Wednesday, April 26, 2017

Nonsensical Numbers

Dean Baker is still engaged in the economist’s favorite pastime of making stuff up as they go along. On Monday he refuted a claim that labor is declining as a percentage of GDP by showing that it is not declining as a percentage of NDP.

First he refers us to a column in Bloomberg News which is concerned about labor’s share of GDP, which Baker describes as “declining from a range of 64 to 65 percent in the 1960s and early 1970s to just over 60 percent in the most recent data.” Actually, the piece provides a chart which shows the rate falling from a high of 66% in 1970 to a low of 59% in 2010, but Dean Baker doesn’t sweat the small stuff.

Then he says that he can show that there has been no drop of labor as a share of GDP by introducing labor as a share of Net Domestic Product, which is GDP “after removing depreciation.”

First of all, this is non sequitur at its worst; similar to proving that trees are not dying on Main Street by showing that I mowed my lawn on Cherry Avenue. He does not claim that anything the Bloomberg author wrote is in error, he doesn’t refute any of the statistics or issues cited in the original column, he merely introduces a new and different measurement which shows labor not declining and pats himself on the back.

And that’s assuming that “GDP after removing depreciation” is a number that has any actual meaning. GDP measures cash flow; how much money is moving in our economy. Yes, investment is one component in that calculation, but that component is the amount of money that has been spent in the current year on investment.

Depreciation exists on a financial statement which evaluates assets and liabilities, known as a “balance sheet,” while GDP is an evaluation of cash flow, known as an “income statement.“ There is no meaningful way to put depreciation on an income statement.

And how was the amount of depreciation determined, do you suppose? How does Dean Baker know the asset value of the US economy, and the lifetime over which it should be depreciated? I suspect the depreciation was determined by applying whatever number was needed to provide an income level that was not falling.

1 comment:

bruce said...

WTF how do you 'depreciate' the GDP? or even try? It makes no sense. Now, if you wanted to talk about the depreciation of a decent society, we could talk on that...

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