“Total Spending” Is Not the Same Thing as NGDP
Amongst my other problems with the market monetarist approach, is the frequent claim that they just want to maintain “total spending” or the “volume of the spending stream.”
No, that’s not correct. Nominal GDP is smaller than total expenditures each year.
I was reminded of this when I listened to Mark Skousen explain to Tom Woods why he (Skousen) thought economists needed to consider his alternative output measure, GO–Gross [Domestic] Output, which the BEA started tracking in 2014.
Incidentally, even Gross Output is a sliver of “total spending,” when we consider how much spending occurs each day in the financial markets.
I’m bringing this up (I think I’ve done it before) mostly just to remind ourselves of some basic facts about the real world, rather than parsing it according to our models. But I also think it cuts against one of Sumner’s ostensible virtues, since I think–though I admit I can’t find a good example* right now with just a little bit of Googling–that he is proud of NGDP being an objective, measurable thing “out there” versus real GDP which is an idea in our minds (since we need to deflate nominal spending by a price index to compute real GDP–it’s not directly observable).
* It’s not merely that I can’t find a good example, but I found this post where Sumner sounds like he’s saying almost the opposite. But I am 96% sure that Sumner has said that NGDP is something we can all observe, as opposed to real GDP which is more subjective by its very nature.
The USA tends to import more than it exports … but the whole import/export balance thing in GDP has always been a bit weird.
Also, capital expenditure is considered to be an investment on future consumption expenditure; so to avoid double-counting only count the consumption side and ignore the capital (but with devices like computers which are general purpose they could physically be either capital or consumption, even both… and that’s spreading as computers get into everything, so for example phones are now general purpose devices too).
The Gross Output proudly admits that it does double count so we don’t need to decide what is capital and what is consumable, but that’s weird as well because we count both the drill press and also the hole it drilled.
Ultimately we cannot know whether “society” is fulfilling its objectives, because we cannot ask “society” what it’s objectives are.
Imports actually play no role in GDP at all. The only reason they are “subtracted” is because they are included in consumption and investment already but shouldn’t be.
What you have to realize about GO is that it makes no sense to “count both the drill press and also the hole it drilled” if you’re trying to track a *real variable*-but if you’re trying to track the flow of money payments chasing both points of the production process, you do want to count both.
GDP is used as a numbers game to distract from enslavement and theft in third world countries for the benefit of firstworlders. By framing economics in national terms, the suffering inflicted on thirdworders to enable firstworlders to be rich can be ignored.
Incidentally, even within the narrow nationalist economic view, GDP and terms like “a rich and booming economy” still down not make sense.
I’m curious… did you bang this out on your keyboard made by slave labor or did you send this from your yurt in some obscure Asian tropical forest?
My keyboard is just as likely to be made with slave labor as yours is. The fact that there is currently no way to tell the difference between slave-made and non-slave-made keyboards is part of the problem of capitalism! And if this keyboard is made from slave labor, that’s all the more reason to try to do penance!
Really, almost anything you buy has the risk that it might contain something made with slave labor. The chances of accidentally enabling evil while shopping are obnoxiously high. So, even if you aren’t sure whether it’s your keyboard or your coat, it’s safe to assume there are multiple things you should do penance for.
Reading your posts are penance.
Considering that tens of millions slaves are being held captive, tortured, and killed all around the world, it would be good if you increased your penance. Like if you tried to do something to free slaves, reduce the amount of slavery you are accidentally enabling, or counter some of the propaganda libertarians write which enables people to pretend like slavery is not happening.
And as painful as you might find the reading to be, can you answer them? How can GDP be calculated when one country, the Congo, is being forced by means of mass enslavement to export vast quantities of products for almost no compensation? How would the Congo’s GDP be calculated? What of the GDP’s of the countries receiving the products of Congolese slave labor? And what do those numbers even tell us?
And if increasing a country’s GDP relative to population is supposed to make everyone in that country richer, then why does Brazil, a country with a whose per-capita GDP works out to $PPP15,838 per person, have such a problem with severe poverty creating vulnerability to slavery?
LOL… IS penance.
“Amongst my other problems with the market monetarist approach, is the frequent claim that they just want to maintain “total spending” or the “volume of the spending stream.”
I think that is an unfair and crude characterization of at least Sumner’s stated purpose of NGDP level targeting. “Total Spending” sounds more Keynesian than anything. MMs what to avoid shocks in the growth path of the currency because at low levels of inflation negative monetary shocks cause negative real shocks because of sticky wages and prices.
Letting a NGDP futures market guide the growth path of the currency is a terrific alternative to a central planning monetary authority. Its incidentally a nice way to counter Krugman’s critique of Friedman when Krugman complains that Friedman believes in “markets in everything except monetary policy.”
A “market” the existence of which is centrally planned and a “target” which is centrally planned and a monopoly note issuer which is de facto a state run corporation, is not an alternative to central planning at all.
If the pricing and volume in the NGDP futures is the result of large numbers of independent buyers and sellers then its not central planning regardless of who maintains the markets infrastructure. Yeah, you’ll still have a monetary authority but making them accountable for a forward looking market derived price is a far cry from making them accountable to only elected officials and there own, internal toward looking economists.
I get the sense you’re not clear on what central planning actually is.
Alright Bob, now here’s a post that’s in my wheelhouse.
If you understand what Sumner is actually trying to accomplish, it doesn’t really matter whether NGDP makes sense in particular, it just needs to be a good proxy for the nominal stream of employee compensation.
This is because all he actually cares about is stabilizing employment. If Compensation is proportional to NGDP then NGDP will be proportional to manhours times “wages”.
Actually an interesting question what the best measure of what Hayek called the “effective money stream” or “amount of money payments” would be. Some MMs prefer Final Sales to Domestic Purchasers, for example.
Below link is interesting in regards to Andrew_FL’s comment.
http://www.themoneyillusion.com/?p=26176
Thanks Andrew and Transformer. I’m not claiming my post blows up the case for MM, I’m just talking about one aspect of its marketing that has always bothered me.
Bob, here’s the sort of quote you’re looking for:
“In general, I regard NGDP as an objectively measurable entity, and inflation and RGDP are merely arbitrary creations of government bureaucrats, with no clear linkages to real world entities. What is the rate of inflation supposed to measure?”
http://www.themoneyillusion.com/?p=27054#comment-356629
Thanks Keshav that’s exactly the sort of thing I had in mind!