Sunday, March 16, 2014

It's not just growth, it's also absolute level

Paul Krugman writes today:
Some people seem to think that something like Spain’s slight recovery this year — the best estimates now are that it may grow 1.5 percent — are as big a failure for the critics of austerity as the kind of thing I show above is a failure of the finance canon. But lots of stuff can cause the economy to grow a percentage point or two more or less than your forecast.
I'll add that also current absolute level, of course, matters, not just growth. If your economy gratuitously shrinks by 15% over four years because you chose austerity, then it grows 1.5%, it's still at least 13.5% smaller than it was, and could have been. Especially with an unemployment rate of 25%, that's a horror, not reason to claim victory and vindication.

If, as an investor, you lose 90% of your family's life savings, then you get a 1.5% return, do you say, Yea! See, my strategy was right! Or do you say that if I had followed a smart strategy I'd be at 110% of where I started, not at 10.15% of where I started -- and claiming victory and vindication.