OK, I know some actual, professional economists read this blog. It is your embarrassing pleasure that you have to hide from your friends, like how I listen to the early Madonna when I’m by myself in the car. (“Crazy for You” is just a great song.)
So here’s a little thought experiment, and I’d like you to please explain how actual economists who work in the CBO or whatever would handle it:
An economy is chugging along nicely at full employment, and price inflation is within the desired range. Real GDP is $1 trillion. Then geologists think they’ve discovered a humongous deposit of oil that will make Saudi Arabians feel like chumps. The problem is, the oil is buried pretty deep. So the oil industry in this country (not foreigners) spends $150 billion buying new drilling equipment and other necessary infrastructure. At the end of the year, the macroeconomists report that real GDP was $1.1 trillion. There was an extra $150 billion in output in the sectors producing the oil equipment, but that was only partially offset by a $50 billion drop in output elsewhere. The apparent discovery of the oil increased the productivity of the factors in the economy, which is what allowed potential GDP to go up 10% in a single year.
The next year, to their horror, the people in the oil industry realize that it wasn’t an oil deposit at all, but just some empty bottles that John Maynard Keynes had buried back in 1936. The entire drilling apparatus overnight becomes almost completely worthless, because it can’t be easily disassembled and shipped elsewhere.
So: Assuming no other technological discoveries or workers gaining skills, real output at best will drop back to $1 trillion in the new year, and will actually be less because some of the maintenance on other production processes would have been shunted into the oil industry the year before.
My question: How would macroeconomists in the CBO do their graphs? Would they go back and mark down the $1.1 trillion “real output” figure in the previous year, because that was obviously a mistake? Or would they say, “No, real output really was that high last year, and it just collapsed this year”?
(In case you’re curious, if the oil deposit had really existed, then oil would have flowed out and been sold [perhaps on the world market] and that’s partly what would have kept real output permanently higher, had there not been such a colossal mistake.)