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It's probably one of those things that might seem more obvious in simple cases, but might surprise folks in more complex cases. For example, a simple case: Sa

by _Nat_ 5y ago

It's probably one of those things that might seem more obvious in simple cases, but might surprise folks in more complex cases. For example, a simple case: Say you go on vacation for a few weeks with a certain amount of cash to spend. Upon arriving at your destination, you immediately purchase some indulgence, and, hey, you're feeling better! Why not immediately keep spending as much as possible to maximize? For example, a complex case: Say you're leading a country. You set up policies that, after a few years, seem to have led to a higher GDP than was previously expected. Does that suggest that the policies are leading to a better future? In the simple cases, like the vacation-example above, it's easy enough to understand the scenario and what's going on. And we can imagine that, hey, immediately spending all of the cash might lead to poor consequences for the rest of the vacation, even if they display some quick-satisfaction at first. But in more complex cases, like with a country's policies leading to a higher GDP, stuff can get trickier. We might say that it's the lack of a top-level model: unlike in the vacation scenario, where we were easily able to predict that there'd be a lack of money later in the vacation, it might be harder to say what else might be going on besides the GDP going up. And all other things held equal, presumably a higher GDP would be better than a lower GDP, and therefore all evidence points toward the policies being a good idea, right?

enkid 5y ago
GDP is actually a great example. It's actually very easy to increase a country's GDP if that's the only thing you care about. You just borrow more money and then spend it. GDP is literally a measure of money changing hands inside a country. If you borrow as much money as you can and then spend it on things like infrastructure projects, you can instantly increase the GDP. Banks see the growing GDP figure and assume that its a good thing and let you borrow more money. That is, until they don't. This happened with Brazil in the 1970's, when the oil crisis made Brazil believe that they were going to face a downturn. To overcome this, they borrowed money and went on an infrastructure spending spree. This made Brazil look like an economic miracle, growing when everyone else was struggling. This encouraged more banks to lend to Brazil. The problem is the money was spent on short term growth instead of things that would more systematically grow the economy over the long term. The government (and lending banks) was substituting year-to-year GDP numbers for economic health. Once credit tightened in the early 1980's, Brazil's growth plummeted. This is of course an over simplification, but I think we are seeing similar problems in modern economies. People often cite China's GDP growth, but they don't balance that out with the debt they are taking on in order to finance that growth.

by _Nat_ 5y ago

enkid 5y ago

GDP is actually a great example. It's actually very easy to increase a country's GDP if that's the only thing you care about. You just borrow more money and then spend it. GDP is literally a measure of money changing hands inside a country. If you borrow as much money as you can and then spend it on things like infrastructure projects, you can instantly increase the GDP. Banks see the growing GDP figure and assume that its a good thing and let you borrow more money. That is, until they don't. This happened with Brazil in the 1970's, when the oil crisis made Brazil believe that they were going to face a downturn. To overcome this, they borrowed money and went on an infrastructure spending spree. This made Brazil look like an economic miracle, growing when everyone else was struggling. This encouraged more banks to lend to Brazil. The problem is the money was spent on short term growth instead of things that would more systematically grow the economy over the long term. The government (and lending banks) was substituting year-to-year GDP numbers for economic health. Once credit tightened in the early 1980's, Brazil's growth plummeted. This is of course an over simplification, but I think we are seeing similar problems in modern economies. People often cite China's GDP growth, but they don't balance that out with the debt they are taking on in order to finance that growth.