tag:blogger.com,1999:blog-17232051.post2703830048372547998..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: How can debt affect GDP?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger52125tag:blogger.com,1999:blog-17232051.post-23410938278726591012016-12-06T10:27:29.746-05:002016-12-06T10:27:29.746-05:00We should think of debt or credit differently, it ...We should think of debt or credit differently, it is only through the banking credit channel that money expands. If money in circulation is not expanding then income, demand and productivity will expand slowly or not at all. So, credit is the engine of productivity. Let's look at it another way by examining the Effective Federal Funds Rate at https://fred.stlouisfed.org/series/FEDFUNDS. Notice that in every instance that the Federal Reserve increases interest rates, which is equivalent to the removal of money from the economy, recessions occur. Why? Because there is less money available for purchasing goods and services, which causes inventories to accumulate, leading to diminished production, layoffs, and other unintended consequences. So, if lack of money causes low demand, then excess money causes high demand and since it is only through the credit channel that we can increase money in circulation, then credit leads to increase in demand (new cars, houses, pianos, clothes and so on), higher levels of production and employment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-38794821035909791552016-09-03T19:46:39.782-04:002016-09-03T19:46:39.782-04:00In a debt economy should GDP growth matter? Debt i...In a debt economy should GDP growth matter? Debt is created from vacuum and it has to be paid back to the system. So in my mind all debt in the economy must be counted as negative.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-22253330909893456942012-05-30T11:08:27.177-04:002012-05-30T11:08:27.177-04:00It can fall to nothing. It is a little dangerous t...It can fall to nothing. It is a little dangerous taking the risk.http://businessloans123.com/http://businessloans123.com/noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51129564555353783802012-03-22T06:53:31.323-04:002012-03-22T06:53:31.323-04:00Very insightful article. The connection between th...Very insightful article. The connection between the debt and the GDP growth seems less important that I thought. <br />I can see some similarities between what you said and between the book of John McMurtry Cancer Stage of Capitalism, because he uses the same argument that debt and generally the financial (unproductive) market can´t influence the real production. <br />It also corresponds with the prof. Stiglitz claim, that US government in the last <a href="http://calgaryrealestate.ca/news/2012/02/joseph-stiglitz-economics-capitalism/" rel="nofollow">Privatizing Profits, Socializing Losses</a>. The austerity and bailout of the financial corporations was not necessary to save the US economy. It actually had an opposite effect on the real production.Laura G.noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-35582151648371186152012-03-21T10:44:01.644-04:002012-03-21T10:44:01.644-04:00Echoing a couple of other commenters:
I find it a...Echoing a couple of other commenters:<br /><br />I find it amazing that this topic can be bandied without referring to Steve Keen's work showing the correlations between debt levels and house prices, unemployment, and stock prices. <br /><br />Actually, a second derivative: the rate of change in the rate of change in debt -- what he calls the credit impulse or the credit accelerator. He's demonstrated strong correlations in the U.S., the U.K, and Australia:<br /><br />http://www.nakedcapitalism.com/2011/06/steve-keen-dude-where%E2%80%99s-my-recovery.htmlSteve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68741768544180592852012-03-20T14:43:36.882-04:002012-03-20T14:43:36.882-04:00People take on debt because they want to buy somet...People take on debt because they want to buy something, so this shows up in GDP as consumption. Those who lent the money might have spent part of it if they hadn't lent it, but they also might have just sat on the cash. So debt gooses GDP, up to a point. The problem comes when debt grows too large relative to income and debt service cuts into consumption. This reverses the flow described above and thus causes a drag on GDP.o. natenoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-27152832390535775402012-03-20T14:33:04.875-04:002012-03-20T14:33:04.875-04:00Since GDP = private consumption + gross investment...Since GDP = private consumption + gross investment + government spending + (exports − imports)"<br /><br />When debt levels are lowered, it appears to logically follow that gross investment and private consumption are reduced. Gross investment is reduced, asuming your standard supply curve, by the lower rates resulting from diminshed effective demand, and private consumption is reduced because of diminished capactity to pay. <br /><br />Effective demand in this case is borrowers with the excess long term income necessary to repay additional loans.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-71309095567028951942012-03-20T14:27:27.003-04:002012-03-20T14:27:27.003-04:00JW,
Your post that you linked to is certainly rel...JW,<br /><br />Your post that you linked to is certainly relevant here. This graph is great :<br /><br />http://1.bp.blogspot.com/-yFRQt80dPKk/TpUFa9fZayI/AAAAAAAAAJ0/xiuJjaKFE_E/s1600/profits+and+payouts.png<br /><br />I suppose one could debate , in a chicken-and-egg manner , whether it was the reduced investment or the shift upward in income distribution that was the first-mover leading to reduced AD , but as your chart shows , the former was a contributor to the latter , given the high concentration of equity holdings at the top of the income pyramid. <br /><br />Together , the result was an economic "doom loop" of failing AD , and debt only served to postpone the collapse.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53628957158084405752012-03-20T13:54:28.645-04:002012-03-20T13:54:28.645-04:00Also, what JazzBumpa and anon said. Upward income ...Also, what JazzBumpa and anon said. Upward income redistribution may reduce AD. <br /><br />Alternatively, a downward shift in investment demand, as a result of the stronger financial claims on nonfinancial firm cashflow. I've written about this <a href="http://slackwire.blogspot.com/2011/10/disgorge-cash.html" rel="nofollow">on my blog</a>.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-79082692344891455422012-03-20T13:27:10.718-04:002012-03-20T13:27:10.718-04:00Also, what JazzBumpa and anon said. Upward income ...Also, what JazzBumpa and anon said. Upward income redistribution may reduce AD. <br /><br />Alternatively, a downward shift in investment demand, as a result of the stronger financial claims on nonfinancial firm cashflow. I've written about this <a href="http://slackwire.blogspot.com/2011/10/disgorge-cash.html" rel="nofollow">on my blog</a>.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-90672698821330170432012-03-20T13:24:21.960-04:002012-03-20T13:24:21.960-04:00So wouldn't that mean we were subject to a con...<i>So wouldn't that mean we were subject to a continuous string of negative AD shocks for over 20 years?</i><br /><br />No, it would mean that AD falls short of AS structurally. This isn't supposed to happen in mainstream macro, but the equilibrating mechanisms that prevent it are weak-to-nonexistent in practice. (Or, perhaps more precisely, the mechanisms that prevent it have take the form precisely of rising debt.)JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42038260395114358732012-03-20T09:55:03.841-04:002012-03-20T09:55:03.841-04:00Noah -
But my question then is still this: What w...Noah -<br /><br /><i>But my question then is still this: What were the negative AD shocks over the last 25 years that all this credit expansion was supposedly required to offset? Deficits were expanding. Interest rates were low. The only thing I can think of is the currency... </i><br /><br />Increasing income and wealth disparity has led to eroded purchasing power in the middle class and below.<br /><br />I supported a family on one income. My children's families need two.<br /><br />Every penny of GDP growth, every increment of productivity increase since the at least the mid-70's has gone to the top 50%, and increasingly skewed toward the top.<br /><br />Up there, the marginal propensity to spend is small. They speculate and collect rents.<br /><br />Finance sector profits have gone from about 25% of the corporate total to about 50%. <br /><br />What we have is massive wealth disparity and asset misallocation - the direct legacy of supply side economic practices for 30+ years.<br /><br />JzBJazzbumpahttps://www.blogger.com/profile/07337490817307473659noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-36673934997359250432012-03-20T00:42:40.459-04:002012-03-20T00:42:40.459-04:00Above , at 1:25 AM Mon morning , I noted that IMF ...Above , at 1:25 AM Mon morning , I noted that IMF global growth estimates have been ratcheting down , as they've realized our "potential" is actually rather limited , and I predicted the following :<br /><br />"Of course , by summertime they'll look at their fancy potential GDP curves and realize they're not working too well, so it'll be time for another smashdown."<br /><br />Hours later , NY Fed Prez Dudley gave a speech in which he seems to be jumping on the IMF bandwagon , specifically as regards American's lack of potential :<br /><br />http://economistsview.typepad.com/timduy/2012/03/fed-still-lowering-potential-output-growth-estimates.html<br /><br />How could someone like me , who's never taken a single econ course ( thank you , dear Tebow ! ) so clearly see this coming , while all around the brightest minds in economics dispute the intricacies of the matter whole ignoring the obvious ?<br /><br />BTW , I want to make it clear that I think we can reclaim our potential , that solutions are available , but those solutions aren't on the table just yet.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64888278660895000932012-03-19T23:49:22.593-04:002012-03-19T23:49:22.593-04:00"But my question then is still this: What wer..."But my question then is still this: What were the negative AD shocks over the last 25 years that all this credit expansion was supposedly required to offset?"<br /><br />How about this :<br /><br />A shift , politically ( bipartisan! ) driven and nurtured along , of 10% of total income shares from the bottom 90% to the top 1% , and mostly to the top 0.1%. A shift from those with a high MPC to those with a low MPC , resulting in a more-or-less continuous shock to AD , which was alleviated by the debt ( public and private )bubble.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40975909087876459022012-03-19T22:16:44.001-04:002012-03-19T22:16:44.001-04:00The empirical evidence for very long-lasting hyste...<i>The empirical evidence for very long-lasting hysteresis is strong.</i><br /><br />OK. Like I said, I'm willing to be persuaded. I'll have to read the paper, though, because hysteresis is very difficult to demonstrate from aggregates without a natural experiment to provide a counterfactual.<br /><br />But my question then is still this: What were the negative AD shocks over the last 25 years that all this credit expansion was supposedly required to offset? Deficits were expanding. Interest rates were low. The only thing I can think of is the currency...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51555595883992549212012-03-19T22:08:13.464-04:002012-03-19T22:08:13.464-04:00Increasing debt levels kept AD *at* potential GDP,...<i>Increasing debt levels kept AD *at* potential GDP, preventing negative hysteresis effects that would cause a permanent reduction in human and physical capital. And if this process happened continuously over 30 years, you would not see the deflationary pressures that the economy would otherwise be subject to.</i><br /><br />So wouldn't that mean we were subject to a continuous string of negative AD shocks for over 20 years?Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56034129937560290622012-03-19T18:29:06.649-04:002012-03-19T18:29:06.649-04:00I think that any reasonable model of hysteresis wi...<i>I think that any reasonable model of hysteresis will not have permanent effects; the recovery of the financial system and the return of normal demand levels will slowly erase the effects of the hysteresis. I'm pretty skeptical of permanent hysteresis effects (though I guess they could exist in principle).</i><br /><br />Read this: http://www.nber.org/papers/w14818<br /><br />The empirical evidence for very long-lasting hysteresis is strong.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40943199361048248412012-03-19T17:46:28.966-04:002012-03-19T17:46:28.966-04:00"Anyway, to sum up this post: It seems clear ..."Anyway, to sum up this post: It seems clear to the average layperson (and it once seemed clear to me) that debt just feeds directly into GDP. But actually, this is not true."<br /><br />Oh dear. Creating debt also creates credit. A rising stock of credit normally translates into a rising *flow* of credit. <br /><br />The flow of credit through transactions for goods and services (and hence incomes) equals nominal GDP (NGDP).<br /><br />Credit can also flow to asset markets, giving asset price rises that are not counted in NGDP (hence the rising debt:GDP ratio).<br /><br />Real GDP growth is driven by population growth (workforce growth) and technological change (which creates new goods and services). <br /><br />If you have insufficient NGDP growth, you will have a demand shortage which can stifle workforce growth (create unemployment, which can become long-term) or slow down technological changes.<br /><br />Try running an economy on zero credit growth (or zero NGDP growth) and see how much real GDP growth you can get.BT (London)noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43184770136197979972012-03-19T17:22:19.722-04:002012-03-19T17:22:19.722-04:00The story would be that increasing debt levels kep...<i>The story would be that increasing debt levels kept boosting AD above potential GDP, leading to hysteresis effects on human and physical capital that then raised potential GDP. But since building up capital takes a while, there would have to be a burst of inflation. And then if this process happened continuously for 30 years, you'd need pretty persistent inflation. Which we didn't see.</i><br /><br />No, that doesn't follow at all. Or rather, that could be true. But it would be just as logical to say:<br /><br />Increasing debt levels kept AD *at* potential GDP, preventing negative hysteresis effects that would cause a permanent reduction in human and physical capital. And if this process happened continuously over 30 years, you would not see the deflationary pressures that the economy would otherwise be subject to.<br /><br />That story is logically equivalent to yours, and it fits the facts fine.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18445533855174374262012-03-19T16:43:05.945-04:002012-03-19T16:43:05.945-04:00"The story would be that increasing debt leve..."The story would be that increasing debt levels kept boosting AD above potential GDP, leading to hysteresis effects on human and physical capital that then raised potential GDP. But since building up capital takes a while, there would have to be a burst of inflation. And then if this process happened continuously for 30 years, you'd need pretty persistent inflation. Which we didn't see."<br /><br />What if the build-up in capital showed up as asset inflation - stocks and housing , mainly - rather than as increases in CPI or PPI ?<br /><br />Those two net worth/gdp bubbles are now pretty obvious , in hindsight. If creation of a new bubble is the only way to fill the "gap" , I'd suggest it's better left unfilled.<br /><br />Of course , that's not the only way to do it. It's the only way the plutocrats would allow us to do it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56555009533617690252012-03-19T15:14:58.704-04:002012-03-19T15:14:58.704-04:00JW and Andrew:
Hmm, I dunno...I think that to tel...JW and Andrew:<br /><br />Hmm, I dunno...I think that to tell the story Salmon et. al. are trying to tell using demand-side hysteresis effects, you'd need to have observed higher inflation in the 80s and 90s and 00s. The story would be that increasing debt levels kept boosting AD above potential GDP, leading to hysteresis effects on human and physical capital that then raised potential GDP. But since building up capital takes a while, there would have to be a burst of inflation. And then if this process happened continuously for 30 years, you'd need pretty persistent inflation. Which we didn't see.<br /><br />Now, I totally <i>agree</i> that a breakdown of financial intermediation might cause a persistent demand shock that could then lower long-term potential GDP via hysteresis effects. In fact, I kind of bet that this is what is really going on in all these examples of post-financial-crisis slowdowns. But I think that any reasonable model of hysteresis will not have permanent effects; the recovery of the financial system and the return of normal demand levels will slowly erase the effects of the hysteresis. I'm pretty skeptical of <i>permanent</i> hysteresis effects (though I guess they could exist in principle).<br /><br />Then again, I think the right sort of overly hawkish policy regime, if it lasted a very long time, could have negative effects on potential output that lasted as long as the regime lasted (and longer). But that is true for pretty much any sub-optimal policy regime...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65282607845294569742012-03-19T14:54:44.472-04:002012-03-19T14:54:44.472-04:00Noah S. is also wrong to think (as, to be fair, ma...<i>Noah S. is also wrong to think (as, to be fair, many economists do) that the long-term growth rate must be independent of demand-side factors.</i><br /><br />JW, I do accept in principle that these sort of things could happen. I just think the model required to model these things is a lot more complex, with a lot more specific and possibly weird-seeming assumptions, than people realize.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88688001829641789022012-03-19T13:27:32.970-04:002012-03-19T13:27:32.970-04:00I think Salmon is right, though he doesn't qui...I think Salmon is right, though he doesn't quite spell it all out. The story for me looks like this: high debt in the U.S. caused artificially high demand which in turn caused an artificially low unemployment rate which ensured that more of our workers maintained their skills - and even more crucially that more of our workers' children were less likely to under-utilize their skills (since poor kids tend to make less of their natural talents than rich ones) - which kept national productivity levels high. <br /><br />The sudden collapse of our debt reversed this trend and permanently reduced our productivity potential. It may be a demand-side explanation for a supply-side phenomenon, but it's certainly plausible and I think it's right.stevehttps://www.blogger.com/profile/00697505560124726405noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62395863477491034052012-03-19T12:36:49.151-04:002012-03-19T12:36:49.151-04:00I agree with Noah that debt boosts demand, but not...I agree with Noah that debt boosts demand, but not productive capacity, and that Salmon's post unfortunately elides this distinction.<br /><br />I disagree with Noah that the evolution of potential GDP is independent of demand conditions. it is perfectly possible to imagine a world (or write a model) in which debt-financed consumption --> higher investment --> more rapid growth in potential GDP. Similarly, it is perfectly possible to imagine a world in which debt-financed consumption --> lower unemployment --> faster growth in the laborforce (hysteresis) --> more rapid growth in potential GDP.<br /><br />Of course the conclusion then should not be Salmon's, that if further accumulation of private debt becomes infeasible we must accept lower growth. Rather, we should look for alternative sources of demand growth, for instance redistribution of income to wages, institutional changes that raise desired private investment, or higher public investment.<br /><br />So Salmon is wrong, but Noah S. is also wrong to think (as, to be fair, many economists do) that the long-term growth rate must be independent of demand-side factors.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-31379754693832423322012-03-19T10:48:24.249-04:002012-03-19T10:48:24.249-04:00You title the article with "GDP", then s...<i>You title the article with "GDP", then switch to the question "But how can a nation artificially increase its maximum possible production by borrowing money?"<br /><br />GDP & 'maximum possible production' aren't the same thing.</i><br /><br />You're right. There are two discussions here: one about long-run potential output, one about short-run actual output.<br /><br />However, in a boom period, short-run actual output is thought to equal or exceed potential output, so many of the same arguments apply. I didn't mention that in the post, to save space.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.com