Y = C + G + I + (X – M)

That’s just to remind you that gross domestic product is equal to personal consumption expenditures plus government expenditures plus business investment plus net exports, i. e. exports less imports. When I say that I think we need more domestic business investment, I’m making a statement about how I think that GDP should grow. Ditto when I say that I think we should export more. If personal consumption expenditures or government spending rises and so do imports, that will result in less GDP growth than otherwise might be the case.

If Okun’s law, the rule of thumb that suggests a positive correlation between GDP and employment, is broken, I think it’s pretty clear that the reason that it’s broken is that consumption expenditures (either private or government) and business investment aren’t resulting in increased employment.

GDP has grown all through the alleged recovery. How fast would it have to grow to put a dent in U. S. unemployment?

27 comments… add one
  • Ben Wolf Link

    I don’t see an employment recovery before the end of this decade unless real GDP growth averages 3-3.5% per year. While corporations are sitting on a mountain of cash they also have a mountain of debt, and this isn’t an attractive investment environment. Households are struggling. The foreign sector continues to deteriorate. Government is the only sector left to spend, but it can’t continue to spend in inefficient and counterproductive ways. We need to do things differently but that isn’t going to happen with the two idiots running for president.

  • Yikes!!!! I tend to agree in large part. One point of possible contention is this,

    Government is the only sector left to spend, but it can’t continue to spend in inefficient and counterproductive ways.

    Given things like deadweight loss, I’d argue that government is always going to be “inefficient”. Then when you add on rent seeking and such it gets even worse.

    We need to do things differently but that isn’t going to happen with the two idiots running for president.

    Completely agree. Ha, take that Ben!!

  • More food for thought…..

    We haven’t had 3-3.5% growth in this country except when we are in a period of a bubble. That suggests that our problems are more serious than anyone probably realizes. We probably need something a bit on the radical side….but Americans are not, in large part, radicals, so that probably wont happen either.

  • Frankly, I’m a mite skeptical of persistent growth above 3% in any developed economy. However, if the critical objective is more employment here’s my two cents:

    – more business investment
    – fewer imports
    – more exports

    That’s not nearly as much fun as more personal consumption expenditures. Note that the “government spending” in the equation that comprises the title of this post doesn’t include transfer payments. That’s part of PCE. Stuff like defense spending, building roads and bridges, and so on.

    Maybe being from St. Louis and living in Illinois colors my views on the wastefulness of infrastructure spending. Having a bridge across the Mississippi, building another bridge a mile downstream, and restricting the old bridge to lighter usage is pretty par for the course. IMO building a third bridge will probably deliver a pretty poor bang for the buck.

    I’ve already noted in previous posts that practically every town worth serving with an interstate is already served by an interstate. Not much bang for the buck there, either. Patching potholes at Davis-Bacon wage rates is basically rent-seeking.

    The infrastructure that’s really worth putting public money in is the power grid. Redundancy and excess capacity aren’t things the private sector is particularly likely to invest in on its own.

    Unfortunately, that won’t be a big job producer. That’s why I keep harping on cheap energy. Cheap energy opens the door to industries that will employ people.

  • Ben Wolf Link

    It wasn’t a coincidence the period of strongest sustained economic growth happened alongside growing real wages. I think consumers, households in aggregate are the most efficient and effective spenders.

  • Andy Link

    IMO building a third bridge will probably deliver a pretty poor bang for the buck.

    Dave, you’re not thinking big enough. We need more tunnels under the Mississippi. Or, we need a water bridge for the river to flow over – like they have at Disney.

  • Weeelll, when all things are considered the Chunnel had a cost overrun of about 100% and the original ROI estimates have proved to be so wildly optimistic that it may never run a profit. The good news is that it was built with exclusively private investment. Can you imagine how big the overruns would have been with public investment?

  • Icepick Link

    We need to do things differently but that isn’t going to happen with the two idiots running for president.

    Ben, are you planning on voting for either of these idiots?

  • Redundancy and excess capacity aren’t things the private sector is particularly likely to invest in on its own.

    I guess the question is how much. Keep in mind that a utility wont make as much money due to downed line/grid issues that cause black outs. After all, most utilities charge per KWH…no KWH no billing. So there is some incentive to build in redundancy. And utilities build capacity based on what they think is likely to happen, so there will be enough capacity to meet demand…although the incremental capacity will likely be rather expensive….and rate payers hate paying higher rates….

    In other words, it isn’t just a failure of the private sector, but also of the regulatory environment as well. Regulators like keeping rates low and stable, or if they are going to raise rates raise on the higher end users (and for residential that usually corresponds with more income).

    Unfortunately, that won’t be a big job producer.

    I don’t know about that. Think about laying a high KV line for dozens of miles, maybe even hundreds of miles. Seems you might end up with a fair number of people working on that.

  • Think about laying a high KV line for dozens of miles

    The physics doesn’t support that. Laying lines works for short hauls, rigging them for longer.

    In the final analysis the issue for upgrading the power grid is the same as for roads and bridges. The contracts will be let to existing, known contractors who already own the equipment, already have a staff, and will traffic the work to avoid adding additional workers with their training and overhead as long as it’s practical to do so.

  • Actually there are pretty long transmission lines out there. The longest cost effective AC transmission line could go up to 2,000 miles maybe more, at least in terms of line losses. The California Oregon Transmission Project will result in a 340 mile transmission line between Oregon and Central California and will be a 500 kv AC line. A DC line could probably go longer distnaces.

  • The contracts will be let to existing, known contractors who already own the equipment, already have a staff, and will traffic the work to avoid adding additional workers with their training and overhead as long as it’s practical to do so.

    Sure, all firms minimize costs. You aren’t suggesting something otherwise are you? And these are projects that are in addition to what is already out there, so adding more workers is likely inevitable.

  • Actually there are pretty long transmission lines out there.

    Underground? Pretty substantial problems with eddy currents on long hauls. The distinction I was trying to make was between “laying a line” (underground) and “rigging a line” (above ground).

  • Also, see the Pacific Intertie (aka Path 25). Path 27 is 488 miles long.

  • Yeah, that’s above ground. Or have they buried it while I wasn’t looking?

  • Going back to the point (employment) above ground power takes a lot less work than below ground.

  • Ben Wolf Link

    The increased costs of underground lines results primarily from additional labor requirements, correct?

  • Icepick Link

    Besides driving up employment/cost, are there real advantages to burying lines? Seems to me like a toss up for high power transmission purposes. It’s probably a bit safer underground, but if something goes wrong it will be much harder to fix, yes?

  • The rationale for burying transmission lines is that they’re less unsightly that way and less susceptible to wind, rain, sun, and ice damage, vandalism, etc. The downside is that it’s more costly to bury them and it’s more costly to maintain them when problems inevitably occur.

    My recollection is that buried lines are unsatisfactory for long hauls due to the problems and power loss caused by eddy currents (“inductive loss”). That’s from a lot of years ago and maybe it’s different now but somehow I doubt it.

    Here in the Chicago area new lines are required to be buried. I don’t know whether that’s all new service or just from the distribution substation or distribution automation device to the user.

    My understanding is that most of the cost differential between overhead transmission lines and buried transmission lines is the labor costs to bury them and that’s substantial. As in $50,000 per customer.

  • Ben Wolf Link

    @Steve Verdon

    “Completely agree. Ha, take that Ben!!”

    I actually like it so much better when we agree. Despite the shots we take at each other I respect your opinions.

  • Ben,

    Well, there are other costs later on such as line insulation and additional time and costs finding damaged lines and repairing them.

    Ice,

    Well, there are less issues with right of way and they are not as much of an eye sore (trust me this can actually be an issue) and are less affected by bad weather. There is also an issue related to the thermal capacity which limits overload.

  • PD Shaw Link

    I thought I’d read in one of the discussions on undergrounding on OTB that the underground wires themselves cost more due to additional insulation, there are load loss issues, and need for additional substations to be built. I don’t know if that doesn’t mean labor is not the “primary” cost, but there are additional non-labor cost components.

    Also, IIRC significant difference in cost of undergrounding when an area is being initially developed as opposed to around existing structrues.

  • steve Link

    Real estate, private and commercial, returning to average rates of production takes care of about half of our employment problem. I think much of the rest of our unemployment is structural. Absent a bubble, it will be with us for a while. Until private and commercial balance sheets, as Ben noted corporations are sitting on lots of debt as well as cash, are fixed, I dont see the structural component improving. (I think most cyclical has now turned into structural.)

    I would also second Ben’s comment about consumers and their spending. We need growth for all of the country, not just a few at the top.

    Steve

  • Real estate, private and commercial, returning to average rates of production takes care of about half of our employment problem.

    The short response is that won’t happen for the foreseeable future. I don’t believe we’ve reached the bottom of housing prices regardless of what Bill McBride thinks. We reached a bottom in 2009, 2010, and 2011, too.

  • I thought I’d read in one of the discussions on undergrounding on OTB that the underground wires themselves cost more due to additional insulation, there are load loss issues, and need for additional substations to be built.

    Those are consequences of the inductive loss I mentioned above. It’s an added cost but not as high as the actual burying process.

  • Andy Link

    Granted, it’s from a power company, but here’s quick-and-dirty comparison between overhead and underground for major transmission lines.

  • As you may have noticed it essentially substantiates everything I said about them.

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