Tag Archives: economic growth

March 2025 in Review

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Most frightening and/or depressing story: The U.S. might be headed for recession. Recessions happen, but this would be the first one where the U.S. government obviously and counter to all competent advice throws a monkey wrench in a perfectly healthy economy, that I know of anyway. Lest we think GDP growth is only a statistic that does not affect real people, the U.S. poverty rate among children was 5% in 2021 and rose to over 13% in 2023, when the economy was doing relatively well as measured by GDP growth and employment, but Congress forced the end of Biden’s tax credits for parents. So pop quiz: force a completely unnecessary recession by choice and will more or less children suffer? Shame shame shame on the Trump administration and Congress you stupid assholes.

Most hopeful story: Trump seems to have some anti-nuclear (weapons) instincts. We will see if his actions bear any relation to his words.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: Prospera is a weird quasi-autonomous city-state nominally inside Honduras run by crypto-currency weirdos.

total factor productivity

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This is mostly a review for yours truly, partly as I am pondering whether there is any economic theory or strategy that could justify the Trump federal budget cuts and tariffs. My verdict: no, I don’t think so, I think they are based on simplistic ideas: linear, short-term, misguided thinking about the national debt and trade deficits. Anyway, here are a few quotes from the IMF:

It’s a measure of an economy’s ability to generate income from inputs—to do more with less. The inputs in question are the economy’s factors of production, primarily the labor supplied by its people (“labor” for short) and its land, machinery, and infrastructure (“capital”). If an economy increases its total income without using more inputs, or if the economy maintains its income level while using fewer inputs, it is said to enjoy higher TFP…

Recent IMF research shows that TFP growth has slowed around the world since the global financial crisis. In low-income developing countries, it has come to a virtual standstill in recent years…

TFP is higher in countries where the average worker has more years of schooling, the quality of education and training is better, and the workforce is healthier. These advantages enable the average hour of work to generate more economic value added—in addition to improving the quality of life more broadly…

So what can advanced economies do? First, they should “do no harm,” by avoiding policy mistakes, such as permitting a decline in market competition, with powerful firms using their monopoly positions to stifle entry and innovation, or reverting to costly trade protectionism. Beyond this, policymakers should craft regulations that tap the possible productivity benefits of recent innovations in green technology, information and communications technology, and artificial intelligence. They should also tackle remaining barriers restricting the opportunity for women and minorities to bring their talents and innovative potential to all sectors of the economy.    

So, a long-term strategy to boost productivity and national wealth could be to invest in childcare and education (the people who will come up with tomorrow’s innovations, and also their parents who can’t come up with today’s innovations because they are too busy), research and development. The current U.S. administration is cutting all these things. Investing in infrastructure and physical capital also helps if you have underinvested in it in the past – there is a diminishing return to these investments, but the U.S. can’t be anywhere near the diminishing return. It also makes sense to invest in a counter-cyclical strategy – more when private sector unemployment is higher and less when it is lower.

 

The Atlanta Fed’s “GDP Nowcast”

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The Atlanta Fed has a spreadsheet model that tries to forecast the U.S. GDP growth rate in real time. Right now, it is showing a sudden, sharp contraction. When I see something like this in any model, I first check the math to see if something got broken. Second, I check the input data for anything missing or otherwise weird. Assuming the Atlanta Fed has a functioning procedure for these checks before it makes its results public, here are some other possible explanations.

First would be the sudden contraction in government spending and general economic anxiety caused by the amateur economic policy the current U.S. administration is implementing. But it’s hard to believe this would be so sudden, and if it were true you might expect to see it in the stock market. The stock market is in fact down about 5% over the last month, which is a lot, but not the kind of discontinuous collapse shown by the Atlanta Fed.

J.W. Mason, and economics professor, suggests it may be caused by a sudden surge of imports as companies try to beat the clock before tariffs hit. Net imports get subtracted from GDP, which I guess makes sense because they represent a flow of money out of the country in exchange for goods and services produced in other countries. He explains though that this could just mean the goods are stockpiled in warehouses to be distributed over the next few months, in which case GDP growth should just bounce back to trend.

There is another theory involving gold. This is the same source (Mason) quoting a report by Goldman Sachs.

most of the widening in the trade deficit since November has been driven by higher gold imports … as participants in the gold market sought to insure themselves against potential tariffs on gold. Although this may seem like a frontloading effect ahead of potential tariffs, these imports are for the most part … being shipped to the US on the off-chance that physical delivery of the gold is required,… Importantly, the Bureau of Economic Analysis (BEA) excludes most gold imports when calculating the imports component of GDP. ….

The same reasoning applies more generally to front-loading by retailers, wholesalers, and producers ahead of tariff increases. Because these developments are unrelated to US production, they should have little net effect on US GDP. In the case of non-gold goods, higher imports should be offset by higher inventories in the national accounts. In practice, it is possible that front-loading exerts a modest drag on reported GDP because imports… tend to be measured more accurately than inventories. We suspect this dynamic is playing out now to some extent… But because front-loading these imports now implies fewer imports later, we think the net effect on 2025 GDP growth should be small.

This is largely over my head, but again it suggests some short-term accounting effect rather than something going on in the real economy that would have an imminent impact on employment and prices.

recession watch

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I’ve been worried about Trump causing a recession. First, he firing federal workers willy nilly, and even if we accepted the idea that these people aren’t doing anything useful, they spend their salaries on groceries, household goods, haircuts, restaurant meals, home improvement, etc. Second, he is cutting federal contracts suddenly. A chunk of the private sector and certainly the research sector relies on federal contracts in one form or another, so this uncertainty will tamp down hiring and lead to layoffs. Then there is all the money that flows from the federal government to state and local governments and economies. That won’t just get magically replaced by state and local programs overnight, if ever. Then you have the tariffs and reduction of trade on top of all that. It sounds like a recipe for a recessionary shock to me.

I’m not an economist, but Claudia Sahm is. Here’s what she has to say, backed up by some facts and figures.

Civilian federal employment (including the Post Office) is currently 3 million or less than 2% of the labor force… About 100,000 workers have either taken deferred resignation or been laid off so far. Even if the total reduction doubles by the end of the year, it would still fall far short of a recessionary shock.

In fiscal year 2023, there were about three times as many federal contractors and grant employees as civilian federal employees (including the Post Office). DOGE canceling or modifying federal contracts and grants put that employment at risk. Elon Musk has set a goal of $1 trillion in savings this year, which most budget experts consider unrealistic. Still, these efforts will lead to a reduction in employment in the private and nonprofit sectors.

But even if DOGE reduces federal employment by 200,000 and canceling contracts reduces contact and grant employment (by a proportional) 600,000, the total is below (though close to) a recessionary shock. Moreover, the reality of the net employment reductions from DOGE this year is likely to be considerably smaller.

the 2024 Nobel Prize in economics

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I learned about the 2024 Nobel in economics from this Planet Money podcast. Basically, the award is for work illustrating how economic growth, and hence economic inequality, can be explained by “institutions”. And specifically “inclusive institutions”. And inclusive institutions seems to come down to what is called (in academic circles and outside the U.S. political context) “liberalism”. Democracy, the rule of law, economic freedom, competitive and well-functioning markets including labor markets, free and fair trade. It all kind of makes sense, just as the world seems headed in other directions. The silver lining, I suppose, is that no matter what hand your country is dealt in terms of geography or natural resources, you can theoretically build good institutions and succeed over time.

the staffing crisis

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This article in Longreads blames the degradation of hotels and restaurants in Yosemite National Park on the Aramark corporation. I think it is part of a larger trend of absolute bare-bones staffing in the U.S. service industry which has been going on at least since the pandemic. Something just seems out of whack when workers are barely getting by, prices seem so high, and service seems so poor. Like it or not, a drop in migrant workers during and since the pandemic is part of the story, whether those pre-pandemic restaurant and hotel workers were undocumented or not. In the U.S. childcare industry, where minimum staffing levels are highly regulated, prices are out of reach of even the upper middle class. In more competitive and less regulated hospitality industries, staffing levels are just cut to the bone. In Asia where I happen to be at the moment, staffing levels at tourist attractions are much higher. This works because tourists are willing or able to pay higher prices than what the local economy alone would otherwise support, and because higher-income countries bring in workers from lower-income countries. Since this will probably never be palatable in the United States, and rents and overhead costs are not going anywhere but up, we are probably stuck with shitty service and miserably overworked restaurant and hotel staff for the foreseeable future.

is the world in a depression?

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According to the IMF’s latest World Economic Outlook, maybe. And not just since Covid, but the world has been slowing since the 2008 financial crisis. They say it’s due to demographics (aging population, shrinking work force), “misallocation of resources” (low capital investment?), “fragmentation” (moving away from free trade?) and slowing innovation as measured by total factor productivity. Well crap. So we should have been investing in education, infrastructure, research and development all this time? Instead we let big business capture the political system, stifle competition and innovation, and starve the public realm apparently. Which is not even in their best interests in the long run. Our society is gradually slipping, and each time there is a crisis we are not able to bounce back all the way to our previous trend. Now we are looking at a looming food crisis and the loss of our coastal urban centers all over the world. And we are stupid enough to get ourselves into wars on top of all this.

September 2023 in Review

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Most frightening and/or depressing story: “the accumulation of physical and knowledge capital to substitute natural resources cannot guarantee green growth“. Green growth, in my own words, is the state where technological innovation allows increased human activity without a corresponding increase in environmental impact. In other words, this article concludes that technological innovation may not be able to save us. This would be bad, because this is a happy story where our civilization has a “soft landing” rather than a major course correction or a major disaster. There are some signs that human population growth may turn the corner (i.e., go from slowing down to actually decreasing in absolute numbers) relatively soon. Based on this, I speculated that “by focusing on per-capital wealth and income as a metric, rather than total national wealth and income, we can try to come up with ways to improve the quality of human lives rather than just increasing total money spent, activity, and environmental impact ceaselessly. What would this mean for “markets”? I’m not sure, but if we can accelerate productivity growth, and spread the gains fairly among the shrinking pool of humans, I don’t see why it has to be so bad.”

Most hopeful story: Autonomous vehicles kill and maim far, far fewer human beings than vehicles driven by humans. I consider this a happy story no matter how matter how much the media hypes each accident autonomous vehicles are involved in while ignoring the tens of thousands of Americans and millions of human beings snuffed out each year by human drivers. I think at some point, insurance companies will start to agree with me an hike premiums on human drivers through the roof. Autonomous parking also has a huge potential to free up space in our urban areas.

Most interesting story, that was not particularly frightening or hopeful, or perhaps was a mixture of both: Venice has completed a major storm surge barrier project.