Tobold's Blog
Tuesday, September 27, 2022
Fake economic growth?

While I have a strong interest in economics, and have educated myself about it, I never had a formal education in that field. So there are some things that I know how they are being calculated, but have my doubts about why it is done that way. One thing that always sounded dubious to me is the calculation of economic growth. For example if I help you and you help me, that doesn't contribute to economic growth. But if I pay you for your help, and you pay me the same amount for my help, we suddenly created economic growth, although we still have the same work done and the same amount of money in our pockets.

I was thinking about my doubts on the way GDP is calculated in the recent economic context. In order to battle inflation, central banks everywhere are raising interest rates. And that has a huge negative impact on GDP. And I was wondering whether at least in part that is because we "faked" economic growth earlier, in the long decades of low interest rates.

If I decide to borrow some money and buy myself something with it, this is counted as straight economic growth. There is no negative accounting of the fact that I now have debt. If we all live way beyond our means, that would be perfect for the official GDP and its growth. In reality we are all hopefully aware that if I spend borrowed money today, that will necessitate that I spend less tomorrow, so I can pay my debt back. So spending borrowed money instead of earned money causes a sort of "fake" economic growth, at it is foreseeable that this isn't permanent, and the seed for negative growth is already sown by the debt.

One person's debt is another person's saving. However, we know that richer people spend a lesser percentage of their income than poorer people, and tend to just sit on their savings. The "trickle-down economics" don't really work, because they are at best a trickle. A fairer distribution of the spoils of capitalism, in which workers get a larger share of created wealth, would create a much more sustainable economic growth.

You seem to be precluding the notion that saving money is somehow not a viable option anymore. Saving your money to buy something instead of going into debt and paying insane interest over time doesn't make a lot of sense in times of high inflation, or anytime really. I worked summer jobs as a teen and paid cash for my first car when I hit 16 and was old enough to get my learners permit. Instead of going the bank/mortage route, I saved my money while I was in the military, and paid cash to buy my land - that I later built my home on. My home and land are now valued at over 10X what I have spent on them. No interest paid. Just a boatload of property taxes over the years.

Anyone can do this, and it really surprises me that "spend, spend, spend" seems to be the mantra that todays economy seems to be supported by, and IMHO, it is not sustainable. When you put your money into the hands of entities with a profit motive, the lines get blurred and the issues of accountability are harder to confine to a single individual.
"we suddenly created economic growth"

Yes, because GDP includes services you created growth - for this period: you didn't have this service transaction last period.
If you don't have this service next period, you created negative growth. If you have the same service, you won't have created growth - because growth is a delta.
The idea is also not that you have the same money in your pockets, but that the service procured has increased your wealth compared to what you had to pay for it.

So low interest rates allow you to obtain more services or for a lower total cost.
Yes, you will have debt when you borrow money - but you will have more debt when the interest rates are higher.
I've written like three different posts, but this topic is so hard to put concisely that I've deleted them all :)

I'll leave you with this question - which society has had the fairest distribution of wealth while still respecting what we now consider to be "human rights"?
GDP is pretty well recognized as a poor metric. But it's one that governments collect data on and report so it's what we're stuck with for now.
I think your original example gets into the area that, in an increasingly digital/virtual world, it is harder to measure GDP and productivity than when the economy made cars and washing machines.

The old [mis]quote is "we are all Keynesians now." The response to recession is not as much an individual's debt. Rather, "Keynes held that governments should increase spending, even if it means going into debt." The debt-to-fight-inflation is your personal debt and your share of the national deficit.

P.S., "In reality we are all hopefully aware that if I spend borrowed money today, that will necessitate that I spend less tomorrow," is a truth that seems unknown to most Western politicians as deficits expand.

P.P.S.: governments constantly adjusting interest rates to avoid the Scylla and Charybdis of recession and inflation, is why Friedman was an Euro-skeptic.
I'll leave you with this question - which society has had the fairest distribution of wealth while still respecting what we now consider to be "human rights"?

The Scandinavian countries would take most of the top spots on that list.
I thought this article was interesting -

This is just one source but I couldn't help but be left with the feeling that as much as some people would like to have equality of outcome it just isn't going to happen because we are not actually all equal. What I'd like to have is equality of opportunity - but within reason. Why the qualifier? It's because to have true equality of opportunity we'd all actually have to be equal. Equality in my mind meaning the same intelligence, physical attributes, etc - I personally wouldn't like to go down the eugenics route so I hope that never happens.

I don't think that you were talking about equality of outcome, although I always seem to come back to that when I think about income inequality. Probably for the reason that I've known so many people with such varying levels of learned knowledge and work ethic that I have strong feelings against overreaching income redistribution (I do think it's redistribution is necessary just for a certain level of social harmony). I just don't want what I've earned to be given to someone that didn't, couldn't, or wouldn't do what I did to earn it.

This is where my thoughts went because you said "fairer" distribution. I just don't know how "fair" is defined and I can't define it myself. I do think that it shouldn't be just outcome based. For the US (since I'm American) I just wish that we'd get rid of tax exploits and ensure that whatever our rules say we should pay is what we actually pay. Then we can tweak things once we see what the true numbers are. As long as there are grey areas and exploits then we'll never have the proper data to make truly informed decisions.
@Janous: We know how capitalism works. It creates wealth from the four factors of production: Land, labor, capital, and entrepreneurship. Each of these factors is essential (although land is becoming less essential for some businesses). But there is no formula in economics that says what the percentage contribution of each factor is, and how the created wealth should be distributed between the providers of land, labor, capital, and entrepreneurship.

What we do know is that in the post-war years in the middle of the last century, which are often called the "economic miracle" years, the percentage of the created wealth that went to labor was much higher, and has been declining since, while the holders of capital and entrepreneurship have now higher parts than before. We can explain why that happened, globalisation made capital more mobile than labor, but we don't have an argument why the new distribution would be fairer than the old one. And the post-war distribution seems closer to Pareto-optimal to me. More wealth to labor produces a lot more demand than the same amount of money added to those who already got a lot of it, and won't spend it. So I'd call the post-war distribution "fairer".
Isn't the issue not just "fairness" in the labor/capital distribution but also within labor?

I don't see as much equity complaints about "Globally competitive" workers. Average software developer salary in CA is over $100k. Median Facebook salary is a quarter of a million dollars per year. Apple gave out $180,000 retention bonus. ...

OTOH, fast food restaurants automation is reducing the need for labor. Automation was already reducing labor in automotive manufacturing and now EVs are simpler to build and need fewer repairs. I remember in 1994, an author speaking at an IBM conference I attended said "if your job has agent in the name, you are in trouble." Mining & petroleum companies - and thus coal miners and oil workers - are pariahs.

So even if corporations were to give extra billions to employees, how much impact would that have on the perception of equality? I.e., I would see them rationally give the extra compensation to the high value employees.

I certainly don't want to say most corporations are angels - or even good. OTOH, I encounter politicians making sound bites but nothing practical about how to deal with a huge swath of the middle class jobs being automated away.

As a former programmer, I am skeptical of "Anybody who can throw coal into a furnace can learn how to program, for God’s sake!
I fully agree. And I am not in favor of equality of outcome. There are jobs that need a Ph.D. degree worth of education to do, meaning years of study under bad financial conditions. Even if you just wanted equal outcome measured over lifetime, these jobs would need a higher annual salary than those somebody can start right after school. Also those Silicon Valley salaries are distorted by the extreme cost of living in the area. That software developer making $100k a year is barely able to make ends meet.

A CEO making 400 times the salary of a worker on the other hand is probably an excess of the system.
"If i pay you and you pay me..." - but if you do it through bank account and your company, you both pay taxes so i guess growth is stimulated there?

"A CEO making 400 times the salary of a worker on the other hand is probably an excess of the system."

I've been thinking about this recently too. Lets say that I start a company making a children's toy. I built the company to moderate size over the years and we are doing very well. The average salary in the company is $50k/yr, however I make $20mil/yr - that doesn't seem wrong to me and I'll explain why. Without me those jobs paying $50k/year wouldn't exist. In addition, I am held responsible for macro issues that the average employee doesn't have to deal (although they may feel the effects). If there is an issue with a toy that causes harm to children then it's likely that if there are legal issues I will bear the brunt of it, not the average worker (e.g. jail time, financial sanctions, etc).

In addition, what if I've developed and organized things in a way where there average worked needs limited skill for their job meaning that those workers are easily replaced. Wouldn't paying them "market value" make sense? If we do well it would be "nice" of me to share, but should I be required to - I don't think so. If I made $100mil/yr would that change? Maybe, maybe not.

Full disclosure - I am not an executive, have never been, nor have I created a company.

Definitely not an easy thing to deal with and I don't profess to have the answers, just my own thoughts that I'm sharing.
I built the company to moderate size over the years and we are doing very wel

This Is far from the typical example.

the more typical example if in the 70's and 80's the company was built up and did well. at that point the ceo was being paid 100x the average salary. Now it 2023 and you have been in charge 4 years. the company Is doing moderately well and you are being paid 400x the average salary, or even the company Is doing very badly and you are still collecting 400x the average salary.

GSP is not a great measure of growth. but they don't have a better measure.
In Australia they have finally admitted that new home owners grants mostly just inflate the cost of property.except they dont have a better idea.

My issue is more with the idea of "I built the company ...". "I"? Really? Your employees didn't contribute to that success? I've seen companies flounder because a few key employees left, and it turned out that the owner-manager wasn't even aware of all the details that made his company successful.
@Tolbod - IMO, yes you have help and yes you delegate responsibilities. However, if you're ultimately approving major decisions and providing the strategic direction then I think "I" while technically not 100% is close enough. The "I" to me at least doesn't mean that you did everything, it means that you put the structure, guidance, and people in place to reach your objectives and goals. You provide the vision. We don't give thanks to the legos (or pay more for them then we have to) that we use to build a great lego build (I'm not equating people to legos, I am talking about the utility of the resource and just wanted an easy to understand analogy). In the case that you described, yes if the CEO isn't providing value to the company commensurate with their compensation then the people should leave and that means to me that things are working as intended.

Side note - this is why collective bargaining is an important thing. If a single employee is easily replaceable then the only way to strengthen their hands is to band together. Maybe you can lose 5% (just for discussion sake, obviously each industry is different) of your employees and be okay, but you can't lose 70% of them.

Ultimately we each leverage the benefits of societies to build whatever is built. We rely on the national and local protection to safeguard us and our property, we leverage the infrastructure for transport and access and power, we leverage the education system to either educate us and/or provide educated workers - so IMO no one truly builds anything alone unless you're building something on undeveloped land under no governments jurisdiction. That shouldn't preclude someone from saying "I" though. "I" is more that they were the catalyst for everything happening, not that they didn't hire anyone to help them.
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