News Flash: The Non-Stupid CBO Proves DeLong Was Wrong
I am traveling all week and have to keep this short and sweet. Here’s a chronicle of what happened in yet another exchange of blogfire with my favorite Keynesians:
==> Brad DeLong said, “There are no signs in the pace of technological progress, in the level of investment…[or in several other factors–RPM]…to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.”
==> I pointed out that even within DeLong’s own conceptual framework, he was speaking nonsense, because investment is down. Capacity is growing more slowly now, than in 2007.
==> DeLong responded that I didn’t do my homework, and Paul Krugman pointed out that the CBO does indeed take into account that investment is down, when estimating “potential GDP.”
Right, exactly Dr. Krugman. And since–like I said–investment is down, so is the growth in capacity, aka “potential GDP.” Here’s the official chart showing year/year growth in real potential output, from that non-stupid organization, the CBO (so you know it’s right):
Incidentally, as I am a fount of magnanimity, I actually calibrated the above chart to end in 1q 2014. So that last data point you see is the CBO’s estimate of what the growth rate of potential GDP will be, for all of 2013.
As the above chart shows, in 2007 “real potential GDP” was growing at just under 2.5 percent per year. Yet now, the CBO predicts that in 2013 it will only grow about 1.8 percent (just eyeballing the chart). So that’s a drop of about a fourth. Is a 25% drop not “material”?
We thus have an ironic situation in which Krugman actually proved my original point. He could’ve easily titled his post, “Brad, Next Time Just Follow My Lead and Ignore Murphy–It’s Safer.”
==> Notwithstanding the above, a Keynesian onlooker says I need aloe vera (since I got burned) and an Austrian onlooker says “OMG” because I got crushed so bad. All I can say is, LOL.
Welcome to my world, kids; my life is full of episodes just like this. For those of you following me on Facebook, now you understand why I have such an odd sense of humor. It’s the only way I’ve found to preserve my sanity.
Congrats man! You are my hero.
http://www.youtube.com/watch?v=IBe4tRNeC-Q
Great Comeback !
I have a question.
Delong said
“Does Murphy note, anywhere, that at a 5% real rate of return on capital the reduction in potential as a result of the post-2008 investment shortfall is now (19%-14% fall in investment share) x 4 years x 5%/year return on capital = 1% reduction in potential GDP, which is why I said that the path of growth is not “materially lower” rather than not lower when you compare it to the 5.5% real aggregate demand shortfall relative to trend?”
This appears to be contradicted by the CBO data you show that implies potential GDP falling by significantly more than 1%. Was Delong just making stuff up here ?
Rob there’s not a necessary contradiction; my chart shows rate of growth, DeLong is talking about levels in the quote you produced.
I think he is going to basically say, “Yep, a 25% drop in the rate of growth is no big deal, what an idiot Murphy is.”
He says that based on his assumptions you would get a “1% reduction in potential GDP”. I take this to mean that 4 years after 2008 potential GDP would be 1% lower as a result of the drop in investment for those 4 years. I don’t see what else he could mean.
But your number show that every year the growth in potential GDP was at least 0.7% lower and in some years above 1% lower than in 2008. That means that potential GDP fell by a minimum of 2.8% in those 3 years and actually much more (probably closer to 4% including compounding).
So even if he claims that a 25% drop in the rate of growth is minor then he is out at last 300% in his estimate of the fall in potential GDP, implying that at the very least his assumptions he uses in the above passage are invalid.
Oh OK sorry Rob I thought you were comparing my figure of 25% drop to DeLong’s 1% figure. I think you’re right, that DeLong’s back-of-the-envelope calculation doesn’t square with the CBO’s estimate.
He used those numbers (amongst other things) to conclude “Oh. It’s Murphy not doing his homework yet again”, and his number (back-of-envelope or not) were way out.
I wonder if he will have the decency to apologize ?
Rob Rawlings wrote:
I wonder if he will have the decency to apologize ?
My thoughts on that question.
This comment from DeLong:
“…a 5% real rate of return on capital the reduction in potential as a result of the post-2008 investment shortfall is now (19%-14% fall in investment share) x 4 years x 5%/year return on capital = 1% reduction in potential GDP…”
Is easily disposed of by considering the fact that the multiplier on “investment share” is not necessarily 1.00, as DeLong assumed it was, likely lazily and unintentionally.
In other words, a doubled capital base does not necessarily imply output doubles, and a halved capital base does not necessarily implies output halves, ceteris paribus.
A decline of 5% in the capital base could very well bring about a 10%, 15%, 20% decline in output. And oh look, Murphy showed the CBO as expecting a 25% drop in potential output (which of course includes other factors, but the point remains).
Murphy’s numbers show a 25% decline in potential GDP’s rate of growth.
Yup. Sometimes I refer to single digits without making explicit it’s a rate of growth. It’s misleading, I know. I sometimes say “5% NGDP.” I don’t mean 5% of NGDP, I mean 5% rate of growth of NGDP.
It’s laziness.
What’s more confusing to me is why the NY TImes shut down their entire site after this incident. They could have just removed Krugman’s post if they were embarrassed about it.
It’s so funny when in attempts to refute Murphy and the Austrian School, Krugman only goes to prove him and the Austrians correct. lol.
Before the battle of Salamis, the great Athenian general Themistocles was locked in a vigorous debate with a Spartan general about potential strategies for defeating the Persians. Themistocles was clearly in the minority with his views (but which ultimately turned out to be right and saved Western Civilization). He continued to interpret and contradict the other generals. Finally, the Spartan general threatened to strike Themistocles if he didn’t shut up and stop. “Strike!” Themistocles shouted back, “But listen!”
LOL, “onlooker”. That pretty much sums up that guy.
I do not see how this refutes anything that Brad Delong said at all. In fact, it seems to substitute argument to authority of an organization that calculates with a simple formula for any actual discussion of any of the points that Delong brings up. Delong puts forth a lot of actual economic arguments, and you respond by simply pointing to a CBO estimate as if it is the ultimate arbiter.
If you actually read Delong’s post, he says “There is an ongoing (and interesting, and insightful) academic discussion of potential GDP and its growth going on. But does Murphy participate in it at all, or recognize its existence?” This statement remains true after this post.
I do not have a horse in this race, but this response seems to show very poor form.
You have got to be kidding me.
Brad’s said Murphy was obviously wrong, and he was right. Krugman informed Murphy that the CBO isn’t stupid, and that thus Murphy was wrong.
But Bob is showing ‘very poor form’ because he is overlooking the ‘nuances’ involved in generating GDP figures? What were DeLong and Krugman doing??
We were having an ongoing (and interesting, and insightful) academic discussion of potential GDP yesterday.
http://consultingbyrpm.com/blog/2013/08/delong-sees-nothing-in-the-investment-data-that-would-slow-capacity-growth.html#comment-72561
I love when economics professors spout apoplectic gobbledygook when someone points out a mistake in their intricately contrived reasoning. It reminds me of grad school.
For the record, I wouldn’t consider your sense of humor “odd”. But perhaps that is because it is so similar to mine.
You guys really are coming off like a bunch of ankle biters. DRB (above) has the right attitude.
Perhaps you should take Krugman’s post as evidence that nobody disagreed with you on the relationship between investment and potential output in the first place (that this is not just something that Austrians and Larry Summers have come up with).
Perhaps?
And that would imply that the disagreement is elsewhere – over the degree of the effect and the strength of DeLong’s initial point. You seem to think that DeLong is using a particular meaning of “materially lower” and hanging an awful lot on the assumption that he is using that phrase in that way.
If there is no disagreement about the relationship between investment and potential output then surely Delong and Krugman must agree that a dip in investment qualifies as a sign that the growth rate in potential gdp should be lower, and they surely must agree too that Murphy was right to point that this contradicts Delong’s claim that there were no such signs.
If Krugman and Delong want to broaden the discussion that’s fine but they shouldn’t be sly about it. They are essentially attacking Murphy because his criticism of Delong doesn’t address the completely new argument Delong makes in response to that criticism. I CAN see Murphy driving a Delorean but I cant see it having a flux capacitor under the hood.
For those who are masochists, here’s my comment left on Daniel Kuehn’s blog:
For anybody who cares, if you look at the CBO’s figures for real potential GDP, the average growth from 4q06 through 4q07 was 2.44%.
At that trend, real potential GDP in 2q2013 would have been about $15.2 trillion. Instead, it was only $14.6 trillion, a shortfall of 3.6%.
True, it’s not DeLong’s threshold of 5% (which he sets as his threshold for “materially lower” in these comments). But on the other hand, it’s 260% more than the figure he came up with, when telling me I needed to quit my job because I couldn’t be bothered to actually do the math.
And yet, somehow, I’m the jerk in all of this because I made a throwaway line about Austrians being the only ones who care about investment. What if I had instead said, “DeLong is the dumbest man alive”? Would people have focused on his misleading claim in that case, and then his follow-up bad arithmetic as he lectured me on the importance of looking up the numbers?
I’m no masochist, but I still read your post.
And you’re not the jerk, DeLong is. And it’s not even close.
Stefaaahn! Oh wait, wrong page.
Seriously though, here you are mowing sucka’s down, but then you get this mosquito buzzing in you ear. All the mosquito says is, “bzzz, bzzz, bzzz” over and over again, because that’s all that he knows how to say. That shit gets annoying after a while.