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It’s Called “Governing”

June 13th, 2012 Comments off

While approximately 23% of the American public and roughly half of the political elite is hell-bent on dismantling and destroying the government that our founders and our predecessors have bequeathed unto us, using methods and theories that bear an uncanny resemblance to medieval bloodletting, I think it’s worth remembering that tens of thousands of people are working hard at the nuts-and-bolts, everyday business of governing well.

That includes, among other things, looking at what we’ve done in the past, whether it still makes sense, and changing or removing practices and policies that … don’t. From the OMB:

In January 2011, the President issued a historic Executive Order, setting forth new cost-saving, burden-reducing requirements for federal regulations, and requiring an ambitious government-wide “lookback” at existing regulations. In response to that requirement, over two dozen agencies identified more than 500 reforms. Agencies have already proposed or finalized more than 100 of them. …

  • On May 21, the Department of Agriculture streamlined its meat and poultry labeling approval process, creating a new, web-based electronic alternative to paper applications, making the process faster, cheaper, and more accurate.
  •  The Federal Railroad Administration plans to eliminate unjustified regulations imposed on the railroad industry, streamlining and simplifying existing requirements and saving hundreds of millions of dollars in the coming years.
  • The Federal Motor Carrier Safety Administration is finalizing today a rule eliminating a reporting requirement imposed on truck drivers, doing away with roughly thirty-eight million reports annually – an amount that represents over $50 million in annual paperwork savings.
  • The Department of Housing and Urban Development plans to eliminate burdensome and unnecessary requirements for mortgage insurance, thus enhancing consumer choice, reducing administrative and paperwork burdens on HUD and the borrowers, and producing savings for prospective borrowers.

I don’t know anything about these particular issues. I do know that the hysteria about zombie regulations is not solved by…getting hysterical about zombie regulations. It’s solved by nitty-gritty, in-the-trenches, hard work. (Something that “conservatives” should admire, no?)

This isn’t about childishly simplistic notions of magic-bullet revenue cuts causing miraculously sensible spending cuts. It’s about doing the real work of making government work.

Government is not the problem.

Bad government is the problem.

Good government is the solution.

 

An Open Letter to Robert Barro

June 12th, 2012 1 comment

Noahpinion points us to — and goggles in amazement at — Robert Barro’s latest op-ed in the WSJ.

Why This Slow Recovery Is Like No Recovery 

This prompts me to republish an open letter to Professor Barro that I posted some years ago. (To which, not surprisingly, I never received a reply.)

It speaks volumes of Robert Barro’s “scholarship” that I am able to reprint this letter word for word in response to his latest screed. (Just insert a link to his latest where you see fit, and adjust the GDP percentages a bit.)

Barro’s willingness to ignore even the evidence of his own research remains unchanged.

————————-

Robert J. Barro is Paul M. Warburg Professor of Economics at Harvard University, a senior fellow of the Hoover Institution of Stanford University, and a research associate of the National Bureau of Economic Research. He is the third-ranked economist in the world, according to RePEc.

Dear Professor Barro:

I’m compelled to write after following your writings for many years, in response to your recent article (PDF) in the Wall Street Journal, your interview with Conor Clark on the Atlantic web site, and your published email interchange with Clive Crook on his Atlantic blog.

In 2000 you demonstrated that in OECD and Rich countries, government consumption levels have no significant correlation to long-term growth rates. (PDF)

In their 2003 meta-analysis (PDF), Nijkamp and Poot demonstrated (with multiple references to your works) that in aggregate, dozens of your colleagues who have actually studied this issue support those results — in spades.

In prosperous, developed countries, smaller government does not yield faster growth. As you and your colleagues have demonstrated, that belief is a myth. (The U.S. has been taxing about 28% of GDP for decades — local, state, and federal combined. Europe has been taxing 40%. But growth rates have been the same.)

But you have constantly promulgated that myth–and you continue to do so–in your scholarly and popular writings, and public pronouncements. This is especially concerning because your statements receive widespread attention and credence regarding taxation and spending policies in the U.S.–which is a decidedly rich country.

Facts on the ground:

In your 2000 paper you broke out growth rates for a panel of Rich countries, of OECD countries, and of Poor countries (PDF: table 1.1, page 35). Results:

Correlations: Government consumption versus growth in real GDP per capita
Rich-countries: -.014 (.042)
OECD-countries: .015 (.040)
Poor countries: -.167 (.030)
All countries: -.157 (.022)

For prosperous countries the results are one positive (more government consumption, faster growth), one negative, neither even vaguely significant.

Only the poor-country panel shows significance. So the negative correlation for the overall sample is completely dominated by the poor-country results. (Not surprisingly: The correlation for poor countries is relatively large, and poor countries in the sample — which are weighted equally with rich countries — greatly outnumber the rich countries.)

As far as I can determine, your 2000 findings regarding rich versus poor countries have been completely absent from your other (widely-cited) works in the field.* Your conclusions in those works have been based on your full sample of approximately 100 countries, which is dominated by poor countries.

You consistently state that greater government consumption reduces growth rates, with some iteration of the following graph.

6a00d8345bb36969e20111686666a5970c-800wi

Even in your 2000 paper, you make no mention of your own findings therein, but rather make the following blanket — and importantly misrepresentative — statement (page 12).

Table 1, column 1 indicates that the effect of the government consumption ratio, G/Y [consumption as a percent of GDP –Steve], on growth is significantly negative. The coefficient estimate implies that an increase in G/Y of 10 percentage points would reduce the growth rate on impact by 1.6% per year.

What about columns 3, 4, and 5? Is this statement  true for prosperous countries like the U.S.? And is it wise to make recommendations about U.S. policy based on findings dominated by countries like Thailand and Mozambique?

Can you explain why you have ignored your own findings — seemingly swept them under the rug — and consistently made statements contradicted both by those findings and by the aggregate findings of your colleagues who have, like you, actually studied this issue?

Thanks,

Steve

* I’ve gone back through much of your work, but the key works on this subject are Determinants of Economic Growth (1998), “Recent Developments in Endogenous Growth Theory” (chapter, 2000), Economic Growth in a Cross Section of Countries (2001), and Economic Growth (2003).

Cross-posted at Angry Bear.

The Macroeconomics of Chinese Kleptocracy

June 12th, 2012 6 comments

Damn, Krugman beat me to this yesterday. I thought I would be bringing in a fascinating piece from the fringes of the Australioblogosphere.

Bronte Capital: The Macroeconomics of Chinese kleptocracy.

My basic take is the same as Paul’s:

I have no idea whether this John Hempton piece on China is at all right, but it’s a terrific read, and provides food for thought.

The logic of the piece is very much dependent on the loanable-funds model:

The Chinese kleptocracy – and indeed several major trends in the global economy – depend on copious quantities of savings at negative expected rates of return by middle and lower income Chinese.

As we saw quite clearly in The Great Keen-Krugman Debate, Paul is a firm believer in that model (and obviously Hempton is too). I and many others (notably Keen) have suggested that the model is ridiculous and nonsensical on its face.

If we look at the Hempton piece through other eyes — MMT for instance — does it still hold up? How can we rewrite it to explain things better while retaining its rather convincing insights?

Now here’s what’s fascinating: my hat tip goes to a post two days ago by Craig Tindale at … Steve Keen’s blog — a blog where you find little patience for the loanable funds model.

1. Why do we find an implicitly approving link over there?

2. How did Krugman come across this piece? Has he taken to reading Keen? If so, it seems rather churlish of him to withhold the hat tip…

Cross-posted at Angry Bear.

Vanity, All Is Vanity. David Brooks Gets One Thing Right.

June 12th, 2012 29 comments

Today (emphasis mine):

Vast majorities of Americans don’t trust their institutions. That’s not mostly because our institutions perform much worse than they did in 1925 and 1955, when they were widely trusted. It’s mostly because more people are cynical and like to pretend that they are better than everything else around them. Vanity has more to do with rising distrust than anything else.

Or more aptly: rising distrust has more to do with vanity than anything else.

This nicely encapsulates an explanation I’ve been coming to for what’s the matter with Kansas — an explanation for the frantic, desperate-seeming, reality-denying, and self-contradictory rhetorical contortions that tea partiers and the Republican right constantly resort to.

They’re protecting, and stroking, their egos.

If America is exceptional, then they’re exceptional. If Sarah Palin isn’t exceptional, then they might not be — probably aren’t, in fact.

If government programs have been necessary to their success, their success might not be primarily a result of their own noble efforts.

If well-off people’s self-serving belief system results in less economic opportunity, they are hard-pressed to plausibly trumpet their clear-eyed pragmatism and serene virtue in empowering and enriching the deserving poor.

If the marketplace does not reliably reward personal merit, their place in life (however modest or grand), has little to do with their personal merit.

If CEO performance is largely a matter of luck (right company, right time), the heroical, captains-of-industry self-regard of those CEOs is a delusion.

It’s easy to add to this list. And it’s also easy to see why stoking this conflagration of self-regard — telling voters that “they are better than everything else around them” (notably government) — would be an excellent political strategy. (How do you know when a politician is lying?)

Combine this strategy with the world’s oldest political pander — “I’ll cut your taxes!” — and you have a pretty good explanation for thirty years of otherwise-inexplicable political ascendancy.

Hat tip: Ecclesiastes.

Cross-posted at Angry Bear.

Dems Need to Pay Attention to Monetary Policy!

June 9th, 2012 13 comments

I’m not nearly the first to this party, but want to bring it up for my readers who may not be clued in to it.

For the second year in a row, some of the best economics bloggers on the Web (this year: Matt Yglesias, Mike Konczal, Karl Smith, Lisa Donner), did a session at Netroots Nation on monetary policy, and how the progressive left (including Democratic lawmakers) needs to saddle up and counter the destructive right-wing influence in this area.

Why the Fed is the Most Important Economic Issue You Know Nothing About

This is a big deal. Monetary policy often, even usually, has a far more potent effect on national well-being and the distribution of wealth and income than the fiscal policy that progressives consider to be so important. (At least in the short- to medium term.) Those fiscal issues are important. But ignoring monetary policy is like ignoring coal plants in discussions of global warming.

Lefty idol Paul Krugman has given this example a zillion times: when Volcker opened the monetary taps in ’83 (after clamping down to tame inflation), the economy — and the employment situation — turned around hugely, within months. That was something of a special case, but it imparts the potential power and immediacy of monetary policy compared to many/most fiscal initiatives, which usually take quite a while to play out, and are rarely large enough to be big short-term game-changers.

But in the political realm, Democrats have largely ceded their voices to the ‘Pubs (HT Ryan Cooper) and their inflation hysteria (which survives like a zombie that won’t die, year after year, even while being wrong, year after year):

“I wish you would take QE3 off the table,” said Texas Rep. Kevin Brady, the ranking Republican on the committee. “I wish you would look the markets in the eye and say that the Fed has done too much.” Similarly, Sen. Jim DeMint (R-SC) complained to Bernanke that many of the stimulative measures the Federal Reserve has taken “are giving us a false sense of security.”

By contrast:

The ranking Democrat on the committee, Sen. Bob Casey, merely inquired, in a neutral tone, whether the Federal Reserve was planning to take further action. Bernanke simply replied that the Fed was still contemplating the matter, and a lot depended on whether “there will be enough growth going forward to make material progress on the unemployment rate.” (Fed officials meet on June 19 to discuss their next steps.)

The Fed is supposed to:

1. Provide for both stable prices and full employment.

and

2. Be politically independent.

But:

1. It has criminally abdicated its responsibility for employment in recent years, while fetishizing its inflation mandate.

2. It is subject to political pressure, as the quotations above make clear.

More proof of #2, from Binyamin Applebaum (HT Matt Yglesias), quoting Eric S. Rosengren, president of the Federal Reserve Bank of Boston:

“We’ve done things that are quite unusual. We’re using tools that we have less experience with,” Mr. Rosengren said. “Most of the criticism has been that we’re being too accommodative. That is a concern that we have to put some weight on.”

It’s time for progressives and congressional Democrats to start exerting some of that pressure. Pay attention, people!

Cross-posted at Angry Bear.

Turtles All the Way Down: Are Fed Promises “Actions”? How About Promises to Make Promises? Game Theory Edition

June 8th, 2012 Comments off

The frequently brilliant Ashwin Parameswaran makes The Case Against Monetary Stimulus Via Asset Purchases, and Nick Rowe responds. Ashwin replies, analyzing “monetary policy as a threat strategy.”

Nick’s view (in Ashwin’s words):

…a credible threat will cause market expectations to adjust and negate the need for any actual intervention in markets by the central bank.

Ashwin counters this view [my slight tweaks]:

…expectations[-setting] only work[s] when there is a clear and credible set of actions that serve as the bazooka(s) to enforce these expectations.

I think the key hinge here is the difference between the declarative, conditional, and subjunctive moods: the assumption that the actions would serve as a bazooka, if….

Nick seems to be assuming that the Fed’s promise is always credible — regardless of whether they have ever (or reliably) fired the bazooka in the past (followed up on their promises with OMO/QE actions/balance sheet changes) — because in theory the Fed could fire the bazooka, and (again, in theory) the bazooka would have the desired effect.

The promise would be credible if: 1. the Fed has shown willingness to engage in those actions in the past in similar situations — by actually taking those actions — and 2. Those actions had the desired effect.

Nick’s view might make sense if the Fed were playing a one-round game. (They could do it, so market players have to assume that if necessary they can and will do it, and it will work.)

But it’s a repeated/ongoing game. I sed at Nick’s place:

It’s the threat that I will shoot you that causes you to turn over your wallet. Not the actual shooting. (The shooting can have the desired effect, but it’s unnecessary if the threat is credible.)

But you and I both know that I’m going to be stealing your wallet every day for the rest of our lives. If I don’t shoot you today when you refuse to hand it over, the threat won’t be credible tomorrow.

So yeah: the threat generally does the job. But the shooting can also do the job, and periodic actual shooting is necessary for the threat to do the job.

Nick replies:

I threaten to go to the North of the herd of cattle, to drive them South. But if my threat is credible, and they head South, I actually follow the cattle south.

To which I replied:

But if it’s a repeated game, if you never head north the threat isn’t credible.

You have to head north sometimes.

(This is all ignoring the question of whether actual balance-sheet changes even would have the desired effect, which market players seem decidedly uncertain about.)

Max, replying to me in the comments at Ashwin’s, seems to perfectly encapsulate Nick’s (some-variety-of-)monetarist position:

Steve, raising the inflation target is an “action”.

Try this:

The Fed promises to raise inflation or NGDP to X (target or relative-to-trend level), doing whatever is necessary in the future to achieve that target/level. They do nothing else — make no significant changes to their balance sheet.

What they’re saying:

“If we have not achieved that target/level at our meeting six months or two years from now, we promise that we will again promise to do whatever is necessary in the future to achieve that target/level.”

Max: when the Fed promises to make future promises, is that an “action”?

It’s turtles all the way down.

I hereby propose a new acronym to add to the lexicon of Fed and monetarist watchers: TATWD.

Nick takes his thinking to its logical conclusion (as he is quite admirably wont to do). Working with his north/south cattle metaphor, he says:

if the conditional threat to buy assets is credible, the central bank would actually sell assets.

So the Fed:

“We’re so confident in our ability to boost NGDP that we’re going to announce our intention to do so, and when we (inevitably) see the lead cow tending south, we’ll start selling in anticipation of our threat working perfectly. The rest of the herd, convinced by our displayed confidence, will turn and follow the leader.”

Does this seem likely?

Or:

“We’ll make our threat, and watch with satisfaction as the whole herd (inevitably) turns south. Then we’ll follow them by selling. We’ll never have to buy.”

As Market Monetarists will be the first to tell you (and as all will I think agree), the Fed is extremely, even excessively reluctant to turn north (more QE). The cattle — market players — know that.

If the Market Monetarists are right, Nick’s (and their) logic has a broken link: the cattle won’t believe the threat to go north because the cattle know that the Fed really, really doesn’t want to go north. (My explanation of why they don’t want to.)

Or, Nick’s logic is just obvious: if the economy gets better (the herd turns south) — for whatever reason(s) — the Fed will tighten by selling assets. No duh.

Cross-posted at Angry Bear.

The Myth of the “Independent” Voter

June 5th, 2012 Comments off

John Sides at The Monkey Cage makes what seems to be an incredibly important point, at least for politico types. In the latest Pew report (PDF) that everyone’s nattering about, we see a big rise in “independent” voters over the last decade (to 38%).

But:

only 12% of respondents did not identify with or lean toward a party

And if you look at the leaners, they’re just as partisan as the fully-declared party supporters:

So pretty much everyone who’s paying attention has taken sides.

Do with that what you will.

Cross-posted at Angry Bear.

I Heart Sane Conservatives!

June 5th, 2012 2 comments

In a recent post I spoke with astonishment and admiration of an article/post by Ron Unz in the May issue of The American Conservative (he’s the publisher) that laid out a realistic, fact-based, cogent, and coherent portrait of our current economic situation. (I also pointed out that he 1. couched the post in an odd and unnecessarily tangential framing, vis-a-vis China, and 2. ignored what I consider to be the most obvious causes of that situation — thirty years of “conservative” economic ascendancy and the resulting empowerment/engorgement of the financial industry).*

I’ve been reading TAC regularly since then (yes: I’m way behind the curve on this), and I think it’s great. These guys fully understand that the dominant Republican/Conservative rhetoric is radical, specious, contrary to reality, and ignorant, blind to, or completely dismissive of the most basic facts on the ground — the stark, simple realities of economic history.

Here’s a guy who likes historical fact.

They understand that today’s so-called “conservatives” are anything but conservative. I could talk economics and politics with them over drinks without wanting to shoot myself in the head in the first twelve minutes. These are Edmund Burke/Dwight David Eisenhower conservatives. We could work with these people.

Yes, I think they still skew their causal interpretations in ways that ignore what seem to me to be patent realities, but they’re not the intentionally blind and/or shameless cherry-pickers, fact-distorters, and logic-contorters that comprise the whole Republican power structure — all the way from the base to Boehner (and decidedly including a large cohort of top-credentialed academic economists).

Speaking of Boehner, here’s a great example by Scott Galupo — a TAC contributor, former staffer for Boehner, and former staff writer for the Sun Myung Moon-founded (and decidedly righty) Washington Times.

Ronald Reagan Practiced Keynesian Economics Successfully – (usnews.com).

I’m not completely taken with this piece. He pretty much skirts the fact that Bush I and Clinton policies embodied exactly the responsible Keynesianism that he recommends (as do I) and that Reagan practiced (to some debatably greater or lesser degree) — pull back on stimulus, raise taxes as needed, and trim deficits in the good times, putting money in the bank for the bad times. And he definitely doesn’t mention how well those Bush I and (especially) Clinton policies seem to have worked out for economic growth. But still: he’s nowhere near the asylum that is modern mainstream “conservatism.”

So here’s a loud shoutout to The American Conservative, and to others of similar stripe (all of whom have been excommunicated or ignored by the Palin paleos and their nutjob nabobs). David Frum. Bruce Bartlett. Christopher BuckleyReihan SalamJim Manzi. (My gentle readers can undoubtedly list more.) Give them your links, your “likes,” and your Google love. (Damn, I might even subscribe.) Talk to them. If we ever manage to emerge from the political and economic morass delivered unto us by the modern Republican party, these people and others like them are likely to be leading the way — in our direction.

* I was somewhat put out that Ron linked to my post in a followup as if my comments were unequivocably approbative, ignoring what I think were important criticisms. But hey.

Cross-posted at Angry Bear.

Eating the Seed Corn? Consumption in the American Economy Since 1929

June 4th, 2012 Comments off

Following up on some work I did a while back (Kuznets Revisited: Investment in the American Economy Since 1929), I got curious about what consumption has looked like in America over the last 80 years.

I’ll give you the results first, as a proportion of output, or GDP, followed by explanation and discussion. Click for larger.

Thinking About Consumption

This all requires some explanation. First off, when I use the word “real” herein, it doesn’t mean “inflation-adjusted.” It means real-world, nonfinancial. In national-account-speak, all consumption and investment spending is about purchases of real goods and services — things that are produced and consumed. Financial “goods” or “assets” — which aren’t/can’t be consumed by humans — aren’t even part of the accounting. (We’re “inside” the NIPAs.)

Next: when you hear economists talk about “consumption,” they’re almost always talking about something somewhat different: consumption spending. Definition: purchases, within a period, of goods and services that are consumed within that same period. (If the period you’re looking at is long enough, everything is consumption. If it’s short enough, everything’s investment — breakfast is an investment in the afternoon’s work. I’ll just talk about one-year periods here to keep things simple.)

But in any period, we’re also consuming stuff that was produced in the past, and so is not included in measures of consumption spending. We’re depleting inventories (these fluctuate up and down over the years, sort of a buffer stock), but more importantly we’re consuming real, long-term productive assets by using them, and through the inevitable decay of time (and obsolescence — a tricky technical accounting issue that I won’t explore here). When you run a drill press you’re using it up. You’re consuming it. It’s even true of living in your house. Absent maintenance and remodels, it eventually becomes a worthless heap of rotting lumber; you’ve consumed its value by living in it.

This is accounted for in the national accounts as Consumption of Fixed Capital (CFC).* (Fixed capital is broken down into equipment, software, and structures, and structures are further broken down into residential and non-residential. Consumer durables — cars and refrigerators — aren’t included in fixed capital because it would require national accountants to model households as production centers, with capital accounts.)

But even with that big C-word at the beginning of its name, economists rarely include CFC as part of “consumption.” In the national accounts you’ll find it accounted for as part of investment — Gross Investment minus CFC is Net Investment, or the net amount added to our national horde of fixed assets. (When you hear macroeconomists talk about investment, it’s almost always shorthand for “gross investment.”)

So: Consumption of Fixed Capital is not spending, but it is (actual, if estimated) consumption.

I was wondering how much of our real output we actually consume each year, so I added CFC to consumption spending to get what I’ll call Gross Consumption (with Net Investment being the remainder of national spending).**

Coming back to the graph, we see:

• A denominator-driven spike in these measures during the depression (GDP plummeted).

• A rapid decline in the pre-war and war years driven by 1. rising GDP and 2. a massive temporary increase in government consumption spending. (Factoid: In just seven years 1940-1947, government’s share of national consumption spending went from 13% to 39% and back to 16%.)

• A steady period of relatively low consumption from the late 40s until the mid 70s or early 80s (depending which measure you look at).

• Consuming an increasingly large portion of our national output since the late 70s/early 80s — with Gross Consumption just shy of 100% ’08-’10.

(The timing of the 70s/80s breakpoint is somewhat unclear because of the high and variable inflation of that period, which had a significant impact on estimates of capital consumption. Changed amortization and depreciation schedules, applied against the whole existing stock of fixed assets, results in significant moves.)

The depression and war years are pretty to easy to understand. What’s interesting here is the trend change since the 70s/80s. That change is not generally driven by more rapid capital consumption: that’s been pretty steady over the decades (though business capital consumption has accelerated as the capital proportions have shifted from longer-lived structures to more rapidly depreciating hardware and software):

You can see that in the first graph as well; the two lines have moved pretty much in synch.

So the long-term trend change for the nation as a whole is simply toward more consumption spending and less investment spending. That may seem obvious to some, but it’s nice to know it for sure.

It’s the same 70s/80s inflection point and secular shift that we see in so many other measures, especially various measures of economic growth (pointed out repeatedly by so many, notably on Angry Bear by Mike Kimel, moi, Jazzbumpa, and others, and serving as the impelling premise of Tyler Cowen’s The Great Stagnation).

I can think of a dozen different explanations, interpretations, and rhetorical riffs off of this three-decade trend. While most have a perjorative and pessimistic import, not all do. Perhaps we’ve gotten better at supply-chain management, so we require an ever-smaller buffer stock of real stuff relative to consumption and output. Or maybe we don’t need as much productive stuff — as it’s measured in dollar terms in the national accounts — to produce the same dollar-denominated quantities for consumption.

These strike me as pretty charitable and speculative explanations, though. The most obvious interpretation is suggested by the title of this post: we’re consuming more and more of our seed corn (and tractors), leaving less for future consumption and production (and growth). That may be true, or it may be simplistically reductive.

For the moment I’ll leave that determination to my gentle readers, and simply leave you with a long-term view of what seems to be an important and not-widely-discussed measure — Gross Consumption — describing how our economy has been operating over the last eighty years.

* I really wish they said “fixed assets” instead of “fixed capital,” because economists are so profoundly confused about what “capital” means. (Many seem to think that fixed “capital” and financial “capital” are equally parts of some synonymous, homogenous, or vaguely contiguous undifferentiated blob.) Many everyday folks are equally confused about “assets,” but most economists seem to understand at least dimly that real (or at least fixed) assets and financial assets are decidedly different things that can’t be thought about, analyzed, or modeled in the same ways. The key in discussion is to always specify what type of assets or capital you’re talking about, especially differentiating between financial and real (with fixed being a subset of real that happens to be fairly easily measurable by totting up money transactions).

** Here ignoring the trade balance for the moment; we purchase 3 or 4% more than we produce these days — part consumption spending, part investment spending — because in toto we import more than we export. Don’t be confused by the GDP = Production = Expenditures = Consumption Spending + Investment Spending = Income identity; that’s only true in a closed economy.

Cross-posted at Angry Bear.

Improper Concepts to Measure

June 4th, 2012 5 comments

In the comments on my recent Home Work, GDP, and Family Values, which discusses a recent study (PDF) on the subject, Saturos points to this Arnold Kling post replying to a Timothy Taylor post summarizing that study.

Saturos thinks Arnold’s post is “excellent.” I think otherwise.

Arnold says “the value of household production” is an “improper concept to measure.” His reasoning:

Should you measure the value of the deck by multiplying the number of hours I spend on it times the wage rate of a professional carpenter? If the carpenter takes 40 hours and I take 4000 hours, then you want to tell me that my deck is 100 times more valuable?

So it’s “improper to measure” this concept because Timothy suggests the wrong wage rate to be used in the measurement/estimate. (Be Very Clear Here: all of the national accounts values are estimates, some more firmly grounded than others.)

I agree that the value of home production shouldn’t be estimated based on what a professional would charge for the same work; that makes no sense. The median wage — what I suggested in my post — does, especially since we’re talking in terms of aggregate national amounts. This completely ameliorates the problem that Arnold’s objection is based upon (basically, normalizing for “utility” and market value) — perhaps not perfectly but very effectively, estimating based on dollar-denominated, market-determined values.

But Arnold seems to want to do much more than correct the estimate. He wants to make off-limits any estimates of productive work not involving monetary exchange. It’s “improper” to even measure the concepts. They’re not just hard to estimate; they’re wrong to estimate.

Discussions of proper methods and targets for national accounting go way back. You’ll find them in spades in Kuznets (basically the father of modern national accounting) as far back as 1946. For an excellent overview of the history and issues, see Jorgensen and Landefeld’s 2004 Blueprint for an Expanded and Integrated Set of Accounts for the United States (PDF).

Three snippets from that fine work:

Simon Kuznets, one of the primary architects of the U.S. accounts, recognized the limitations of focusing on market activities and excluding household production and a broad range of other non-market activities and assets that have productive value or yield satisfaction. The need to better understand the sources of economic growth in the post-war era led to the development—much of it by academic researchers—of various supplemental series, such as investments in human capital.

Kuznets (1946), favored development of a much broader set of welfare-orientated accounts that would focus on sustainability and address the externalities and social costs associated with economic development.

Work by Nordhaus and Tobin (1973), among others, on adjusting traditional economic accounts for changes in leisure time, disamenities of urbanization, exhaustion of natural resources, population growth, and other aspects of welfare produced indicators of economic well-being.

It’s hard to avoid imputing normative objectives to Arnold’s objection. If you outlaw measurement of things that are not represented by money transactions, you essentially outlaw discussion of utility (or, the equivalent: pre-assume that one dollar always and everywhere equals one “util”). This avoids the need to perceive some obvious implications of Textbook Economic Concepts like declining marginal utility, which tells us that transferring money from the rich to the poor, ceteris paribus, creates utility out of thin air.

I wouldn’t even dream of saying that Arnold makes these kinds of assertions to please his masters at Mercatus. (No names, just initials: Koch.) But I have no qualms saying that if he didn’t make these kinds of assertions, he wouldn’t have ended up there. See Manufacturing Consent.

Cross-posted at Angry Bear.