Saturday assorted link

1. And yet so few people are celebrating: “Labor share being higher and corporate profit share being lower as a % of GDP than previously thought”.

You don’t need any other link for today, that explains so much of our intellectual and policy world.

Addendum: On the new Robert Barro gdp double-counting hypothesis, which lies behind all of this, here is a good MR comment:

The algebra is fine as it is, but I take strong issue with the idea that GDP “mismeasures” something. As any decent intro macro course will tells its students, “GDP is not a measure of welfare.” Indeed, the Kuznets quotes that Barro points to are exactly of this nature; we have this high profile GDP number, but it doesn’t do what you want it to do – or at least not ALL the things you want it to.

What Barro does here is construct a new measure – present discounted value of consumption – and shown how it relates to GDP (and GDP’s present discounted value). In addition, he provides a capital income / labor income decomposition for both measures (GDP having such an exact decomposition because of constant returns to scale, Euler’s identity for homogenous functions, and marginal-value input prices). He then says present discounted value of consumption, and its associated decompositions, are “right” while the other the construction GDP is “wrong” and thus gives “misstated” decompositions. Of course, “right/wrong” and “correct/incorrect” begs the question – right about WHAT? Correct for WHAT?

Barro says that in present discounted value terms GDP “double counts” investment. The “double counting” is only relative to how things are calculated for the present discounted value of consumption. This just reflects the fact that GDP counts production, while consumption only counts consumption. Market clearing, saving, and no storage imply that in every period consumption will be less than production. Specifically, looking at present values, future consumption in part reflects past savings i.e. past investments. GDP counts the production from the investment part (e.g. making the car) and the consumption part (e.g. driving the car), while consumption only counts the consumption part. If what you’re after is welfare – sure only count consumption. If what you’re after is production, well then you count production. Absolutely, GDP is higher than consumption. All Barro has done is given a more precise statement of how much bigger, in a PDV sense, GDP will be than consumption.

Noting that the “capital” share of GDP and the “capital” share of consumption are different is more word games. Indeed, assigning similar names to decompositions of different constructs is completely arbitrary. Barro doesn’t explain why the “capital share” of one thing is more important than the “capital share” of some other thing. In practice, we care about the “capital share” because it tells us something about the structure of the economy – i.e. with Cobb Douglas the capital share of GDP is used to calibrate the alpha parameter. Skimming the paper, its not immediately obvious what the structural parameter linked to the “capital share” of PDV consumption is, but I wouldn’t be surprised if its just alpha/2. Ok, the “capital share” of something different concept spits out a different number. For an RBC/neoclassical type, not thinking about the structural parameters is an obvious mistake…

More interesting than the LEVEL of any value is how these values change over time, and what this implies for the changing structure of the economy. Barro’s attempt to say the level of the capital share is “wrong” misses the point – we aren’t after the capital share per say, we’re after alpha. And since the two “capital shares” are proportional, a rising GDP capital share is the same as a rising PDV consumption capital share. The mystery continues, just with scaled down numbers…

But I think that means Barro is basically correct.


'“Labor share being higher and corporate profit share being lower as a % of GDP than previously thought”.'

'It appeared that there had even been demonstrations to thank B-B for raising the chocolate ration to twenty grams a week. And only yesterday […] it had been announced that the ration was to be reduced to twenty grams a week. Was it possible that they could swallow that, after only twenty-four hours?'

I gotta big boner.

When your political philosophy depends on poor economic times to convince large numbers of people to support you, then when the economy is booming you must find some way to convince people that the economy is not good. How is this different from what Karl Marx taught and believed?

"...yet so few people are celebrating."

IOW, the MSM is quiet about it, because they need bad news to prove orange man bad. So racist.

"When your political philosophy depends on poor economic times to convince large numbers of people to support you..."

Yeah, 'cuz Orange Man never did that!

So is there an exciting time series which shows this comment to be beside the point or something? Because reading it as is, levels vs rates of change seem a pretty valid point in saying this doesn't matter (outside national accounting of course). If we now have a reversed change narrative that's another matter of course! But whether or not Barro is correct, I at least don't follow why it's supposed to be exciting....

Prof. Cowen is authorized to say that the action he is now reporting may well bring the war against socialism within measurable distance of its end.

I feel your pain.

But, Holy Cow!

It is indeed a very good comment, but I don't see that it tells us that Barro has a good point. If we want to measure consumption, then let's measure consumption.

The labor share is the percentage of economic output that accrues to workers in the form of compensation. It is calculated by dividing the compensation earned during a certain period by the economic output produced over the same period. So according to Barro and Cowen I got a raise and didn't even know it. Now that I know it, I am happy, contrary to what Cowen and Sen say. Are you happy that you got a raise? Indeed, is Cowen happy that he got a raise?

What is GDP? The G means gross, as in Gross Domestic Product. Thus, GDP equals private consumption + gross investment + government investment + government spending + (exports – imports). Barro modifies the definition by full expensing of gross investment in determining the capital share. Does that mean I didn't get a raise? Sorry, but you didn't get a raise. Now are you sad again? But there's hope. As our economy shifts from industrial production to services, the labor share will go up because there's less gross investment (that would, in the everybody's world except Barro's, be amortized (depreciated)). Indeed, the labor share has been rising lately for that reason. Now are you happy? I didn't get a raise, but I'm not in the part of labor referred to as "knowledge workers", who deserve the raise and got it. Get it?

Pres. Trump is often accused of "spin", what his critics call lies. When an economist does the same thing, is it "spin", a lie, or academic license?

'When an economist does the same thing, is it "spin", a lie, or academic license?'

Is this a trick question? The answer is clearly small steps toward a much better world.

"So according to Barro and Cowen I got a raise and didn't even know it."

Or some unemployed workers got jobs and you didn't even give a crap.

There are other components to gdp other than just corporate profits and wages. If labor share of gdp increased why did he revenue from social security taxes fall from 4.4% in 2017 to 4.2% of gdp in 2018?

It doesn't require much labor for economic growth attributable to rising asset prices. Alternatively, if labor's share is constant but inequality is rising, less of the labor share will be subject to employment taxes. But don't cry for the downtrodden, for Barro has written that rising inequality in a developed country encourages growth. Happier days are ahead!

Why does rising inequality encourage growth in a developed country? According to Barro, it raises savings/investment. One might conclude, therefore, that rising inequality and savings/investment would increase the capital share, which would be a good thing, right? Not in the political economy sense: labor would complain that labor isn't getting what labor rightfully deserves. Worse, if rising inequality in a developed country correlates with slower growth not faster growth, it creates a problem in the academic sense. What if we have been doing it (the it being the calculation of GDP and labor and capital shares) all wrong, under-counting the labor share and over-counting the capital share? In that case, we should adopt policies that will increase the capital share and thereby increase growth.

Ultimately, GDP "represents" nothing more than an estimate of how many dollars were "spent" in the national economy on arbitrarily selected goods and services.

However, the very term gross-domestic-"Product" clearly pretends to measure national "production" but observes only 'spending'... and mere spending does not equate to useful production of goods & services.
The endless fascination with GDP analysis is a fool's amusement.

True. Nothing is perfect. Nothing is infallible.

Whatever the GDP calculation rules, it's OK as long as it's consistently applied. Then, we can "see" trends and policy-makers can propose economic engineering/management reactions, which is also fallible and imperfect.

When I was a lad the convention with quotations was that one would quietly correct errors such as "per say". It would have been thought mildly rude to let them stand, and vilely rude to write "[sic]" after them.

Just more evidence of the decline in civility I suppose.

I forgot to add - cock piss partridge!

... sorry Dick, that's nonsense.

if you have a calculator that always gives wrong answers -- you don't try an guess the correct answers from the random jibberish spit out by that defective calculator. You get rid of the bad calculator entirely.

The known, insurmountable flaws of GDP calculation make it totally worthless -- except as a deceptive prop for statist central planners & government market-interventionists.

Thank you, sir! May I have another.

Almost nothing in life is "totally worthless."

Per your theory, also "totally worthless" would be every financial statement ever issued. So, we have US GAAP (fatally flawed), SEC (flawed and should be more police than regulators), and public accounting (fatally flawed) that users (owners, managements, investors, creditors, et al) can "rationally use" (knowing the rules) for their varied purposes the statements, knowing the esoteric US GAAP accounting principles and standards.

Calm down. The only life certainties are death and taxes.

I really wonder when economists will stop pretending their numbers mean anything in the real world. I respect them for continuing to try to fit their models to the reality, but they need to keep their models to themselves until they have a good track record of being able to predict the future.

I medicine, we come up with bullshit models all the time. The difference is that we wait for some sort of validation before applying it to real world humans. It's not perfect. The validations are often flawed, but at least we try.

Economists just get some kludgy variable that fits the data and then declare that their previously held beliefs are validated by the new model or number.

Stop. Just stop. You're embarrassing yourselves and helping destroy whatever faith remains in the wisdom of "experts."

Perhaps no one is better at this destruction than Paul "always-wrong" Krugman and his predictions of the post-2016 apocalypse, but Tyler comes in at a pretty close second with his breathless reporting of these imaginary figures.

Thread winner!

This might be the post of the month!

People need to pay attention - models are useless until they are validated via predictions.

This is true for economics, medicine, and especially climate.

Non-linear systems can be especially badly behaved, and most of the real world is non-linear.

In medicine, there are strong disagreements on everything from whether to test for cancers that are over-diagnosed by screening ---- to whether people should eat steak a few times a year, weekly, or never.

Economists in general are not doing any worse than doctors in general:, not any better, probably , but not worse.

The way I see it is this:
there are easy fields of endeavor, where success is measurable (for example, think of all the wasted mental effort at bridge and chess and Minecraft) ....

there are slightly easier fields of endeavor, where success is also regularly attainable by honest effort (getting good grades in law school and winning "clerkships", academia, being a "respected" medical specialist)

and then there are really easy fields of endeavor, which generally get you about double minimum wage if you succeed in them (for men, working at Jiffy Lube, for women, being a polite cashier at Target).

A Previous commenter said "most of the real world is non-linear" ... well put.

If you correctly assume, as I do, that almost all specialists have no idea how to track non-linear systems well, and that almost all who do know how to track them well have no idea how to express their methods, and that almost all who know how to track them well and express their methods almost never overcome the temptation to branch out into other fields where they are Clueless, due to lack of experience, and in which they do harm, then you will understand why access to people who know what they are doing is important, for more reasons than I or any one else can explain.

"why having personal one-on-one access" instead of "why access" in the second to last line
Language, at the level of words and sentences, is difficult !

If you are an aficionado of this sort of thing, my candidates for actual geniuses in small fields, who "branched out into other fields" that are important, and who did not "do harm" are (just counting people who were famous at some point in the 20th century) ...
J.M. Keynes (a better pure logician than Wittgenstein, and his public policy recommendations did keep lots of British people from suffering real harm during the financial convulsions of the 30s - had there been a Keynes on the Continent during that time frame, there may not have been a Second World War - think about it) .... (Geoffrey Keynes did a lot of good, too) ...
Hyman Rickover, who despite his limitations did something you (probably) or I (very probably) could not do - oversaw the extremely dangerous thing called a "nuclear-powered submarine fleet" and succeeded in having no major disasters occur under his watch .... (yes I know about the disasters and deaths, I am talking 'major disasters' here)
Nassim Taleb, who is a born-to-the-manor financier of genius, of which there are dozens in every generation, but whose true legacy will be his words of truth on GMOs, on the necessity to distinguish between "policing" and "warmongering", and on the pro-life issue ...
and two or three winners of the famous economic prize that they give out in Scandinavia every year, I am familiar with almost all of them and several of them - the auction guys, the micro-credit guys, and that amazingly talented French guy .... have, in my humble opinion, done an awful lot to make the world a better place, or at least to keep it from becoming a worse place at a slower place than it would otherwise be if they had not been born.
Thanks for reading, and always, sorry I did not have time to make my comment shorter.

"at a slower pace", in the second to last line

X being better than previously thought doesn't tell you anything about whether X is anywhere close to being acceptable or not. Tyler should know that.

Or whether either measurement of X is anywhere being close to reflecting something valuable in the real world.

"saturday assorted link"
nekked barnie sanders is wrong about pretty much everthing
ladies, grab your brooms!

When we build a toll road, the workers consume but the road is not operating, it is not delivering consumer goods. If returns to scale are stable, then conservation of goods tells us that someone is consuming less when the road is built. How much less?

The scale of distribution is slightly stretched. The scale has been adapted to partially compensate for future efficiency gains. We go with slightly less inventory, run a bit risky. We partially adapt to the new scale in anticipation that the road will finish before we run inventory dry. Barro wants to balance current depreciation of old capital against future appreciation of the new capital being built.

Perhaps the easiest way to see Barro's point is a two-period model. In period 1 labor income Y is earned. Part of this is saved (S) and part of this is consumed (C1). Savings earn a return r. In the second period there is no income from labor, consumption is S(1+r), and the world ends. The present value of GDP is C1 + 2S, whereas the present value of consumption is C1 + S.

Thanks very helpful. But abc's comment still holds, does this give us a superior measure?

Eyeballing the chart, is going from around .093 to .087 really that big of a deal? I don’t know the economics, but on the face of it doesn’t seem particularly significant.

The primary reason profits share of GDP rose in the early 2000s was much more weak nominal GDP growth rather than strong profits.

from 2000 to 2014 NOMINAL GDP GROWTH SLOWED TO 4.0 %

Since 2015 profits growth has been significantly weaker than nominal GDP. Probably why no one is celebrating it is that they recognize it is much more a story of weak nominal GDP than strong profits.

I never understood why anyone cared about this. There is no 'pie' to slice up.

It matters for the calibration of fiscal or monetary policy. Optimal policy depends on accurately measuring the output gap.

Monetary policy can't do anything about any supposed output gap. Neither can fiscal planning. Sorry the 20th century happened central planning lost.

So is TC going to mention the fact that GDP is not only revised down so that it never exceed 3% growth during Trump's term (so much for that boom) but that it's declining along with investment?

It might right, but a link to an approving Twitter thread doesn't convince me.

Appending an updated comment from the earlier Barro thread...

Grammatical comments not withstanding (no tense consistency criticism...)

Upon further reflection, Barro's article is really really pointless. As I argued earlier, we already know that consumption is the better metric if what we care about is "welfare." Well, guess what - we already measure consumption too! And, to boot, when we measure consumption we do exactly what Barro says and use a "full expensing" approach!

For consumer durables, we only record the value of the good when its purchased and do not record any subsequent utility/consumption flow that this purchase may generate. With housing, on the other hand, we put construction/renovation into the Investment component of GDP and record the flow of "housing services" in consumption.

No need for special assumptions or extra modelling. We already have a measure of consumption that does what Barro wants. Maybe we should focus on consumption more than GDP (a point many have already made). Maybe we could do our direct measurement of consumption better (filling in owner occupied housing in super tricky, and how do we value "financial services" separate from realized returns?).

In the second half of the paper, Barro turns to some ACTUAL measurement issues, mainly focusing on how to properly capture investment spending and returns various hard-to-measure types of capital (e.g. intellectual property, inventory investment, etc.) The focus on measuring investment seems odd, if what he wants is to measure consumption (which, as noted above, we already do). If anything, this proposal suggests that we can use consumption (which may be easier to measure) to correct for past misses in investment and thus get a better index of the capital stock.

Indeed, given the consumption measure we already have, its straightforward to get a PDV for this by assuming a growth rate for consumption (equal to growth of GDP on the balanced growth path) and applying the appropriate discount rates. Again, no adjustments relative to GDP needed...

Next, his "capital share" is a purely accounting statement, and its not clear what it might mean. As other commenters have said, his decomposition mixes up an Income measure and an Expenditure measure.

First, expenditure accounting for GDP gives us:
Y = C + I
Second, income accounting for GDP gives us:
Y = R*K + w*L
and our economic model tells us R = r - delta

In turn, on a balanced growth path, capital growth equals GDP growth, so together with a basic capital accumulation we have
K_t+1 = It + (1-delta)Kt
(1+g)Kt = It + (1-delta)Kt
(delta + g)Kt = It

So combining these three, we have an accounting statement:
C = Y - I
= (r+delta)*K + w*L - (delta+g)K
= (r-g)*K + w*L

Again, this is all fine as far as it goes, what does this equation actually mean? Taken literally, its just "income after investment equals consumption, plugging in the investment that keeps capital on the BGP".

I would say this is purely an accounting equation - two quantities that will definitely add up, given our definitions. Absolutely, R*K is not equal to (r-g)*K. And absolutely R*K/Y is not equal to (r-g)*K/C. But why do I care about one and not the other? What do I learn by comparing these two values? In what sense is one "right" and the other "wrong"? To simply assert that (r-g)*K/C is "right" tells us nothing.

I take a shot, but I could definitely be wrong.
Call g the balanced growth of capital goods (the result of investment). It has two components, capital goods leaving via depreciation, and capital goods coming in. I would think that capital goods leaving do not always leave, they become an expense, but still yield a surplus close to the value before. There must be an appreciation schedule to cancel the effect, it leaves a one time shift from t to t+1.

Trying to be as wrong as possible, let me step it.

If capital entering overlaps with capital leaving, but the intersection is not counted, then the error is discovered the next capital cycle, and new capital is appreciated from its initial value. Always one step behind in obtaining the real value of new capital. New capital in always appreciates in value the next cycle, so institute a corrective appreciation cycle.

we are so lucky to have another genius looking out for our benefit.

The reason nobody is celebrating is made clear in the quoted comment:

More interesting than the LEVEL of any value is how these values change over time,

Whatever calculation is being done, I don't see that the change over time is any different than what it is under the standard GDP calculation.

Well Conor Sen says he’s celebrating

Barro is technically correct. The best kind of correct. (aka true, but inconsequential to anything real)

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