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The Massive Missing Link in GDP: Home-Work

December 30th, 2008 No comments

I’ve spilled a lot of electronic ink over the last few years arguing about what causes GDP growth (especially in developed countries like the U.S.), tacitly accepting that GDP per capita was a reasonably good proxy for prosperity and well-being. And it is–reasonably. It has the advantage of being widely and fairly consistently measured throughout the world, and most measures of well-being do correlate quite strongly with GDP per capita: life expectancy, child mortality, “happiness,” material well-being, access to education and health care, absolute poverty levels, etc. So it’s not crazy to look at this measure, and try to figure out what government policies increase it.

But there’s always been something nagging at me, telling me that GDP has something missing–something big.

That something is home-work. GDP doesn’t count any work that that isn’t somehow part of the “market.”

Suppose you buy some pasta and tomato sauce and cheese, and make lasagna for your family and friends. That doesn’t count as “production.” If you’d bought the lasagna ready-made at the supermarket, that would count (because people were “employed” making that lasagna). But your work at home doesn’t count.

Now multiply that by 100 million households, 365 days a year.

Or suppose you spend your vacation painting your house. Does it count? No. (Except for the paint and materials you buy.) But if you hire a contractor to do it for you, that counts.

There have been many attempts over recent decades to more accurately measure countries’ “informal sectors” (partly correlated with the “shadow” and in part illegal economy)–individuals working for themselves and in small groups–attempting to include this notoriously difficult-to-measure but huge sector in GDP estimates. (The IMF estimates that the shadow economy accounts for 12-15% of GDP in OECD countries, and 35-44% in developing economies.)

But even those studies don’t attempt to measure what is undoubtedly a massive amount of production that has nothing to do with markets.

There’s a nice writeup of this conundrum on page 79 of Norman Frumkin’s Tracking America’s Economy.

Says Frumkin:

In the 1970s, the Bureau of Economic Analysis began to develop estimates of such items that economists could use to modify the traditional GDP measures, but the project was discontinued for lack of funding.

This all leads me to wonder: when Europe builds a system based on shorter work weeks and long vacations, how much more home-work gets done as a result? If that work were included in GDP estimates, what would it say about economic growth, prosperity, and well-being in those countries? (This not even counting the inherent “good” of leisure time.)

I’m here to say that there are few things that contribute more mightily to a society’s happiness and well-being than people cooking meals with and for their friends and families. Home maintenance undoubtedly contributes massively to the general prosperity.

Reading to our children and taking care of our elderly? You decide.

Update: I pulled together some rough numbers on this, posted here.

Depression Lessons: How Much Fiscal Stimulus?

December 13th, 2008 No comments

There's lots of talk these days on upcoming fiscal stimulus–how much it should be and how it should be delivered. The NYT Economix blog offers recommendations from several economists, assuming a $500-billion package. Here's one that Greg Mankiw likes.

When it comes to the size of the stimulus–and as Krugman argues quite cogently, in this case size is what matters–the Great Depression, and our recovery from same, gives some pretty solid clues.

So first, a brief history. How did we get into the Great Depression, and how did we get out of it?

  1. Technology and corporate capitalism pre-'29 delivered a huge productivity/efficiency boom.
  2. Absent sufficient redistribution, a smaller percentage of GDP went to wages, and more to profits–there was more money, but it wasn't widespread.
  3. This resulted in insufficient consumer demand to support the upward spiral, and excessive speculative investment from all those profits because there weren't enough productive investments available (because there wasn't enough demand). The log stopped rolling and things fell apart.
  4. The government/Fed response was initially almost nonexistent. They never even touched the most powerful lever–monetary easing–until '31/'32. (Gotta let that creative destruction happen…)
  5. By that point deflation had set in, making monetary easing largely ineffective.
  6. Despite widespread notions to the contrary, net fiscal stimulus '32-'39 was actually quite tepid. In '36 Roosevelt even raised taxes and cut spending out of budget concern, and the still-latent depression surged back.
  7. Starting in '39, orders from Europe increased demand, offering some relief, but with little or no effect on U.S. domestic consumer demand.
  8. During the war years U.S. government (deficit) spending surged spectacularly. The federal debt when from 50% to 120% of GDP. Consumer demand remained low, but for reasons unrelated to monetary or fiscal policy. (50% of output going to the military–and much going overseas–and rationing on everything, right down to clothing.)
  9. Personal savings (especially E Bills) did climb rapidly, and production spiked as government spending (read: demand) put unproductive capacity (plants, financial capital, and people) to work.
  10. When the war ended–with the wheels of the economy rolling full-speed and wartime distortions removed–people started spending their savings and their wages (think: demand), and we entered the great prosperity.
  11. Over the next 35 years that prosperity allowed us to pay down the debt that pulled us out of the Depression, bringing it steadily down, to 35% of GDP by 1980. (Then came Reagan; we're now back to 70%.)

Short story, it was the massive fiscal stimulus of wartime deficit spending that finally broke the Depression's back.

Now we're in the same situation (with the same causes–but with a worse debt position). The Fed has pulled out every monetary stop, and it's still not enough. Fiscal spending it the only shot we have left in the locker.

If we take WWII deficit spending as a model, how much fiscal stimulus should we provide?

If we do half of what we did we World War II–increase our government debt by 35% of GDP–we're talking something like 4 trillion dollars in government deficit spending. Since most proposals include big chunks of productive investment as opposed to mere government consumption (i.e., bombs and bombers), we can probably get by with far less. (Though investment spending takes longer to work.)

If that spending also serves to raise our ongoing government/redistributive spending and (especially) taxing to a responsible level at which a high-productivity economy has the aggregate demand to thrive without meltdowns, the resulting prosperity should allow us to pay off that debt in less than 20 years. (This assumes the kind of more-responsible government we had pre-Reagan.)

I think that puts the current proposals–for stimulus of $500 to $700 billion–in appropriate historical perspective.

Medicare: Government Does It Right

December 13th, 2008 1 comment

I recently had occasion to go through two years of my 84-year-old mom's medical and insurance statements, to be sure that everything was kosher and that insurers were, in fact, paying all the bills they were supposed to be paying.

You've undoubtedly attempted similar, so you can imagine that it was a daunting task–trying to cross-reference all the providers' bills against the insurance statements.

All I can say is, thank god for Medicare.

The bills and statements from private providers and private insurers were nightmarish–mostly just dollar amounts (often lacking dates of service) attached to cryptic codes–often providers' internal codes unrelated to standard practice codes. If I'd been relying on these private statements alone, it would have taken me at least week to sort through all the statements–searching the web to track down those codes, and spending hours on hold with all the providers and insurers.

Happily, the Medicare statements made it easy. They are clear, well-laid out, and fully informative (in plain English)–exactly the kind of statements I insisted on when I was running a company. I was able to cross-check all the private statements against the Medicare statements to figure out what those private statements were actually referring to, then determine if private insurers had covered their share.

Thanks to the Medicare statements, I got the job done in a few hours.

Then, this fall it was time to choose a Medicare drug plan for my mom. Guess what? Medicare has the best insurance comparison engine, hands-down, anywhere on the web. You enter the prescriptions you currently take or expect to take, and it throws up an easily apprehensible list of insurers, sorted by your total costs per year and including quality ratings for the insurers. You click deeper for details on each, compare them, or jump to their sites for more info.

No private entity is offering anything even approaching this site. Market incentives?

So when somebody tells you that you can't trust governent to do anything right…well, you won't convince them because it's a faith-based belief…but you can take comfort in knowing that they're just plain wrong.

Gates Saying All the Right Things

December 7th, 2008 2 comments

I first read Robert Gates’ book several years ago, and re-read chunks of it last month. He’s a seriously sensible guy. (He even managed to come through Reaganville/Iran-Contraland with his integrity mostly intact.) I’ve been touting him for SecDef for more than a year—ever since he started clamoring for more money and resources at State. (Do Pentagon chiefs ever do that?)

And he’s still banging his spoon on the high chair–here, in the current issue of Foreign Affairs:

What is dubbed the war on terror is, in grim reality, a prolonged, worldwide irregular campaign — a struggle between the forces of violent extremism and those of moderation. Direct military force will continue to play a role in the long-term effort against terrorists and other extremists. But over the long term, the United States cannot kill or capture its way to victory. Where possible, what the military calls kinetic operations should be subordinated to measures aimed at promoting better governance, economic programs that spur development, and efforts to address the grievances among the discontented, from whom the terrorists recruit. It will take the patient accumulation of quiet successes over a long time to discredit and defeat extremist movements and their ideologies.

I really like the bolded line, which is a direct quote from Petraus’s congressional testimony.

I wish certain people had realized that six years ago.

As for killing and capturing (still necessary, of course), am I crazy, or do the (increasing) attacks in Mumbai, Kabul, and Islamabad offer Obama/Clinton an amazing opportunity to bring those three countries together with the U.S., putting aside squabbles, to collectively crush the crazies? All four governments are being directly, physically threatened by the same people.

Key question there: can the Pakistani civilian leaders remove the crucial impediment–the crazies in their military and intelligence arms? Can Clinton make the case that they have to, for the sake of their own existence?

Update 12/8: 1. Yes, the Pakistanis are trying. 2. It’s nice to see that Robert Kaplan and maybe even Barack Obama are having similar thoughts:

The existence of terrorist outfits like Lashkar-e-Taiba that have links
with the Pakistani security apparatus but are outside the control of
Pakistan’s own civilian authorities is the very definition of chaos. … We need a second special negotiator for the Middle East, a skilled
diplomat shuttling regularly among New Delhi, Islamabad and Kabul
.
(There has been some speculation, in fact, that Barack Obama is
considering Richard Holbrooke, the former United Nations ambassador,
for just such a job.)