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02/15/2013

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Alexander Ač

Well,

I really started to laugh when Brad DeLong was staring at the VERY GLOOMY CBO graph ... :-)

What about that gloomy correlation between GDP and biosphere destruction?

Alex

Jim

Headline: "CBO Economists Say Future is Magically Delicious!"

Where's me lucky charms?

JohnWDB

Here's the most simple explanation I can come up with offhand:

Real GDP is actually aggregate consumption; this is a measurable value. Potential GDP is the aggregate production potential; this is a theoretical calculation.

When there is a gap between "potential" and "real" GDP, there is an imbalance between what can be produced, theoretically, and what is actually consumed.

If the real GDP is *below* potential GDP, this means that there isn't enough consumption capacity to balance production capacity.

Imagine an economy with producers and consumers. Let's say the consumers are broke, and they can only exchange their labor for the producers' products. If they are under-compensated for their labor, they may be able to consume far less than what can theoretically be produced.

As a second step, imagine that those broke individuals have access to credit. They may now borrow enough to consume what the wealthy individual produces, and real GDP may meet or surpass potential GDP (if it surpasses it, there is inflation).

As a third step, imagine that for whatever reason, a large fraction of those individuals default on that credit. There will now be a large correction, as those individuals will no longer be able to continue borrowing. Real GDP will drop to a lower plane.

Now if a few of the producers also fail, the potential GDP will fall as well! But, if some external agency borrows to keep those producers from failing, only the consumers will fail while the producers persist. Potential GDP will continue on its upward path, unabated, while real GDP will struggle along well below it.

And this, to me, seems to be exactly what has occurred.

Oliver

After careful study of these graphs, and several calls for clarification to an esteemed professor of Real Potential Economics at the University of Klaud-Koukou, I have discerned the amazingly simple answer to the puzzle:

The three letters of CBO need to be replaced by WTF.

John D

This could spawn a whole new cottage industry for measuring potential vs. actual. Fans at home could track the actual score of a football game vs. the potential score of their favorite team if they didn't fumble so many times. We could track actual test scores of college students vs. the potential if they hadn't stayed out partying the night before the test....

In the end this is just another way for TPTB to try to keep up from looking behind the curtain and seeing how bad things are.

Aboc Zed

For those who like math I suggest a look at work by Edward Lambert

https://docs.google.com/folder/d/0BzqyF_-6xLVEelhXNXFHdmhYMjQ/edit?pli=1

I picked it from the comments of Brad Delong's blog

There is a good discussion of how economic growth machine has ran against the labor share of income constraint and how economy now is on the downward spiral with the real potential GDP shifting down. All of that in line with what we can observe directly: unemployment continues to rise and businesses trying to squeeze profits out of labor share which then kills demand for their products and the vicious cycle continues.

Capitalism reached its limits and if economist were really looking into numbers thew would have seen it by now.

No point to repeat what Dave says better than I do.

I just thought that math was a good ecercsize and whated to share it with those that may like to waste their time following Lambert's narrative and graphs fitting the data that goes back to 60ties.

adam

Looks like "potential GDP" is another cover for "eternal growth". If we assume GDP will always go up, forever into the future, we're going to have serious problems. There is also the little issue of how much of current GDP is driven by borrowing.

JohnWDB

The hilarious thing is that "real GDP" is expected to catch up with "potential GDP" projections by about 2020. Krugman likes this view. He believes a "certain amount of deleveraging" must occur, and then the economy will start roaring again. Unfortunately, the uptrend now is fueled entirely by government borrowing. Population growth can contribute to an increase in GDP, but fighting against this is decreasing EROEI. Shall we face the music? Nah, let's pretend that all is well and we just got sidetracked by a few predatory lenders.


Mike Roberts

Since it is an estimate (potential GDP), compared to a highly manipulated figure (so called real GDP), then the graphs are largely worthless, except for a good laugh and to pull apart.

Alexander Ač

According to real scientists, humans are changing the climate but we can solve the problem today. We have the technology, we only lack the will.

John Abraham is a professor of engineering at the University of St. Thomas.

- http://m.startribune.com/?id=191473431

As much as I like John Abraham and his work, I do not agree with the statement in bold.

Alex

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