Simon Johnson notes:
We don’t know how much of banking profits in recent years were illusory
and should not have been booked as GDP. In fact, it would not be a big
surprise if – eventually – we go back and mark down our true production
of goods and services in 2007 by 2 or even 5 percent. In this sense,
we face a statistical situation similar to that of the Soviet Union at
its demise – once they figured out that all their military production
had no real value, they had to reduce measured GDP sharply.
Don't forget to make another adjustment for the real value of health care and whether it rose proportionately with expenditure.
As Steve Ballmer said, this is less a recession than a resetting.
Pavel,
I think that is what Tyler is saying. Activity doesn’t equal prospertiy, no matter how you measure it. That’s what I say anyway.
I’ve been trying to track down a related question, but don’t have the time or resources – perhaps someone here knows. The GDP imputes a rental value of owner-occupied housing as a component, which ends up being rather large. How much of the GDP gains from 2000-2007 were reflecting this bubble? How much of the current downturn is simply that bubble popping, forcing a reduction in the imputation?
Simon Johnson might be on to something. As a former Sovietologist myself, I have actually made this analogy as well and for similar reasons about the growth accounting. The mechanism is the governmental cycle of debt and debasement. In other words, examine the fiscal imbalances in the system. In fact, over 20 years ago I got myself in trouble at a job talk because I made this point — and focused on the argument that the defacto Soviet economic system was more “market oriented” and the defacto US economic system was more “government oriented” than our traditional ways to talk about these systems and that we potentially had to confront similar problems down the road as a result.
For readers who are misunderstanding Simon’s point, I suggest reading Birman, Igor. (1978). “From the Achieved Level,” Soviet Studies 31 (2):153 – 172, about Soviet fiscal imbalance.
Pete
Dan–I do not know the facts on the impact of the imputed value of housing services in the GDP accounts, but because housing is such a long lived asset — the average home in the US is 25 years old– I doubt that the change in housing values would have had a significant impact on reported GDP.
ok, so then you have to add something for GDP for the freeeee stuff i do on the internet?
As I said months ago on this blog: the dollar value of something is no longer as important as the value in a basket of currencies and compared to a wide variety of goods.
The dollar was low which made everything very expensive now its high which is making everything very cheap. It will be low again soon due to the quantative easing and everything will be very expensive once more.
While one might question the financial judgement of the governors of California and Pennsylvania, what do you make of Bloomberg the mayor and defender of the free market saying the US has run up a $1.6T deficit in infrastructure maintenance from roads and bridges in decay, to leaking water and sewage, to obsolete rail for both passengers and freight, to the energy grid and pipelines?
If a business manager boosted profits by not depreciating and maintaining productive capital, one might argue the past results should be restated, but the normal approach is to write down the assets in a one time admission of past mismanagement and then move on and focus on fixing the problems.
To sit around blaming others for the broken manufacturing machine, or failed bridge, without facing up to the problem and pulling out the wallet and putting cash on the table to repair the capital is unproductive. On the GDP or the balance sheets of thousands of corporations, some one time charges need to be made to mark the bad past decisions and the magnitude of the problem. Footnotes can be added saying past results are suspect. But the key is to look to the future as honestly and transparently as possible.
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