Relevant and even prescient commentary on news, politics and the economy.

What do we want our economy to do? Misuse of GDP

by Divorced one like Bush
(successfully I might add)

I had the following quotes sitting around for awhile. Like May of 07. Being that we have a “crisis” with our economy (I have a hard time with the word crisis being used, it implies suddenness, unseen), a new governing philosophy in place and we really, really, really have to broaden our discussion, I feel this is the time to post some thoughts on GDP. It goes along with asking what I think is the most important, “In the beginning”, big bang question to ask now that we have been a “great social experiment” for TWO HUNDRED and THIRTY TWO years: What do we want our economy to do for us?

I think it’s about time we ask this question, No? The “for us” is the important subject of the question.

But even if we act to erase material poverty, there is another greater task, it is to confront the poverty of satisfaction – purpose and dignity – that afflicts us all. Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product – if we judge the United States of America by that – that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife. And the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.
Robert Kennedy, University of Kansas. 3/18/68

Unfortunately GDP figures are generally used without the caveat that they represent an income that cannot be sustained. Current calculations ignore the degradation of the natural resource base and view the sale of non-renewable resources entirely as income. A better way must be found to measure the prosperity and progress of mankind”
Barber Conable,
former President of the World Bank, 1989

Simon Kuznets – GDP’s creator – in his very first report to the US Congress in 1934 said[2]:
…the welfare of a nation can scarcely be inferred from a measure of national income. If the GDP is up, why is America down? Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

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On the Internet, no one knows you’re a Nobel Prize-winning Economist*

And sometimes it would be better if it stayed that way.

Remember, Real Business Cycle is when you look back at the Perfect Storm and note how calm the water is now.

Yes, I know. prize in honor of and all that.

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An Economist Who Doesn’t Believe People Respond to Incentives

Ladies and gentlemen, Tyler (“So Right It Hurts“) Cowen presents the following, er, argument:

Excessive bank regulation is another danger. To be sure, the regulatory structure for financial institutions failed in the current crisis, and change is in order. But we shouldn’t reform in a way that will discourage bank lending and weaken the tie between savings and investment. Banks are already allergic to very risky mortgages — probably excessively so — and we shouldn’t overreact by punishing them for past mistakes. [emphasis mine]

Somewhere, an Economic Angel had its wings rent asunder.

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City Journal’s Propositions of Economics

Mark Thoma asks for comments on a set of supposed propositions of economic science that ran in the City Journal, a/k/a the glibertarian Manhattan Institute’s house organ. I thought the best thing I could do would be to fill in some ellipses from Mark’s extended citation:

1. The market economy is the most efficient of all economic systems.

Some market economies are more market, and more efficient than others. (At the same time? Hey, is that an underpants gnome over there?!)

2. Free trade helps economic development.

Unless it’s trade in intellectual property.

3. Good institutions help development.

However, we have no idea what exactly those are.

4. The best measure of a good economy is its growth.

Growth is also acceptable as a measure of a not-so-good economy.

5. Creative destruction is the engine of economic growth.

So is non-creative destruction (see also #4).

6. Monetary stability, too, is necessary for growth; inflation is always harmful.

Especially wage inflation.

7. Unemployment among unskilled workers is largely determined by how much labor costs.

Because some sectors of the economy only have supply curves.

8. While the welfare state is necessary in some form, it isn’t always effective.

1. Freedom. 2. ??? 3. Dinner on the table!

And don’t take away our cars.

9. The creation of complex financial markets has brought about economic progress.

In the finance and/or litigation sectors.

10. Competition is usually desirable.

But we’re flexible on this in surprising ways.

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Should We Worry about Tyler Cowen?

Tim Harford (h/t Mark Thoma) presents the old trade-off between Rationality and Cooperation, with a curious parenthetic:

Except, nobody really thinks this is the way players would behave in reality. The optimal strategy seems sociopathic; isn’t it worth playing cooperatively in the hope that the other player will do the same thing? (Unlike much real human interaction, standard game theory does not accomodate the “hope” that someone else will play suboptimally: optimal play is to be expected at all times. )

But Ignacio Palacios-Huerta…and Oscar Volij gave the centipede game to skilled chess players. They found that the chess players were far more likely to play optimally; grandmasters always played optimally and took the $4. Hyper-rationality can be a disadvantage. (Or did the experiment discover something else: that chess grandmasters are sociopaths?) Palacios-Huerta and Volij don’t speculate. My guess is that they have discovered something about the rationality rather than morality or empathy of chess players, but I may be wrong. [emphasis mine; parenthetic link about real football omitted]

They should run the same experiment with Tour de France riders.

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Dep’t of Who’d’a Thunk: Interests of Social Security Retirees and High-Bracket Taxpayers Align?

Both would benefit from a higher inflation index than CPI. AEI hack (and former Social Security Administration commissioner!) Andrew Biggs redefines bracket creep (*) for the W$J op-ed page:

Tax revenues would skyrocket if the tax cuts expire, due to “bracket creep.” Average incomes are higher today than in the 1990s, but income-tax brackets aren’t adjusted for the growth of earnings. As a result, Americans will shift into higher tax brackets and pay a greater share of their incomes in taxes. [emphasis added]

Via Greg Mankiw, who for inscrutable reasons calls this “reporting.”

Of course, tax brackets (with the notable exception of those of the Alternative Minimum Tax) now are indexed for growth in prices, at least to the extent that’s measured by CPI. Really, this is part of a broader attack on progressive taxation, as you can see from an earlier effort along these lines by AEI über-hack Kevin Hassett of Dow 36,000 fame. Though I suppose there may be some positive side effects for society if the AEI’s paymasters had to allow enough trickle-down to keep average wage growth ahead of CPI.

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McArdle vs. Warren, Round 1: Are We Saving Enough?

Megan McArdle’s taken up the task of trying to prove that the middle class actually isn’t stressed to the breaking point, apparently as part of a project to teach Elizabeth Warren a lesson in good reserach practices or something. Part the first claims that observed low savings rates are, contra Warren et al., nothing to worry about:

But Warren, like many commentators, implies that this is because families are too strapped to save. In fact, it’s because of the two successive bubbles in the stock and housing markets. Families responded to the run up in their net worth by saving less.

Now, you could argue that this was foolish, and I in fact agree with you… The asset model is a standard explanation that pretty much any economist in the country could give you… Even if you think this explanation is wrong, I think you need to explain why your model is a better fit.

I’m a little surprised that she even admitted that the behavior was “foolish.” She might have pulled out this [pdf] paper (*) from the JPE which claims to predict optimal wealth targets and concludes most of us are doing quite well, if anything tending to oversave. (If you believe that, then please allow me to sell you this optimally structured debt-backed security!)

The gut-check on the notion that we’re saving superoptimally, as I see it, is this: what middle-aged person among us wakes up, slaps self on the forehead, and exclaims, “Dang, if only I drank another beer back in college, I could have $10 less in my savings today!”

In fact, a CBO study McArdle links in the post already has some mixed news for her in the details. Even the studies that are generally sanguine about retirement savings adequacy find that savings inadequacy is not independent of class considerations. Shockingly, factors including lower income and lower education have systematic relationships with savings inadequacy. Savings inadequacy tends towards the norm for the lower-middle class and below.

The story that savings rates have rationally declined in response to asset price growth also begs some features of the savings rate data. Specifically, the story ought to be reversible: if everyone was happily booking their home equity inflation in lieu of savings and not overly stressed, financially, then the lower returns on the household portfolios ought to spark a round of catch-up savings. Look at the recent history of the NIPA savings rate, though:

The savings rate collapses to zero, and basically has stayed there, even as the collapse of the RE bubble has been vigorously marking down the value of the middle-class family’s biggest asset. For that matter, the savings rate is no higher in 2002 (after the gyrations of the last recession and late-2001), with the stock market busted and the real estate bubble well under way but a fair amount of kool-aid not yet drunk than it was in early 2000 (and 1999, not shown) when housing and the stock market should have both contributed positively to household balance sheets.

So with the housing market now long past peak, and the stock market lackluster, where’s the pop in savings? Either people rationally want to be poorer in the future (doubtful!) or they ain’t got the money.

Other affiliated observations, like the substitution of credit cards for decreasingly available home-equity loans and increasing credit card delinquency, don’t help McArdle’s case. The sociologists — they study class for a living, the the wacko elitist liberals (**) — have plenty to say on the subject, and that picture isn’t pretty either.

This points to our next installment: are our debt loads really so bad? Stay tuned!

(*) John Karl Scholz, Ananth Seshadri and Surachai Khitatrakun, “Are Americans Saving ‘Optimally’ for Retirement?” Journal of Political Economy, 114(4), August 2006, 607-643.

(**) Kidding about the wacko elitist part.

BTW, my dismissal of models that purport to compare observed savings behavior with results from intertemporally optimal behavior isn’t just that I think the results are obviously at variance with reality. I have a theory for why they’re wrong (and, in a way, a “neoclassical” theory of why paternalistic policy interventions of the sort coming out of the behavioral economics programs can work). The gut check bit isn’t entirely an attempted joke: as I like to think of it, our future selves can’t freely “contract” with our current selves not to do things that we’ll regret ex post. What would you expect our current selves, other than maybe to the extent we try to be H. economicus, to do with that “market power”? The unwary rationalist could confuse the results with a high rate of time preference. So we might be made better off by mechanisms that effectively force us to take the longer view now.

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Economic Advisors to the Presidential Candidates – Let’s Hope McCain Isn’t Listening to Kudlow

Via Greg Mankiw comes a discussion by Jeanne Sahadi that Senator Clinton listens to Gene Sperling (no surprise) and Senator Obama listens to Austan Goolsbee. John McCain apparently is listening to deficit hawk Douglas Holtz-Eakin who appears to be more willing to use entitlement cuts than tax increases to restore fiscal sanity.

On this score – I’d prefer those listening to Sperling or Goolsbee but let’s all pray that McCain does not listen to Lawrence Kudlow:

This is one reason why my idea of a McCain dollar could be very important. A stronger greenback would reduce inflation. Cutting corporate taxes, as well as reforming the entire tax code, might also help.

That’s right boys and girls – let’s go with tight money to lower inflation as we adopt fiscal stimulus to get us back to full employment. Sort of what I criticized in the update to this post:

Isn’t this the macroeconomic policy mix during 1981 that gave us a collapse of net exports from an overly strong dollar (something Kudlow endorses) and the 1982 recession? Of course, we could have a massive fiscal stimulus with little in the way of tight money, which might be inflationary if Buiter is even remotely correct about the labor market. Leave it to a clown like Kudlow to endorse such a disastrous policy mix!

Correct me if I’m wrong but wasn’t Kudlow one of the village idiots that convinced Reagan to go along with this insane macroeconomic policy mix. While Reagan was an economics major, McCain has admitted that he knows little about economics. So why would a President McCain be more willing to listen to Douglas Holtz-Eakin than to free lunch village idiots like Lawrence Kudlow?

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Doing the Economy One Better

Seems there is a movement afoot to do the economy one better. There will be a conference Beyond GDP held in Brussels in November.

GDP is the best-recognised measure of economic performance in the world, often used as a generic indicator of progress. However, the relationship between economic growth as measured by GDP and other dimensions of societal progress is not straightforward. Effectively measuring progress, wealth and well-being requires indices that are as clear and appealing as GDP but more inclusive than GDP—ones that incorporate social and environmental issues. This is especially important given global challenges such as climate change, global poverty, pressure on resources and their potential impact on societies.

The purpose:

The European Commission, European Parliament, Club of Rome, OECD and WWF will host a high-level conference with the objectives of clarifying which indices are most appropriate to measure progress, and how these can best be integrated into the decision-making process and taken up by public debate.

This link is to a list of indicators that are being discussed.

While people look to come up with a better measurement, there is a movement coming to your town that has happened throughout the rest of the world: The Solidarity Economy Network.

The Solidarity Economy offers an alternative economic framework to that of neoliberal globalization – one that is grounded in solidarity and cooperation, rather than the pursuit of narrow, individual self-interest.• It promotes social and economic democracy, equity in all dimensions (e.g. race, class, gender…) and sustainability.• It is pluralist and organic in its approach, allowing for different forms and strategies in different contexts, and is open to continual change driven from the bottom up whether in civil society or the marketplace.

Of course, a move to do the economy one better would not be complete without a discussion of the “corporation”.
There is a Summit at Faneuil Hall, Boston asking: Are Corporations equipped for the 21st century?

The Summit…is inspired by the growing tension between the emergence of the corporation as the world’s most powerful and innovative social institution and the growing severity of social and environmental problems that plague billions of people. As the tension between these two realities grows, the roles, responsibilities and rights of business are the subject of increasing controversy, as are the relationships of the corporation to government and civil society.

The Summit marks an historical moment for considering how the most influential social institution of our time can serve the broader public interest essential to its own long-term prosperity, and to begin designing corporate forms that recognize the reciprocity between private and public interests.


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Money from money? Not good.

On September 28th Bill Moyers’ guest was John Bogle. You can see the interview or read the transcript from here.

The setup for the interview is about private equity firms and he mentions the Sunday NY Times front page article: At Many Homes, More Profit and Less Nursing.

His introduction of Mr. Bogle is:

It’s this kind of capitalism that drives John Bogle up the wall, as you’re about to learn. John Bogle believes owners should be in charge — and accountable. He’s known and respected world-wide as the father of index funds and the founder of The Vanguard Group, one of the largest mutual funds anywhere, with over a trillion dollars in assets.

I make no bones about it. My opinion is that the focus is currently wrong 1. as it relates to purpose of an economy and 2. by the philosophy that studies it: economics. The focus of understanding resulting in the judgment of an economy, should be in how successful it is in fulfilling these two aspects of the constitution: insure domestic tranquility, promote the general welfare.

I’ll put it this way: to what purpose is there to knowing how to make horse power, greater efficiency, greater durability, the relationship of the parts in motion, the chemistry of fuels, the metallurgy, flow dynamics, etc., etc., etc. if not to serve people? Just because? Just to make more?

So picture me in my recliner (be kind), suspicious of what I will hear when Mr. Moyers asked:

BILL MOYERS: What should be the dominant? What is the job of capitalism?

JOHN BOGLE: Well, ultimately, the job of capitalism is to serve the consumer.

WHAT?!!!!!!!! There is someone with more money than God that thinks like me? But…is there a but? Don’t tease me like this. I’m the one saying we are making money from money and that such is of no substance especially as it relates to our purpose (see US Constitution).

Within his answer is:

But, we’ve moved from that to a big capital accumulation — self interest — creating wealth for the providers of these services when the providers of these services are in fact subtracting value from society. So, it doesn’t work.

You can mail my PhD diploma — thank you very much, to: … : )

He notes that Lord Keynes has gotten “misshapen”. How?

JOHN BOGLE: Well, it’s gotten misshapen because the financial side of the economy is dominating the productive side of the economy…We’ve become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment ultimately of our society.

How bad is it?

It’s just gotten totally out of hand. My estimate is that the financial sector takes $560 billion a year out of society. Five hundred and sixty billion.

Did I hear this right, focusing on making money from money is not where it’s at? It’s hurting us?

I want to come back to the difference between the financial system and the productive system. The productive system adds to the value of our economy. And, by and large, the financial system subtracts. And, yet, it’s growing and growing and growing. And this short term thing where short term orientation in which trading pieces of paper is regarded as a social value. It is not a social value.

But what about labor? Do those at the top really get what they deserve?

And they get enormous amounts of pay for actually doing very little. I’m a
businessman. Listen, we all– we chief executives get an awful lot of credit
that we don’t deserve. Real work in companies is done by the people who are
getting themselves together and doing the hard work of making companies grow–

So, Milton knew of externalities, and a need for governance. Although it’s already in the constitution and should not be debatable. Cactus’ is showing us ideology matters. And now a person who makes money from money is telling us the current ideology has gone to far. What’s next? The World Bank seeing the light? Glad you asked. That is exactly what is next.

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