General Interest

Category: General Interest

Master of Supply & Demand… and Lots of Other Stuff

In a twist on the “Life After Lawrence” meme, Professor Merton D. “Marty” Finkler officially retired yesterday, after serving on the economics faculty for more than 30 years.  Professor Finkler is the consummate economist, always interested in talking about economics and ideas whether in class or at the ball game.   He also has a remarkable versatility, from his principal field of health economics to his core (and terrifying?) macro theory course to urban economics to sports economics to environmental economics and on to China.  It certainly is not possible to replace his expertise, at least not with one person.  Fortunately, he will continue to teach and engage with our students as an emeritus professor, beginning this fall with his Investments class.

Here he is pictured in his new hood (!), along with our faculty and one of our more photogenic students.   His Honorary Degree citation is below the break.

Last Hurrah

Continue reading Master of Supply & Demand… and Lots of Other Stuff

Masters of Supply & Demand

Congratulations to our 2016 graduates, many of whom walked the stage yesterday.  We were happy to see so many of you and your families at the Saturday reception.   We trust we will hear back from you at some point (and not just because you are applying for graduate school and need a recommendation(!)).

IMG_2401 (Small)

The Economics Department distributes (?) a number of awards each year, and here are the particulars:

The Iden Charles Champion Award in Commerce and Industry (Paper Prize)

  • Mishal Ayz, Astoria, NY, “A Game Theoretic Analysis of International Justice Disputes.”
  • Perrin Tourangeuau, Denver, CO, “Why Forests Fail: Exploring the Relationship between Institutions and Forest Management Outcomes in Haiti and the Dominican Republic.”

The William A. McConagha Prize for excellence in economics (Seniors)

  • Ruby Dickson, Louisville, CO
  • Zachary Martin, Brookfield, WI
  • Perrin Tourangeuau, Denver, CO

The Philip and Rosemary Wiley Bradley Achievement Scholarship in Economics (Juniors)

  • Dylan Geary, Overland Park, KS
  • Mattias Soderqvist, Stockholm, Sweeden

 

The New Economics of Religion

That’s the title of a June 2016 Journal of Economic Literature piece, available at a website near you.   Typically, this wouldn’t warrant a response from the Lawrence Economics Blog, but typically you don’t see accolades like this directed towards one of our own:

One of the classic papers written on the economics of religion, Azzi and Ehrenberg (1975), summarized the literature on what the empirical correlates of religiosity had discovered about the United States until then.

Wow, classic papers!  If you see Professor Azzi, be sure to ask him about the genesis of that paper.

  • Sriya Iyer. 2016. “The New Economics of Religion.” Journal of Economic Literature, 54(2): 395-441.
  • Corry Azzi and Ronald Ehrenberg. 1975. “Household Allocation of Time and Church Attendance.” Journal of Political Economy 83 (1): 27–56.

10 Ways to Tell If You Are Sitting Next to an Economist

keynes and friedmanYou may have heard that an economist was taken off an airplane for working on equations that employed Greek letters.  It turned out to be an Italian economist working out a differential equation.  The Buttonwood column of the Economist provides some advice for those who might not know if they are sitting next to an economist (or who the two people pictured above are.)

For starters, here’s one clue.

He keeps telling you that “there is no such thing” as a “complimentary refreshment service.”

For the rest, check out the Buttonwood column.

Enjoy!

Five Big Truths About Trade

In a recent opinion piece in the Wall Street Journal, Princeton economist and former vice-chair of the Federal Reserve, Alan Blinder attempts to add constructive insight to the political discussion regarding international trade.  Below you will find the Five Big Truth he cited.  I encourage you to read the details.

  1. Most job losses are not due to international trade.
  2. Trade is more about efficiency – and hence wages – than about the number of jobs.
  3. Bilateral trade imbalances are inevitable and mostly uninteresting.
  4. Running an overall trade deficit does not make us “losers.”
  5. Trade agreements barely affect a nation’s trade balance.

If you can’t access the Wall Street Journal, use the entry on Greg Mankiw’s blog.

2016-17 Draft Schedule

Click here for the Draft 2016-17 schedule.   There will be some changes to this, but that is effectively what we are looking at for next year.

 

Fall Term 2016 ** DRAFT **
Fall Term 2016 ● ECON 100 (5483) ● INTRODUCTORY MICROECONOMICS (Q) ● (L:40 R:0 W:0) ● 09:50-11:00 MWF ● Jonathan Lhost

Fall Term 2016 ● ECON 245 (5484) ● LAW AND ECONOMICS ● (L:25 R:0 W:0) ● 12:30-02:20 TR ● Jonathan Lhost
Fall Term 2016 ● ECON 300 (5485) ● MICROECONOMIC THEORY (Q) ● 08:30-09:40 MTWF ● Adam Galambos
Fall Term 2016 ● ECON 421 (5486) ● INVESTMENTS ● 09:00-10:50 TR ● Merton D. Finkler
Fall Term 2016 ● ECON 481 (5487) ● ADV ECONOMETRICS & MODELING ● (L:15 R:0 W:0) ● APR ● 01:50-03:00 MWF ● Hillary Caruthers
Winter Term 2017 ** DRAFT **
Winter Term 2017 ● ECON 100 (1482) ● INTRODUCTORY MICROECONOMICS (Q) ● (L:40 R:0 W:0) ● 01:50-03:00 MWF ● Hillary Caruthers
Winter Term 2017 ● ECON 205 (1483) ● INTRO TO INTERNATNL ECONOMICS (G) ● (L:25 R:0 W:0) ● 09:50-11:00 MWF ● Hillary Caruthers
Winter Term 2017 ● ECON 215 (1484) ● COMPARATIVE ECONOMIC SYSTEMS (G) ● 11:10-12:20 MWF ● Adam Galambos
Winter Term 2017 ● ECON 255 (1480) ● START-UP THEATRE ● APR ● 01:50-03:00 MWF ● Staff
Winter Term 2017 ● ECON 380 (1489) ● ECONOMETRICS (Q) ● 09:50-11:00 MTWR ● Jonathan Lhost
Winter Term 2017 ● ECON 380 (1505) ● ECONOMETRICS (Q) ● 03:10-04:20 MTWR ● Jonathan Lhost
Winter Term 2017 ● ECON 450 (1485) ● ECONOMICS OF THE FIRM (Q) ● Arranged● David Gerard
Winter Term 2017 ● ECON 495 (1486) ● TOP: NEW INSTITUTNL ECONOMICS ● Arranged ● David Gerard
Winter Term 2017 ● ECON 601 (1487) ● SENIOR EXPERIENCE: READING OPT ● 12:30-02:20 T ● Adam Galambos
Winter Term 2017 ● ECON 602 (1488) ● SENIOR EXPERIENCE: PAPER ● APR ● Arranged ● Jonathan Lhost
Spring Term 2017 ** DRAFT **
Spring Term 2017 ● ECON 100 (3520) ● INTRODUCTORY MICROECONOMICS (Q) ● (L:40 R:0 W:0) ● 08:30-09:40 MTWR ● David Gerard
Spring Term 2017 ● ECON 225 (3521) ● DECISION THEORY ● 11:10-12:20 MWF ● Adam Galambos
Spring Term 2017 ● ECON 280 (3522) ● ENVIRONMENTAL ECONOMICS ● (L:25 R:0 W:0) ● 12:30-02:20 TR ● David Gerard
Spring Term 2017 ● ECON 320 (3525) ● MACROECONOMIC THEORY (Q) ● 09:50-11:00 MTWR ● Hillary Caruthers
Spring Term 2017 ● ECON 320 (3542) ● MACROECONOMIC THEORY (Q) ● 03:10-04:20 MTWR ● Hillary Caruthers
Spring Term 2017 ● ECON 400 (3523) ● INDUSTRIAL ORGANIZATION (Q) ● (L:15 R:0 W:0) ● 11:10-12:20 MWF ● Jonathan Lhost
Spring Term 2017 ● ECON 405 (3524) ● INNOVATION & ENTREPRENEURSHIP ● 08:30-09:40 MWF ● Adam Galambos
Spring Term 2017 ● ECON 415 ● INDIVIDUALITY & COMMUNITY ● (L:18 R:0 W:0) ● 12:30-02:20 TR ● Steven Wulf

Click here for course descriptions.

The Evangelical (and Wisconsonian) Roots of American Economics

Bradley W. Bateman, President of Randolph College, Keynesian scholar, and frequent visitor to Lawrence, has a piece up at The Atlantic Monthly today on the surprising religious past of American economics.

A big part of the story is the leadership of Richard T. Ely, an extremely controversial figure who spent more than thirty years of his career at the University of Wisconsin directing the School of Economics, Political Science, and History.

Of course, the religious roots were not long-lived, as President Bateman notes:

It is, of course, hard to recognize this earlier type of economist in today’s profession. Like the university, the discipline of economics was secularized after 1920. Around this time, the discipline of philosophy came to be dominated by logical positivism—essentially, the idea that the scientific method is the only way to arrive at true, factual knowledge—and this school of thought greatly influenced American economists as the landscape of their own discipline was changing. They developed the idea that their new analytical focus was value-free—a premise still taught in most introductory economic textbooks.

But, of course, is not, which is important to recognize.

Bateman doesn’t really comment on whether the Wisconsonian influence has been diminished.  You can find The Atlantic piece here.

For more thorough treatment, check out (then) Professor Bateman in the Journal of Economic Perspectives.

An easy subject at which very few excel!

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel!  — John Maynard Keynes

I came across this gem at Brad Delong’s website, where he is having a dialog with Paul Krugman about the use of graphs in Econ 101, and specifically whether Production Possibilities and Edgeworth Boxes should be introduced at the introductory level.

This is certainly a conversation we are having on our floor.  I think we generally introduce PPFs, but not the Edgeworth Boxes in our introductory courses, and our Econ 300 students get the Ysidro Edgeworth treatment.  I guess I’m all ears if you have thoughts on the topic.

As for the more obnoxious point that economics is a seemingly lightweight subject that few are good at, huh.  Keynes continues:

The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher-in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future.

That’s from his obituary for Alfred Marshall, author of the incredible Principles of Economics, the profession’s first textbook, and namesake of Marshallian Demand!  Truly a pioneer and an intellectual giant, regardless of what Keynes says here.

It’s nice to see someone say something nice about economists, even it if is an economist, and even if it was 90 years ago.

 

 

 

A Slippery (North?) Slope

In the past, I’ve often harangued my environmental economics students with the question of why, if we are running out of natural resources, the futures markets don’t project substantial increases in oil prices.  After all, a constrained supply should lead to higher prices on the one hand, and the industrialization of China, India, and other countries suggests that world demand will continue to increase (or, at least, it won’t decline substantially).   Add together lower supply and higher demand and we should be seeing higher prices.

The scholars at www.Env-Econ.net have a nice overview of the canonical Hotelling Rule that provides some logic for increasing oil prices, along with a potential price trajectory based on marginal production costs.

Yet, anyone looking out in the world today certainly has noticed that oil prices have dropped precipitously.  This screen grab from Bloomberg shows that in late 2014 oil prices moved from the $80-100 range to the $40-$60 range for the better part of 2015.  Prices have continued to slide, and were just north of $30 as of a few minutes ago.

Bloomberg Markets

So what are we to make of all of this? Continue reading A Slippery (North?) Slope

Is American Economic Growth in a Gordonian Knot?

One of the reasons, I suppose, that there has never been a more interesting time to be an economist is that we can all see remarkable technological advances unfolding in front of us, but no one quite agrees what to make of them.  A few years ago, Tyler Cowen published a little e-book, The Great Stagnation, that was widely talked about and reviewed in about a million places.  The man-bites-dog angle there was these technological changes have not translated into more robust growth (building on the Solow Paradox, I suppose, that we “can see the computer age everywhere but in the productivity statistics.”)

Since then, we have seen MIT’s techno-optimist Eric Brynjolfsson weigh in with The Race Against the Machine and Northwestern’s Robert Gordon counter with his “headwinds” argument.  Specifically, Gordon argues that our most productive days are behind us, and that innovation will be insufficient to enable us to sustain the 2% per capita real growth of the 20th century.  If you are so inclined, you can watch Brynjolfsson and Gordon square off in this TED debate.

Gordon has now substantially bolstered his argument with a new book, The Rise and Fall of American Growth.  The massive 762-page tome will certainly be the hottest economics book since Thomas Piketty published Capital in 2014 (and probably read cover-to-cover by approximately the same percentage of readers). But if you don’t have time to wade through the text, there are plenty of people discussing it, including Gordon himself in this PBS News Hour video.

A number of big hitters have offered their thoughts, including Paul Krugman in the New York Times, LU Econ Blog favorite, Ed Glaeser in the Wall Street Journal, and the aforementioned Tyler Cowen for Foreign Affairs.  I expect to see many, many more in the coming weeks.

Certainly, there are plenty of resources to get you thinking about the topic even if you don’t have the book itself.  I currently have procured the Mudd’s copy, and will report back my thoughts when I get to it in 2018.

 

 

“There has never been a more interesting time to be an economist, I think”

Quora is a website dedicated to “sharing and growing the world’s knowledge.”  Ask a question, and the good folks at Quora will find someone with first-hand knowledge to answer it.

Today’s contribution to sharing and growing is “Why do technology companies hire economists?”

My response, of course, is Who wouldn’t want to hire an economist?. This response was unsatisfying enough that Quora asked Susan Athey, Professor in the Economics of Technology at Stanford’s Graduate School of Business, to address the question. Here is my condensed version of her response.

This is a great time for economists in tech companies—the most interesting firms in Silicon Valley are hiring chief economists as well as economic teams at a very rapid clip….

Each tech company, and each chief economist, is different, but there are several main categories.  First are microeconomic issues involved in pricing and product design…  Second is corporate strategy…  Third is public policy… Fourth, and closely related, are direct legal and regulatory challenges — antitrust/competition policy issues and regulatory investigations.

More junior economists have a wide variety of roles in tech firms.  They can take traditional data science roles, be product managers, work in corporate strategy, or on policy teams.  They would typically do a lot of empirical work.

My emphasis (see also, here).

I was particularly interested in this nugget about why economists might be particularly valuable in a room full of data:

I have found that economists bring some unique skills to the table.  First of all, machine learning or traditional data scientists often don’t have a lot of expertise in using observational data or designing experiments to answer business questions.  Did an advertising campaign work?  What would have happened if we hadn’t released the low end version of a product?  Should we change the auction design?  Machine learning is better at prediction, but less at analyzing “counter-factuals,” or what-if questions.  (I’m currently doing a lot of research on modifying machine learning methods to make them more suitable for causal inference).

Click through for her complete answer to the original question, along with her insights on Bitcoin, the impacts of machine learning on economic science, the potential benefits of collusion, and some elaboration on her contention that “there has never been a more interesting time to be an economist.”

 

Turn and face the strange

Are economists ideological zealots who come up with models and quantitative devices to corroborate their preconceived notions?  That may be the case for some, but Adam Ozimek at Moody’s Analytics catalogs a number of cases where prominent economists have changed their opinions based on empirical work in the field.

Narayana Kocherlakota spent three years at the head of the Minneapolis Fed criticizing monetary policy as risking out-of-control inflation and unlikely to help the economy. Then in 2012, he made an about face, telling the New York Times that “a wave of research gradually convinced him that he was wrong.” As a result he became one of the most strident proponents of more monetary stimulus.

Ozimek cites economists who have changed their minds on other matters, including that free trade can lead to job losses in some areas that are both substantial and persistent, that recessions can have permanent negative effects on output, and that standardized tests may well be a good measure of teacher performance.

Definitely worth thinking about his parting shot: “Has a single economics study changed your mind on an important issue?”

 

UPDATE:!!!  Tyler Cowen weighs in with a long list.   And Paul Krugman, too!

I’m Sinking in the Quicksand of my Thoughts

The winter 2016 issue of Resources Magazine is out, featuring some germane pieces for my courses on the “real” costs and benefits of federal regulations, and the Impacts of Biofuel Mandates on Food Prices and the Emissions.

The first piece is an interview with Richard Morgenstern on his news study where he retrospectively evaluates the costs and benefits of regulations.  Clearly, Morgenstern has been interested in this area for some time, having published “On the Accuracy of Regulatory Cost Estimates” in the Journal of Policy Analysis  and Management back in 2000, a stalwart in the ECON 444 course.   One of the main takeaways is that this exercise is something that is not regularly done and is surprisingly hard to complete.  The forthcoming study Morgenstern talks about evaluates nine policies.

The second piece, as the title suggests, tries to isolate the impact of biofuel mandates on food prices.  The US Environmental Protection Agency has a Renewable Fuel Standard (RFS) that requires a certain portion of vehicle fuel to contain “renewable” sources.   In practice, this generally means corn ethanol, and as a result the demand for corn is much higher than it would otherwise be (more than 40 percent of US corn is used to produce ethanol).

This is chock full of partial-equilibrium analysis.  The increase in the demand for corn should lead to a movement along the supply curve, and a simultaneous decrease in the supply of other substitutes in production.   Meanwhile, as world income has gone up and many in developing countries are eating diets more dependent on animal protein.   This further increases the demand for cereals for animal feed (for reasons I will let you infer).

Ujjayant Chakravorty has developed a global land use model that isolates the effect of the RFS on food prices and emissions.  Here are the key findings:

[I]f there were no biofuel mandates, food prices would increase—by about 15 percent in 2022 compared to the base year 2007.  When we superimpose the US and EU biofuel mandates, world food prices go up by 32 percent.

Our results highlight the impact of increased meat and dairy consumption on the projected growth of food prices. Put another way, if diets were kept constant, food prices would actually fall over time without energy regulation. Then, with the biofuel mandates, they would rise by only 7 percent in year 2022.

Ironically, the RFS doesn’t do much for global carbon emissions.  Follow this logic:

An important conclusion from our analysis is that under no scenario do we get a major reduction in global carbon emissions. Under the RFS, US emissions fall by about 1 percent; however, that leads to a lowering of global crude oil prices and an increase in oil consumption overseas. Moreover, because of all the new land being farmed, the RFS also causes an increase in carbon emissions. Aggregate global carbon emissions (from both direct burning of fuels and land use changes) increase from 13.4 billion tons of carbon dioxide equivalent to 17.8 billion tons in 2022.

Emphasis mine in both cases.

As a colleague of mine used to say, if you want to grow fuel, grow fuel.  Don’t grow corn and turn it into fuel.

If the topic interests you, check out the symposium on agriculture in the Winter 2014 Journal of Economic Perspectives.

Economics is What Economists Do

The post title is, of course, from the late, great Jacob Viner, who tells us that it isn’t totally easy to characterize exactly what it is that we economists do.  The alive, possibly great Daniel Hamermesh from the University of Texas has been making some headway on cataloging exactly what that is.  And, increasingly, it appears that the top journals are featuring more empirical work and less theory.

Justin Fox at Bloomberg tells us all about it.*

Or just look at the picture:

Is this part of the big data revolution we’ve been hearing so much about?

Potentially more interesting is that experimental makes up almost 10% of the total.

 

* Actually, Hamermesh published the paper several years ago, but I guess the news cycle is slow getting around to reading the Journal of Economic Literature.

We did a Similar Post Last Year

The 2015 edition of the eponymous Which Famous Economist are you Similar to? interactive tool is now available, and once again — though once again I probably shouldn’t be telling you this — yours truly has been paired with Daren Acemolgu.  (Acemoglu, as you possibly know, is the MIT superstar economist who is the subject of the Daren Acemoglu Facts tumblr page, chock full of economist “humor”).

As far as the Which Famous Economist site goes, the data are from the University of Chicago’s IGM Economic Experts Panel, which periodically surveys many economists on issues of the day.  The matching is done via principal components, which is somewhat ironic, given principal-component modeling isn’t really part of the economist’s standard canon of quantitative tools.

If you decide to take the poll, I recommend that you leave the questions you haven’t thought about (or don’t know anything about) blank.  The authors say that “accuracy” requires at least 20 responses out of the 30 questions.

Which famous economist are you most similar to

I’m the red dot, and the arrow points to Professor Acemoglu.  Robert Hall and José Scheinkman are the dots closest to mine, and you can read the explanation for why I was not paired with one of them in the figure’s legend.

The site also allows you to highlight where your views differ from the consensus view (I have a higher opinion of my peers’ knowledge of book prices, for example.)  It also contains a correlation matrix for each economist in the survey pool — all are positively correlated!

See you next year.

 

 

************ Advice for Potential Majors & AIM Placement

Here is our message to those of you thinking about pursuing an economics major (or minor).  For more on the collegiate economics major more generally, here is some information from the American Economics Association.

Advice to Potential Majors:  Students interested in a major in Economics should begin with introductory classes in economics and mathematics.  The first economics class is ECON 100.

Students who have satisfied the ECON 100 requirement should consider taking 200-level classes based on their own interests (e.g., 200 Development Economics, 205 International Economics, 225 Decision Theory, 245 Law & Economics, 280 Environmental Economics, 290 Economics of Medical Care).

There are three intermediate theory courses that are offered sequentially each year – ECON 300 Microeconomics in the fall, ECON 380 Econometrics in the winter, ECON 320 in the spring.  These courses are most effective when taken sequentially in either the sophomore or junior year.  Freshman should not enroll in these courses.

Sophomore year is a good time to take ECON 225 Decision Theory.   This is not a required course, but we strongly recommend it for all majors and minors.

Mathematics Requirements and Advice:  The introductory mathematics courses are essential because they are foundational to intermediate theory courses.  Calculus (MATH 120 and 130 or MATH 140) is a prerequisite for ECON 300 and ECON 320.  Statistics (MATH 107 or the equivalent) is a prerequisite for ECON 380.

For the purposes of the Economics Department, we believe students should consider MATH 120 and 130 if they are interested in applied problem solving and developing some Excel skills.   Students who plan to take math beyond the calculus sequence should take MATH 140.   The decision on which calculus to take is probably worth a discussion both with the math and the econ department faculty.

A typical sequence for a student who comes in as an economics major.

Freshman: Introductory Economics (ECON 100), 200-level courses based on student interest, Calculus (MATH 120 and 130 or MATH 140).

Sophomore:  Intermediate sequence (ECON 300, 380, 320), 200-level courses based on student interest, Statistics (MATH 107).  ECON 300 and MATH 107 are offered in the fall.

Junior-Senior: Advanced electives.

This sequence can be pushed back a year for those who decide during their sophomore year to pursue an economics degree.

MINOR: The minor requirements are indeed minor.  No significant planning is necessary during the Freshman year to complete this degree, though our recommendations in terms of taking introductory economics and mathematics courses remain the same for majors and minors alike.

 

AIM Placement: If you scored a 4 or 5 on the AP micro test, you can obtain credit through the Registrar’s office for ECON 100.  This satisfies that requirement for the department, though we strongly suggest you take at least one 200-level course before beginning the 300 sequence.  Talk to a faculty member in economics for appropriate recommendations.

If you earned a 4 or a 5 on the AP macro test, you can obtain 6 units of Lawrence credit, and you should take Economics 100.

GDP: Useful Construct or Weapon of Mass Misdirection

Estimates of GDP growth vary widely (often well over 1 percentage point) from the initial one (typically at the end of the first month after the quarter) to a final one (up to a year later).  This post addresses such variation and the debate about whether it arises from measurement error or definitions based on contemporary politics.  No matter which view you might hold, it’s pretty clear that macroeconomic policy should not be based on early estimates of quarterly GDP growth.

Last month, the Bureau of Economics Analysis (BEA) reported that 2nd Quarter 2015 GDP had increased by 3.7% (in annualized terms.)  Its first estimate (in July) was 2.3%.  For the first quarter of 2015, we now have three estimates: earliest +0.2%, 2nd -0.7%,  and most recent (August) +0.6%. In short, we can’t easily tell whether the economy grew or not.

Some of you may recall that GDP can be calculated in three ways:  1) the sum of what it would cost to purchase all goods produced in the US for final sale, 2) the income paid to all factors of production in the U.S. plus depreciation and indirect business taxes, and 3) the sum of all values added.

Typically no one calculates the third but recently, the BEA has begun to provide the income-based measure.  For the first quarter of 2015, the second estimate was 0.4% after an initial estimate of 0.1%.  For the second quarter of 2015, the only estimate of growth of gross domestic income was 0.6% (well short of the 3.7% GDP growth estimate cited above.)

GDP ResidualThe difference between income based and expenditure based methods, as reflected by the residual (in red) in the above chart, is far from trivial. The blue line reflects gaps in converting nominal GDP to real GDP.  These were substantial in the past, but appear not to be a problem today. See the St. Louis Federal Reserve’s discussion of this residual for details.

In a recent article entitled “Weapons of Economic Misdirection,” John Mauldin traces the history of GDP accounting and asks whether the changes reflect improved knowledge of the economy – such as updates to inventory, export, and import data – or political manipulation.  Keynes and Hayek disagreed about what to measure and how it should be used, and Simon Kuznets, who created the national income accounts and received one of the first Nobel prizes in economics for his work, disagreed with the Commerce Department regarding the same two concerns.

Mauldin refers to and quotes from Diane Coyle’s new book GDP: A Brief But Affectionate History to illuminate the controversy.  I encourage you to read Mauldin’s posting.

I’ll give Chinese Premier Li Keqiang the last word (especially with reference to the accuracy of Chinese GDP estimates – which seem to matter to many investors in the U.S.) “Chinese economic statistics are ‘man made’ and, apart from the numbers for electricity use, bank lending and rail freight, are for reference only.”  Gives you great confidence, doesn’t it?