Why you should not blindly trust statistics on per capita GDP based on PPP

Everybody knows that Gross Domestic Product (GDP) should be adjusted for the different level of prices if you want to compare different regions or countries. That is why the GDP based on Purchasing Power Parity (PPP) was created. However, this measure can be quite misleading, and I explain you why.

First of all, price levels are often measured in a bogus way, as I have argued in a previous post. But another fact is even more important, and it is that if a large firm establishes its headquarter in an area that does not have a very large population, its revenues are going to considerably distort the value of the GDP based on PPP. This is especially true if the the given area is not very rich.

Let's consider the map of the GDP of european regions in PPS: [1,2]

You can see there are regions in central-eastern Europe that are apparently wealthier than many western european regions. Is this really the case? Is the Bucarest region wealthier than Finland and large parts of Germany? Not quite.

So how can we get a realistic picture? There are better measures, like the GfK purchasing power index: [3]

Now everything makes much more sense. The eastern european areas that are classified as having a GDP in PPS way above the european average turn out to be relatively poor areas compared to most of western europe, which is what real world experience tells us.

[1] PPS stands for Purchasing Power Standard. Here we can ignore the technicalities about the difference between PPP and PPS. Interested readers can find some details on the eurostat website.

[2] The map on GDP in PPS was taken from here.

[3] The map on GfK Purchasing Power was taken from here.

The "secret" behind Trump's economic "miracle"

So, what is the magical recipe adopted by Trump to boost the US economy as mentioned in the last post? Don't hold your breath: there is no "secret". Trump did a pretty simple thing: he cut the taxes. If you cut taxes without cutting public expenditure, you can expect to give a boost to the economy, and that's what happened. Of course, I'm oversimplifying a lot, but this is it in a nutshell. It's not rocket science, even a child can get it, although IT IS smart compared to the approach of many European countries that keep raising taxes AND public expenditure, achieving only sluggish economic growth and unsustainable government debts. Maybe we should replace European politicians with children...

No doubt, even the American federal debt is piling up; it's another obvious thing that you get if you cut taxes without cutting the expenditure. Still, under Obama the federal debt was piling up at an even worse rate, so we can hardly accuse Trump of jeopardizing an otherwise idyllic situation. Even the threats of protectionist policies and trade wars, in the end, did little damage.

The question everybody is asking is: how much will it last? Will a brutal correction, at some point, wipe out three years of gains? The non-stop increase of the federal debt is only one possible source of problems, and probably not in the immediate future. Many people start to fear the stock market rally is actually a bubble ready to burst. And what will happen if the Fed raises the interest rates? These are questions hardly limited to the United States. Strong distortions are at work in the financial markets of many countries. I'll tell you more about this in another post.

"This is why many people think economics is BS"

econjobrumors.com is a website on which economists (and academics in related disciplines) share and discuss job offers, conferences, academic journals and so on. Contrary to what you might think, it is often funny to read and politically incorrect, probably thanks to the fact that posts are anonymous. While browsing the website, I stumbled upon a post that shed light on an issue every economist is faced with: many people think economics is just bullshit. Even though I don't even call myself an economist, finance is a related discipline, and so I still feel the heat sometimes. This is why I want to share with you the post I mentioned. The discussion was about Krugman's prediction that the election of Trump would have wrecked the american economy to the point it would have never recovered:

If the question is when markets will recover, a first-pass answer is never. [...] So we are very probably looking at a global recession, with no end in sight.

Krugman's article didn't exactly age well: the markets have been breaking record after record, the unemployment rate is at a near-record low, and the american economy overall is just booming. And this came from a Nobel prize winner economist! So let's get at the post of our anonymous friend on the discussion I mentioned:

This is funny. But we should also be angry. All those people who think economics is BS voodoo science think that way because dbags like Krugman go on TV/in the press and make claims they can't possibly back-up with sound economics.
The only practical way your average layman has to evaluate the success of economics is that they saw idiots like Kruggles in the NYT saying "markets will never recover" (which any actual economist can immediately see is nonsense).
It's fine for Krugman who already has his phat Nobel money, his sweet speaking gigs, and his cushy NYT column. But for those of us who depend on public funding to do actual research, and on attracting students to the study of economics to maintain the viability of our departments, people like Krugman are public enemy number 1. 

This pretty much nails it. Economics is a social science, and as such it will never be as rigorous as natural sciences. But this is not the main problem. The main problem is that it is a discipline with political implications, and too many of the big guys in the field seem to abandon objectivity to push political positions. Krugman is probably an extreme case (I also think his Nobel prize was the most undeserved ever, but that's another story), but he's certainly not alone. While economics does not and probably never will have the rigorousness of natural sciences, it is also not BS as many people think. And while it's true that economists disagree, serious economists do not disagree as much as the general public thinks. There is a vast body of knowledge on which the discipline lies that is pretty much well established.

Finally, one thing that will never be pointed out often enough: the job of economists is not to make predictions. They do make predictions sometimes, but that's not what the discipline is about. Ideally, an economist is like a doctor, with the difference that the patient is not a person, but an economic system, or a part of it. Like a doctor, he tries to tell what's good and what's bad for the economy, he tries to find out what's wrong when something does not work properly, and how to fix it. Every doctor will tell you that smoking is bad for you, and that's true. However, there are people who smoke for decades and stay healthy until the age of 90, and people who never smoked that die of cancer at the age of 40. That does not invalidate the statement that smoking is bad for you. Other questions are more open and doctors disagree, like about the health consequences of eating red meat. While medicine is more rigorous than economics, they are similar in this regard. This is the correct way to look at economics as a discipline.