photo credit: Matti Mattila

Renegade Economists Podcast 106

As broadcast on the almighty 3cr.org.au on 16/09/09. Subscribe now

Show Notes
Indicators of Distrust: we show how Australia really has been in recession, why GDP is a poor measure and hear from the Save VCA program on the economic incentives that led to a couple of key buildings being demolished today.

Read the Data: it was a recession

THE fact that Australia has managed to avoid a “technical” recession by not having had two consecutive quarters of negative gross domestic product growth is very much an artefact of the data sets we use.

The GDP figure that is published is an average of the three measures used to calculate GDP. Looking at the three series individually tells a very different story.

Stiglitz Urges End to GDP ‘Fetish’ in Favor of Broader Measures
Sept. 13 (Bloomberg) — Joseph Stiglitz, the Nobel Prize- winning economist, urged world leaders to drop an obsession with examining gross domestic product and focus more on broader measures of prosperity.

“GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said in an interview today in Paris.

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“So many things that are important to individuals are not included in GDP,” said Stiglitz, a Columbia University professor. “There needs to be an array of numbers but we need to understand the role of each number. We may not be able to aggregate everything together.”

Government’s Contribution
Assessing government’s contribution to economic output, which ranges from 39 percent in the U.S. to 48 percent in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said. Similarly, increased household debt may drive up output numbers, whereas that doesn’t amount to a real increase in wealth, he added.
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“This information is important because it affects how you make decisions,” he said. “The approach will get greater and greater acceptance over time.”

Population Health Olympics
WHY do people in these countries live longer than we do in the United States?

OUR GREATEST HEALTH HAZARD is the economic “gap” between the rich and the poor. With greater economic inequality comes worse health — lower life expectancy and higher mortality rates. The U.S. spends the most money on health care, but ties for 30th place in life expectancy.

All of the countries that rank higher in the Health Olympics have a smaller gap in income distribution between their richest and poorest citizens.

Wish We Could Have Covered…
How Did Economists Get It So Wrong?
U.S. households have seen $13 trillion in wealth evaporate. More than six million jobs have been lost, and the unemployment rate appears headed for its highest level since 1940.
.,..
During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.
But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.
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But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.