Saturday, July 18, 2009

How do you define "Real Economic Recovery"?

Two economists, Shiller and Roubini, mentioned recently that lost confidence (animal spirits impacted by fear) was a key factor in worsening economy *:

The leads to a question. A Big, Hairy, Audacious Question.

How do you define Real Economic Recovery?
1> GDP growth? Economic recovery could be defined as a specific technical recovery from a recession as indicated by GDP numbers.

2> Employment Growth? Would you define economic recovery as a scenario where 96% of the country returns to productive work and innovation flourishes? Would this thought be in line with Schiller's and Roubini's contention that "animal spirits" play a part in worsening the economy?

I threw "innovation flourishes" in there, despite some question over whether government intervention in innovation helps. E.g. MITI in Japan.

3> GDP size? Would you define economic recovery in terms of GDP size? i.e. the world may not be what it used to be, but the world returns to some semblance of "normal" economic activity? Simply put, if financial institution balance sheets need to contract for a return to "normalcy", couldn't GDP numbers contract as we return to "normal" economic activity? Would this not really be a resetting of the GDP scale?

What does this mean to your daily life? Are there other, more effective recovery measures we could develop?

What do you think?

The Big, Hairy, Audacious Context
GDP as a "measure" vs. GDP as an indicator of true economic activity.
To illustrate an extreme case in point, there are remote parts of the world, say a self sustaining tribe in a remote village in India (an interesting example with a dichotomy between the stock market oriented urban economy vs. the rural economy), where people work hard every day to ensure that they can feed themselves. Individuals in this tribe own no land- its a jungle- and they move from clearing to clearing. From their perspective, they live full, healthy, economically productive lives.

However, due to the fact that this tribe exists in a very remote region, it not part of a GDP measurement.

On the other hand, GDP might stop contracting, and even improve for successive quarters, while job losses continue, and few new ideas that truly improve lives are launched.

Government Investment in "Infrastructure" for Economic Recovery
Is government investment in infrastructure a critical tool for economic recovery? If so, would energy and healthcare qualify as "infrastructure"? This based on a loose definition of infrastructure as a series of standard frameworks that simplify people's lives and make them more productive in leveraging their strengths?

E.g. Given the inverted population pyramid, could healthcare qualify to be called infrastructure, just like national highways?

Note: * Thanks to Amit for posting this on the Macroeconomics forum- it got me thinking about this topic again.

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