Menzie has the
data.
He reviews the recent GDP revisions and discovers that all the domestic economy was revised downward but not exports, they have been accurately estimated all through the downturn.
What was the tautological
definition of a recession? We are in recession when the banking network is incoherent from the real goods network. NGDP and RGDP match for exports, not for the domestic economy.
Domestic consumption, driven by federal spending, is incoherent and unreadable. Exports work just fine.
The correct conclusion would seem to be that federal multipliers are much lower than we think, the opposite conclusion that Menzie reaches. The whole point of Keynes was that we should be pleasantly surprised by upward revisions of the domestic economy.
Now check out the progressive take on this from Yglesias,
That title should read:
Exports doing fine, Federal spending still Incoherent and Useless. Over the past few years we watched the kid get successively mis-educated by a series of bonehead, ignorant Keynesian economists.
A quick glance at deLongs blog and we we find
Gavyn Davies , with more Keynesian nonsense:
So what does it seem we will get? Precisely the opposite. The most likely deal will see around $1 trillion of government spending reductions starting next year, along with an automatic trigger mechanism to ensure that the scale of tightening is increased in a second round of cuts before very long. Furthermore, these cuts may be legislated in advance to take effect whatever the state of the economy is at the time. This means that if the economy slides back into recession, any emergency fiscal action has been ruled out in advance.
No, the GDP revisions tell us that our ability to measure government multipliers is badly broken, or another interpretation is that we cannot locate valuable things for the federal government to invest in or we are crowded out or federal goods are not exportable.
Where to we see the effect of debt based federal spending? In price dispersion, specifically price dispersion between essential imports and domestic prices, the centralized banking system is unable to discover the effects that Menzie discovers. Also notice that the more that federal spending grows relative to other sectors, the greater the divergence in the GDP revisions.
What does Shannon Theory have to say about all of this?
When Congress pushes another bunch of spending into the economy, we get unattended aggregates of goods queuing up. As time passes these aggregates get sold at discount and groups of domestic producers drop out of the economy. Once the inventory corrections are made, the BEA can then report the real results, as if things had gone smoothly. And the real results are downward revisions. If Keynes were correct, the sudden push of federal goods would cause scarcity and price rise.
Shanon Theory would also tell us the local governments are correct, they would see congestion before central data collectors, and begin shutting down programs.
The key insight with Shannon Theory is constant uncertainty. We can operate in the corridor of production until the uncertain limits of inventory risk is reached, then we reconfigure the total of distribution, we make the spanning tree minimal again. But the aggregate signal for reconfiguration occurs when the inventory risk has been distributed, and each step in production notices it equally. The constant of uncertainty seems to be 15%, we must guarantee a 15% inventory reserve. This number came from study of cities by an idle out of work physicist.
We define reconfiguration as a network rank change, up in an expansion down in a contraction.
Tyler Cowen has another
take on the revision, a good one.
Just to review briefly, I find the most plausible structural interpretations of the recent downturn to be based in the “we thought we were wealthier than we were” mechanism, leading to excess enthusiasm, excess leverage, and an eventual series of painful contractions, both AS and AD-driven, to correct the previous mistakes. I view this hypothesis as the intersection of Fischer Black, Hyman Minsky, and Michael Mandel.
The correction of course is: Fischer Black, Hyman Minsky, and Michael Mandel;
and then Shannon who came around in 1940. I also refer back to what I call the Canadian interpretation that came about in on of Nick Roses
posts. He talks about Uncle Milts discussion of uncertainty of measurement and hits upon the idea of constant uncertainty. That realization is the same as the Copenhagen Interpretation for quantum mechanics. It is the key understanding that takes us out of the smooth world of Keynes into the finite channel theory of Shannon, and is the best model of economies of scale we have.
