

Response to Marc Andreessen on Secular Stagnation - mr_golyadkin
http://larrysummers.com/2015/01/12/response-to-marc-andreessen-on-secular-stagnation

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DennisP
From a non-economist point of view, the bit about deflationary technological
advancement doesn't seem hard to understand at all.

Summers claims it makes no sense because price changes are accounted for in
GDP. I'm willing to bet that GDP is _not_ adjusted for Moore's Law, or we
would have had much higher official growth numbers than we've had. Every
iPhone is a more powerful computer than an early-90s supercomputer. Each
iPhone sale does not add as much to GDP as each supercomputer did, even after
adjusting for our modest inflation.

And yet that computational power is improving people's lives in all sorts of
ways.

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nostrademons
There's usually a paragraph in most introductory macroeconomic textbooks, as
they introduce the definitions of nominal GDP and real GDP, to the effect of
"Real GDP is GDP deflated by the price of a basket of goods. It cannot account
for qualitative improvements in the nature of goods, nor can it account for
substitution effects where an old good is completely replaced by a new good of
equal price but higher quality. These effects are difficult to measure and
difficult to quantify." And then because they are difficult to measure and
difficult to quantify, they are ignored in the rest of the textbook.

It's telling that a professional economist like Larry Summers can forget that
paragraph. When you work with models day in and day out for your whole career,
the models quickly _become_ reality, even if the models have known flaws and
blind spots that become very apparent when you apply them to everyone else's
reality.

~~~
smacktoward
I still remember the first day in my college freshman year Econ 101 class. The
professor began by explaining how the foundational idea of the discipline is
that people are rational actors who make decisions by weighing costs and
benefits. I thought of all the actual people I knew, every one of whom had
made major life decisions based on impulse, emotion or stupidity, and thought
"welp, so much for economics then."

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grandalf
I think the decline in real interest rates is explained by the market's
coordination toward systemic risk collusion:

Now that we know that governments bail out inadequately hedged systemic risk,
we might as well all play a new game in which we ignore those risks entirely.
Perhaps in the past we under-hedged, but now we don't have to hedge at all.

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jonawesomegreen
Original tweet storm can be found here:
[http://www.yvoschaap.com/pmarca/](http://www.yvoschaap.com/pmarca/)

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carsongross
"From an economist’s point of view, this paragraph is very hard to understand.
Real GDP and productivity statistics are calculated after adjusting for price
changes – so they are unaffected by inflation or deflation."

Glad to hear that Mr. Summers has had a change of heart on deflation being bad
for real GDP. Progress!

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Plough_Jogger
"From an economist’s point of view, this paragraph is very hard to understand.
Real GDP and productivity statistics are calculated after adjusting for price
changes – so they are unaffected by inflation or deflation."

~~~
grandalf
> they are unaffected by inflation or deflation

In other words someone picks a basket of goods and those price changes are
measured.

Economists have every incentive to get this right. I think they probably do,
but if you see the world progressing in a "singulatarian" way toward
exponential growth in many areas, it's unlikely that the basket of goods
chosen accurately tracks the broader trend.

Also, if such a singulatarian world is happening, economists, by virtue of not
believing that to be the case, would correct for those goods when formulating
the basket used to track price changes.

One final point: There are enough seemingly price-stable goods where the
prices are actually the result of factors other than pure supply and demand
(such as unknown risk premiums, etc.) which if they end up in the basket of
goods could cause systemic bias, since those risk premiums may not be
structurally stable in either direction.

From a policy perspective, we must recall that interest rates are a blunt
instrument and it has been a major goal/concern of the Fed to come up with
other, smaller knobs to turn. One of these is QE policy, others are regulation
and enforcement mechanisms that impact capital flows in a broad way (but less
broadly than interest rates).

