Friday, 28 March 2008

Growth? What growth?

Time for some more fun with numbers:

1. Nominal GDP in 1996-97 was £778.7 bn*.

2. Total nominal GDP for the ten years 1997-98 to 2006-07 was £10,592 bn.

3. If we'd had no real growth whatsover since 1996-97, i.e. if GDP had merely increased in line with RPI, total GDP in the same ten-year period would have been £8,992. So 'extra' GDP was £1,600 bn.

4. Household debts increased from £500 bn to £1,325 bn between May 1997 and April 2007.

5. Nominal government gross debt increased from £401 bn to £574 bn over the same period, chuck in another £50 bn for latent PFI & Northern Rock liabilities, that's an increase of £223 bn.

6. So two-thirds of that 'extra' GDP of £1,600 bn was financed purely out of additional household and government borrowing of £1,048 bn**.

Sure, for every liability, there is an asset. But that's not much consolation for the 95,000 families whose homes were subject to repossession orders last year; future taxpayers who are going to have to pay off this borrowing binge or depositors at banks who can't get their money back.

* All figures from here unless stated.

** So true 'extra' GDP over the last ten years was £552 bn. Which is equivalent to an annual £10 bn increase in GDP for ten years (£10 + £20 + £30 ... £100 = £550) or an average of about 1% economic growth.

I have posted this at LabourHome as well, just to see how they respond.


Anonymous said...

Suppose in a country of two people we each earn £100, so national income is £200. Then your pay goes up to £120. So our national income has increased by 10%.

If I borrow £20 and use it to buy stuff worth £20, I'm no worse off (in present value terms) when I pay it back and you are better off by £20.

If I can't afford to pay it back, you're no worse off than you were and I'm better off by £20 (embodied in the stuff I bought).

Either way the system is richer by £20 - GDP has increased by 10%. When you borrow money, you do it to finance activity that has value to you.

Finally, I suppose it's possible that my additional £20 of stuff is actually just asset price inflation - more expensive houses, for example. But then the beneficiary is whoever sold me the house. Once again, the system is £20 up.

I agree that debt is a problem, and your comparisons help to illustrate the scale. But netting debt off GDP growth is just gibberish - you're comparing totally different numbers.


Mark Wadsworth said...

You started off well there but your analogies fall down if you think them through.

Yes of course, producers are allowed to sell stuff to customers on credit provided they can collect the debts. If in year 2, you, the customer, default on your debt to me, then my income falls back to £100 (my new income £120 less £20 bad debts) and yours remains at £100. So in year two, our collective GDP falls back to £200.

You can repeat this exercise as many times as you like until I learn not to sell you goods on credit, at which stage GDP reverts back to its equilibrium level of £200.

But it's the scenario in your paragraph starting with the word 'Finally' that you have to think about now - because that it exactly what is happening in our economy.

Let's assume that the two people in our simple economy are you (who produces £100's worth of goods and services) and I am the landlord (who charges you £100 a year rent). So far so good, GDP is £200.

I then manage to sell you the house for one-fifth more than it is really worth. As we don't have a bank, this being a very simple economy, all I have is a promise from you to give me £120's worth of goods and services a year until the 'mortgage' is paid off.

But your income is still only £100. So sooner or later I repossess the house and write off one-fifth of the amount outstanding. So neither of us are any better off and you have a lousy credit rating.

Anonymous said...

No, I still don't think so.

Start with the first case. In year 2, your income doesn't fall because of bad debt. A bad debt is just some of your 1st year income you don't get back - you don't have to pay it over again.

You're double-counting the lost debt. If there's an extra £20 going into the system (GDP growth) then it benefits somebody, regardless of who lends what to whom.

In year 1 I had £100 income +£20 stuff with the loan I had, and you had £100 (£120 less the loan to me). Collectively we were £20 up. In year 2, if I don't pay back, I have £100 and you have £120 income. If I do pay you back I have £80 and you £140. Whichever way you cut it, we are £20 up - we haven't destroyed the GDP growth by lending each other money. The extra £20 a year keeps going into the system, whether you lend it to me or not. It can't just be lost.

Your second example does indeed show zero economic growth. But it's nothing to do with debt. My house appreciated in value over the last few years, and is presumably now falling back (this is sadly true, not a hypothetical). If I counted the former as income and the latter as loss, it affects GDP. But whether I have a mortgage or not does not.

I think what you're after is a measure of how much the national stock of wealth has fallen as a result of the credit crunch. I don't know the answer - but it is not the figure for gross debt.

Do you suppose anyone else is reading this?


Mark Wadsworth said...

Arfa, the truth as ever lies somewhere between your examples and my examples.

Re your £20 bad debt, if you fail to pay me back, sooner or later I will stop giving you credit, and for lack of any other customer, my output will fall back to £100.

In the second example, I am not counting house price rises as economic growth. I am saying that the short term boost from debt-fuelled spending is largely self-cancelling.

No of course nobody is reading this.

Anonymous said...

Yes, there's another sad geezer reading this.
I'm with Arfa. The money is in the system, there are just winners and losers.
Now that reality seems to have dawned, a lot of people seem to have been caught with their pants down. I liked the 'tide going out and seeing who's been swimming naked' analogy.
I realise that all the central banks liquidity injections are backed by assets, hence they are not printing money. I do however have concerns about the quality of what they are accepting as security. I don't believe that this will all be paid back, hence the banks will have to print money and the inflationary genie is out of the bottle.
Certainly interesting times, especially as I sold to rent having seen this coming.