Does GDP growth cause recession?

[brainstorm]

This topic emerged in another thread but I find it interesting enough to warrant a new thread of its own.

The premise is that GDP growth provides more money for investment, consumption, and other spending. To the extent that this extra money allows fiscal discipline to relax, it can have the effect of increasing irrationality in expenditures, which in turn allows less rational enterprises to develop which generate profit by essentially wasting resources. Since less efficiency results in more spending per unit utility, this further increases GDP-growth.

The irony of this is that the growing inefficiency and waste may end up actually generating resource scarcities that, while driving up prices and profits, reduce availability of goods and services rendering the people who can't afford them (relatively) poorer than they would be if they could. If, on the other hand, GDP-growth remained constrained and fiscal-disciplined maintained, a greater overall level of efficiency in the economy may raise the amount of utility-per-unit-expenditure for industry and consumers, in effect raising overall economic satisfaction.

So while GDP is generally associated with increasing revenues, income, jobs, etc., does it ultimately promote a lower standard of living and a wider gap between a middle-class trying to keep up with inflation and a working-class or poverty-class that increasingly loses access to goods and services that are becoming scarcer due to widespread efficiency-losses?

 

[dacruick]

I think there is definitely a truth to what you are saying. But its a bold statement to say that GDP growth 'causes' recessions. you might want to replace that with 'can contribute to'

 

[eachus]

Economists have known for over a hundred years that (GDP) growth beyond what is sustainable leads to a boom and bust economy.

Does holding growth to sustainable rates lead to more growth over a long period of time? No. It just eliminates some of the pain associated with the inevitable corrections.

Unsustainable growth is called a "bubble." The problem is that most pundits who comment on the economy have trouble recognizing bubbles as they are occurring. Just another reason why economics is called the dismal science.

 

[brainstorm]

Economists have known for over a hundred years that (GDP) growth beyond what is sustainable leads to a boom and bust economy.

Does holding growth to sustainable rates lead to more growth over a long period of time? No. It just eliminates some of the pain associated with the inevitable corrections.

Unsustainable growth is called a "bubble." The problem is that most pundits who comment on the economy have trouble recognizing bubbles as they are occurring. Just another reason why economics is called the dismal science.

Do you think this might have to do with a cult of hyper-profits where people fall under the spell of milking a boom for all they can prior to the meltdown and then living on the money until recovery occurs and the next bubble starts inflating? It's not that people have trouble recognizing bubbles, it's that they are afraid to lose popularity among the boom-surfers by calling BS and calming speculation-driven value-appreciation.

What would happen if investors/producers focussed on the products they produced instead of the money to be made? If the economy abounded with high-quality products made to reduce the need for investment and spending, would people be able to live well without large GDP growth and fluctuations?

 

[WhoWee]

Do you think this might have to do with a cult of hyper-profits where people fall under the spell of milking a boom for all they can prior to the meltdown and then living on the money until recovery occurs and the next bubble starts inflating? It's not that people have trouble recognizing bubbles, it's that they are afraid to lose popularity among the boom-surfers by calling BS and calming speculation-driven value-appreciation.

Is this all opinion - or do you have a specific example?

 

[brainstorm]

Is this all opinion - or do you have a specific example?

If you pay attention, you can observe this behavior in everyone to some extent. Try going to an antique-dealer convention and telling people how antiques have no intrinsic value so most of the dealers are likely to suffer major losses in a recessionary economy. Then go to another convention and talk either good news or at least realism spiced with hope and optimism. People like good news better than bad news. If their business is collecting money by whatever means, good news involves hearing that cash flows are going up. When people are in the business of producing things other than income, good news is when prices go down because that means their input-costs will be less and they'll be able to do more with less. Doesn't this come down to "bears vs. bulls?"

 

[WhoWee]

If you pay attention, you can observe this behavior in everyone to some extent. Try going to an antique-dealer convention and telling people how antiques have no intrinsic value so most of the dealers are likely to suffer major losses in a recessionary economy. Then go to another convention and talk either good news or at least realism spiced with hope and optimism. People like good news better than bad news. If their business is collecting money by whatever means, good news involves hearing that cash flows are going up. When people are in the business of producing things other than income, good news is when prices go down because that means their input-costs will be less and they'll be able to do more with less. Doesn't this come down to "bears vs. bulls?"

I'm not sure how speculative investment in antiques would impact GDP growth and ultimately cause recession?

 

[brainstorm]

I'm not sure how speculative investment in antiques would impact GDP growth and ultimately cause recession?

It seems like you're playing coy to obfuscate the discussion, and I don't get why. The antique market analogy was just to illustrate why people tend to preach good news or realism if they want to be popular. You asked for "proof of accusations" as if I was suggesting something beyond what happens normally everyday. People avoid bursting other people's bubbles, especially when it could affect their income to do so.

A culture has developed where people look at economics purely as a means of attaining money and therefore they don't mind ignoring everything else about the economy that isn't directly related to them getting more money. That's why I said that people enjoy having an economy of boom-bust cycles, because that allows them to try to get money by investing on during the boom and even make money short-selling the bust if they can predict it. These people wouldn't want an economy of steady or flat growth, because they wouldn't be able to make money on speculation through the ebbs and flows of the cycles.

 

[WhoWee]

It seems like you're playing coy to obfuscate the discussion, and I don't get why. The antique market analogy was just to illustrate why people tend to preach good news or realism if they want to be popular. You asked for "proof of accusations" as if I was suggesting something beyond what happens normally everyday. People avoid bursting other people's bubbles, especially when it could affect their income to do so.

A culture has developed where people look at economics purely as a means of attaining money and therefore they don't mind ignoring everything else about the economy that isn't directly related to them getting more money. That's why I said that people enjoy having an economy of boom-bust cycles, because that allows them to try to get money by investing on during the boom and even make money short-selling the bust if they can predict it. These people wouldn't want an economy of steady or flat growth, because they wouldn't be able to make money on speculation through the ebbs and flows of the cycles.

There isn't a single link posted in this thread to substantiate anything you've said. When I asked if this was all opinion - you answered with the antique analogy. I'm not "playing coy to obfuscate the discussion" - I'm trying to figure out where this thread is going.

 

[brainstorm]

There isn't a single link posted in this thread to substantiate anything you've said. When I asked if this was all opinion - you answered with the antique analogy. I'm not "playing coy to obfuscate the discussion" - I'm trying to figure out where this thread is going.

You asked if I could prove that people pander to the will to profit. I said it was everyday behavior. You're asking where the thread is going. I can only refer to the OP and suggest considering whether growth itself can lead to recession for the reasons I've given. The reverse question is whether fiscal discipline can prevent recession by encouraging people and firms to utilize resources with greater efficiency.

 

[WhoWee]

You asked if I could prove that people pander to the will to profit. I said it was everyday behavior.

Actually, I asked "Is this all opinion - or do you have a specific example?" and then, "I'm not sure how speculative investment in antiques would impact GDP growth and ultimately cause recession? "

Perhaps you're referring to someone else's post?

 

[brainstorm]

Actually, I asked "Is this all opinion - or do you have a specific example?" and then, "I'm not sure how speculative investment in antiques would impact GDP growth and ultimately cause recession? "

Perhaps you're referring to someone else's post?

The antique example was illustrative but indeed specific. The question of how antique investments would impact GDP growth and/or cause recession was irrelevant because it was merely an illustration to help you see how people pander to the will to profit in various market situations.

 

[WhoWee]

The antique example was illustrative but indeed specific. The question of how antique investments would impact GDP growth and/or cause recession was irrelevant because it was merely an illustration to help you see how people pander to the will to profit in various market situations.

As per the OP, "The premise is that GDP growth provides more money for investment, consumption, and other spending. To the extent that this extra money allows fiscal discipline to relax, it can have the effect of increasing irrationality in expenditures, which in turn allows less rational enterprises to develop which generate profit by essentially wasting resources. Since less efficiency results in more spending per unit utility, this further increases GDP-growth."

This may be true for the person who suddenly has the greatest success of their lifetime that chooses to purchase something they've wanted for a long time - such as an antique. However, most business plans would call for reinvestment and growth. If the business plan calls for the payout of all cash to it's investors - those investors will have the opportunity to save, invest, or consume. For the business that celebrates success with the construction of monuments to the founder - perhaps they consider taxes a waste of resources.

There will always be a secondary market for the re-sale of goods and services - either all cash or barter and often not subject to taxation. Not to derail the thread, some might argue that taxation is a waste of resources and that tax free transactions are more efficient.

Worth mentioning, the person who sold the antique will have an opportunity to save, invest, or consume as well. A person selling the antique at a flea market might purchase groceries or a new can opener and the antique dealer might purchase a new car with the profits. The sale of the antique does not represent a waste of resources - except for the person that has lost their ability to purchase.

 

[brainstorm]

Not to derail the thread, some might argue that taxation is a waste of resources and that tax free transactions are more efficient.

This frame is too abstract to determine whether resources are being wasted. It depends on which resource you mean and how. To the extent that government employees, contractors, or other beneficiaries could be doing something more productive with their human capital than they are, it could be argued that they are wasting time/energy/labor by what they're doing. But the same person could go to work for a company that was previously paying taxes that funded their salary and receive the same salary in direct wages instead. So what increased about the person's productivity because they went to work for the company directly instead of indirectly through taxes? Did anything about their consumption change that increased efficiency and reduced resource-expenditure?

Worth mentioning, the person who sold the antique will have an opportunity to save, invest, or consume as well. A person selling the antique at a flea market might purchase groceries or a new can opener and the antique dealer might purchase a new car with the profits. The sale of the antique does not represent a waste of resources - except for the person that has lost their ability to purchase.

Money is not a resource itself, in the sense of being something that is naturally scarce and can be depleted. It's the things money is used to regulate that are real material resources that can be used relatively efficiently or not. Human labor is a resource, as is steel, oil/gas, car-chassis integrity, etc. An antique car market could stimulate people to drive more efficiently and avoid wasting their chassis-integrity (by minimizing driving and jolts to the chassis, etc.) because they expect to sell their car as an antique in many years. On the other hand, the same person could also conserve their car for the sake of keeping it in good condition for longer and avoiding repairs and maintenance work.

The problem with conserving resources is that there are loads of people whose basic necessities get confiscated when they don't have sufficient work/jobs to get paid for. So these people (e.g. auto mechanics) may wish for more business to get more money, even if that business is caused by people driving less conservatively and causing more frequent repairs and service-calls. What is needed is an economy where everyone can get rewarded for conservation without the reward coming in the form of more spending, since that would once again promote resource waste and general economic inefficiency. Still, people shouldn't be losing their houses and food supply because the people who pay to employ them are taking better care of their things.

Basically, there needs to be means of home-ownership that don't involve financing on the premise of long-term repayment from wages. This creates a situation where people need jobs/income to keep from losing their house. This aversion to homelessness then creates a political will to fiscal stimulus and GDP-growth, which promotes resource waste (including human labor). It's a viscous cycle that makes it more difficult for cultures of resource conservation to develop/evolve.

 

[WhoWee]

Basically, there needs to be means of home-ownership that don't involve financing on the premise of long-term repayment from wages. This creates a situation where people need jobs/income to keep from losing their house. This aversion to homelessness then creates a political will to fiscal stimulus and GDP-growth, which promotes resource waste (including human labor). It's a viscous cycle that makes it more difficult for cultures of resource conservation to develop/evolve.

There is a simple solution to your problem. Limit the purchase price of your home to the amount you can afford - based on current income - for a shorter period of time. Instead of financing a $150,000 loan for 30 years, purchase a $50,000 home financed over 10 years - I AGREE!

 

[brainstorm]

There is a simple solution to your problem. Limit the purchase price of your home to the amount you can afford - based on current income - for a shorter period of time. Instead of financing a $150,000 loan for 30 years, purchase a $50,000 home financed over 10 years - I AGREE!

Why is 10 years more doable than 30 in the event of recession or other cause for structural unemployment?

 

[WhoWee]

Why is 10 years more doable than 30 in the event of recession or other cause for structural unemployment?

You'll only 1/3 as much to begin.

 

[brainstorm]

You'll only 1/3 as much to begin.

But the point is that it still creates an impetus for people to lobby the government to ensure GDP to prevent people from losing their houses. If people bought houses without credit, GDP could be zero and they wouldn't be out on the street (unless the local tax authority evicted them for failing to pay taxes).

 

[WhoWee]

But the point is that it still creates an impetus for people to lobby the government to ensure GDP to prevent people from losing their houses. If people bought houses without credit, GDP could be zero and they wouldn't be out on the street (unless the local tax authority evicted them for failing to pay taxes).

My point is that it's more difficult to refinance/restructure a loan of $150,000 than a loan of $50,000. If we limit our purchases to amounts we can assume responsibility for - we don't need Governmental intervention (the family making the purchase or the bank making the loan). A 10 year loan at $50,000 could be restructured into a 30 year loan if necessary - without any Government involvement whatsoever.

 

[brainstorm]

My point is that it's more difficult to refinance/restructure a loan of $150,000 than a loan of $50,000. If we limit our purchases to amounts we can assume responsibility for - we don't need Governmental intervention (the family making the purchase or the bank making the loan). A 10 year loan at $50,000 could be restructured into a 30 year loan if necessary - without any Government involvement whatsoever.

Maybe, but do you see the long-term consequences for income re-distribution? What could basically happen is that people would get 10 year loans and then refinance to 30 once they run into problems. This would effectively channel people from initially higher-paying jobs to long-term careers in lower-paying ones. Of course, there's nothing wrong with lower-paying jobs, especially when the work and scheduling isn't terrible. But I'm sure people would prefer to own a domicile free and clear of debt and then devote their income purely to goods and service beyond basic necessity, even if that income was less. That way, they would be working for luxury instead of necessity.

Regardless of what people prefer, though, the relevant factor is the actual cost of producing a domicile in terms of total labor hours and materials costs because there's no way someone can buy a house for less than the cost of producing it, at least not in the long term. In the short-term, real-estate surpluses might make it possible for people to get properties far below cost but when new property needs to be built or old property renovated, there has to be a whole industry of building supplies to underwrite that, no?

 

[WhoWee]

Maybe, but do you see the long-term consequences for income re-distribution? What could basically happen is that people would get 10 year loans and then refinance to 30 once they run into problems. This would effectively channel people from initially higher-paying jobs to long-term careers in lower-paying ones. Of course, there's nothing wrong with lower-paying jobs, especially when the work and scheduling isn't terrible. But I'm sure people would prefer to own a domicile free and clear of debt and then devote their income purely to goods and service beyond basic necessity, even if that income was less. That way, they would be working for luxury instead of necessity.

Regardless of what people prefer, though, the relevant factor is the actual cost of producing a domicile in terms of total labor hours and materials costs because there's no way someone can buy a house for less than the cost of producing it, at least not in the long term. In the short-term, real-estate surpluses might make it possible for people to get properties far below cost but when new property needs to be built or old property renovated, there has to be a whole industry of building supplies to underwrite that, no?

I'm in favor of living within one's ability to pay - keeping credit purchases to a minimum. As for mortgages - is it reasonable to purchase a house that you might not be able to afford - just because a loan is possible? How many people can't afford to buy furniture for their new homes?

The reality for many people currently receiving long term unemployment benefits may be a lower hourly wage or an incentive-based compensation plan in the future.