason we have persistent unemployment now is because we're hitting global limits now.

The quoted statement above is statement of your opinion, based on your prediction of where we're eventually going to end up. The statement that low-growth will persist as long as transportation is based on petroleum is a causative statement, and it's really kind of silly. There were lots of causes for the recent crisis. Petroleum wasn't among them. There are lots of causes for our failure to recover. Unless you intend to prove that weak correlation equals causation, petroleum isn't among them. The primary cause for the short-term failure to recover, as you seemingly agree, is political.

I'm not questioning that eventually we're going to run out of petroleum. We're probably already past peak. Claiming that this means that we're going to get high unemployment from now on no matter what we do is a reckless, unsupported kind of statement. It's like telling people on the East Coast of the U.S. that they'd better get used to frequent tornadoes and floods destroying everything now that global warming is occurring.

Kooiti Masuda said...

According to Robert Ayres and Benjamin Warr, GDP growth in the 20th century has too good correlation to be accidental with energy utilization in both the USA and Japan. (They count "useful work", so energy efficiency matters as well.) See references at my memorandum". So, if we want GDP to grow, we need to establish a new kind of social system that does not follow the empirical law of the 20th century capitalist economy.

Shining Raven said...

I don't comment here often, and now I feel compelled to do so again within a few days.

I completely agree with Rich Puchalsky, this series is really kind of silly, and you are not doing yourself a favor with this. You said in one of these posts that you are kind of throwing out new ideas without necessarily reading all that is out there, but nonetheless you should tighten your filter a bit.

I agree that eventually we are going to run up against the limits of growth. No question about it. But I don't think it helps to blame our current problems on this, when they quite obviously have different reasons.

I also think you have it backwards when you believe that slower growth is taking us where we need to go.
My reasoning here is simple: where do you believe the current infrastructure (coal-fired power plants, car-centric transportation infrastructure...) can be replaced more quickly by a more sustainable infrastructure? In a depressed slow-growth economy, or in an economy with lots of new investments?

I know that historically strong GDP growth has been correlated with a strong growth in energy use. However, I don't think the solution is to stop growth, I think the solution is to break this correlation. And I don't think this is a crazy idea. It certainly seems simpler than to break our economic system.

In a society where people collect beanie babies valued at ridiculously high amounts, it is certainly possible to have large GDP growth without a large expenditure of resources. It's just a question of what we value, and attach monetary value to.

So I do not believe that slow growth, high unemployment and a depressed economy are necessary and the right way into the future.

Michael Tobis said...

There are several ideas being conflated.

First, there is my desire for a low energy growth scenario as the most likely way to keep the world from undergoing major damage. I share this with most readers, I think.

Second, there is my expectation that eventually growth of any meaningful quantity (at least, as constrained by the gravitation field of the earth) must of necessity stop. This may be a bit more controversial.

Third, there is my claim that this may well be the point of inflection, where the sustained growth of the past century turns into something else.

Where I am headed is an argument that the concept of "full employment" as we understand it is tied to the concept of "perpetual growth" as we understand it; that you cannot have one without the other, and that since the one must stop, so must the other.

I have learned that between my writing style and the reading style of most blog readers, it's best to do things in small chunks. Nevertheless, I am trying to make a case more complex that I usually have on this blog.

Claims so far:

1) the expected automation crisis did not arrive
2) the expected leisure society did not arrive
3) indeed, working hours per capita increased

I will claim next that wealth was increasingly retained by capital, not by labor, which I think ought to be uncontroversial.

Michael Tobis said...

This article and the prior one arise from my understanding of the current recession.

I do not see a recovery to full employment as feasible on a time scale comparable to ordinary recessions. This is not part of my exposition or crucial to it. But I think the graphs do show how expectations set up in past recessions are going to be wrong in this case.

Individual prosperity is already less and less tied to work and more and more tied to social class, luck, and capital. I am not sure how we should allocate things, but I think we need to give up on the employment myth.

So whether or not this is really the shit hitting the fan once and for all, it's good practice. And Wiener's questions to Reuther are salient.

It's true that we wouldn't be in crisis without a failure to regulate the financial sector that culminated in the GWB administration. Stiil, the trigger was oil prices driven by increasing demand in China. I'm amazed that people have forgotten that.

If the west approaches recovery, the oil prices will shoot up again. This will put a damper on recovery.

Collective expenditure on post-oil infrastructure is likely required to precede any emergence from recession in any country which doesn't export petroleum.

Obama cannot fix this, nor can his opponents. Only public sector funded retooling can work, I think,
and US politics won't support it.

As for the beanie-baby economy we've discussed it around here before. Given the scale and scope of the problem, the switch over to a fantasy economy will have to be very quick. We may freeze in the dark, but Barbie and Ken's Dream Furnace will keep them warm and nothing prevents us from spending money on that. A correspondent referred to this as switching over to Monopoly money.

Comparison to the latter-day Warsaw Pact economies may weaken your enthusiasm for a fantasy-based economy. The watchword of the Soviet counries was "we pretend to work and they pretend to pay us". We may be able to create a free-market version of that, but it won't help much.

Shining Raven said...

Well, you do make some good points, but I don't think you are right in your main argument.

Sure, wealth has been mostly retained by capital, not labor. I see this mainly as a function of the suppression of organized labor in the US and the weakening of unions. That is a fundamental problem, but not one that is inherent in the economic system, but a political one.

I think your understanding of the current recession is flawed (or I do not understand your point), and you need to acquaint yourself better with the economic literature, if you want to criticize it in an effective way. I am not an economist, but from my understanding you are making elementary mistakes.

I do not think that Wiener's questions are "salient", I think he fell prey to a simple fallacy: employment decrease in one sector due to increased automation does not lead to falling employment in the economy overall. It has not happened in the past, so why now?

And I don't mean to suggest that we should go to a "fantasy economy". The beanie baby example was glib (and I darkly remember the conversation on this now, I thought I was being original), but I don't see why it should be impossible to still have "growth" in the purely imaginary accounting sense of economics without a commensurate increase in resources.

We can all still open massage parlors or become internet celebrities or actors...

I simply don't see by which theory you get that a sustainable society cannot have full employment.

And as Rich does, I don't see what oil has to do with the current recession and a possible emergence. It certainly does not seem to be a limiting factor. But rich already said this.

Don't get me wrong: I appreciate your thoughts, I just believe in this particular case you are wrong and fall prey to some economic fallacies. I am probably the wrong person to nail this down, though.

Rich Puchalsky said...

"It's true that we wouldn't be in crisis without a failure to regulate the financial sector that culminated in the GWB administration. Stiil, the trigger was oil prices driven by increasing demand in China. I'm amazed that people have forgotten that."

Forgotten ... or never agreed with in the first place?

What do knowledgeable people think were the actual causes of the crisis? Well, I'll look at wikipedia, which has obvious flaws but is usually fairly representative on range-of-what-experts-think questions. Here is the page. As I expected, it has multi-paragraph sections on excessive debt levels, subprime lending, governmental deregulation, and over-leveraging/credit default swaps. The Austrians get to say their bit about credit creation. Then there's a paragraph about one economist who thinks that his model shows that oil prices explain it. Could they be right? Maybe, but it's clearly very much a minority view.

Do you have any particular expertise in this area? Not that I know of. So when you confidently assert that the trigger was oil prices and that everyone has forgotten that, you're coming really close to being the economist (let's say) who says that solar variability is the main cause of climate change and why has everyone forgotten that.

King of the Road said...

Cause <> trigger

King of the Road said...

That said, however, brother Pulchalsky's last point is worthy of thought and cleverly framed.

King of the Road said...

Brother Puchalsky. Forgive the misspelling, please.

Michael Tobis said...

Huh, I didn't say *everyone* had forgotten. That's certainly how I remember it. And see this graph to refresh your memory.

I am not one who claims that a lack of credentials disqualifies someone from taking a position NOR that an incomplete understanding of the material disqualifies someone from calling a discipline into question.

I DO think that years of study are deserving of respect. An expert will certainly know things that a casual observer does not. But that doesn't make the expert automatically right. It depends crucially on the field and its maturity (or as I would prefer to say, coherence) as a discipline.

Oddly, though, in this case (the role of energy prices in triggering and prolonging the super-recession a.k.a. mini-depression) I'm pretty sure what I'm saying is conventional wisdom. I'm surprised to see it questioned.

Michael Tobis said...

What this guy says.

Rich Puchalsky said...

I don't think that the graph shows what you think it does. (And the quote? With sufficient Googling one can find someone on the Internet to say anything about any topic.) The whole point of looking at the wiki page was to say that no, this isn't conventional wisdom -- assuming that some editing cabal hasn't taken over that wiki page.

Imagine that you hold to one of the conventional views about recessions: they involve overconfidence and overproduction, followed by overfull inventories and employers firing no-longer-needed workers and demand falling as laid-off people no longer have money to spend. What did oil prices do during this process? Well, when production zoomed upwards, oil use did too, and there was an oil price peak. When it dropped, oil use dropped. You have correlation without causation.

Kooiti Masuda said...

> wealth was increasingly retained by capital, not by labor, which I think ought to be uncontroversial.

Following Ayres and Warr I rather say, growth of wealth was retained by petroleum and coal (and perhaps uranium), not so much by capital or labor.

Michael Tobis said...

Masuda-san, do you mean "created", as opposed to "retained"? I do not understand the concept of retention of wealth by a resource.

Kooiti Masuda said...

Excuse me for awkward expression. Perhaps "creating wealth" is better. My mind happened to be around the concept of "retaining growth of GDP". (I think this is not categorically impossible but very difficult without growth of energy resource consumption.)