05 Dec 2017

“Total Spending” Is Not the Same Thing as NGDP

Market Monetarism 19 Comments

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.

19 Responses to ““Total Spending” Is Not the Same Thing as NGDP”

  1. Tel says:

    No, that’s not correct. Nominal GDP is smaller than total expenditures each year.

    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.

    • Andrew_FL says:

      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.

  2. Anonymous says:

    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.

    At the very beginning of the twentieth century there was an unquenchable demand in America and Europe for an amazing new technology—air-filled rubber tires. The Age of the Railroad was ending. Henry Ford was making cars by the million, bicycles were pouring out of factories, freight was moving in gasoline-powered trucks, and they all ran on rubber. The Congo had more natural rubber than anywhere else. To meet this demand King Leopold II of Belgium, in one of the greatest scams in history, tricked local tribes into signing away their lands and lives in bogus treaties that none of them could read. He sold these “concessions” to speculators who used torture and murder to drive whole communities into the jungle to harvest rubber. The profits from the slave-driving concessions were stupendous. Wild rubber, as well as elephant ivory for piano keys and decoration, was ripped out of the forests at an incredible human cost. Experts believe that ten million people died. It is the great forgotten genocide of the twentieth century. One witness was an African-American journalist named George Washington Williams. He coined the phrase “crimes against humanity” to describe what he saw.

    The genocide, the killers, and the corrupt king were exposed by a whistle-blower, an English shipping clerk named Edmund Morel. Assigned to keep track of the goods flowing in and out of the Congo, he realized that rubber and ivory worth millions were arriving in Europe, but the ships going back carried little besides weapons, manacles, and luxury goods for the bosses. Nothing was going in to pay for what was coming out. Morel kept digging, getting the facts. He was threatened and then thrown out of his job, but he didn’t stop. By 1901, he was working with others in a full-time campaign against slavery in the Congo that brought in celebrity supporters like Mark Twain.
    -Kevin Bales, Blood and Earth, pages 15-16

    • Anonymous says:

      Incidentally, even within the narrow nationalist economic view, GDP and terms like “a rich and booming economy” still down not make sense.

      Along the road walk tired and dusty men. These are the sem terra, the landless. Because of Brazil’s completely lopsided economy and extreme income inequality, in spite of its success in the world markets, there are thousands and thousands of these men trying anything anywhere to find work. Think of the droves of wandering workers in America during the Great Depression of the 1930s, men willing to do anything for a meal. What is so out of kilter is that there is no depression here, these destitute men are living in a rich and booming economy but have fallen off the bottom rung of a ladder that keeps rising above them. The groups of wrath flourish here, along with weeds of desperation. Poorly educated, skilled only in hard labor, these men, women, and children make easy prey for slaveholders. Yet, they are also men and women that know they live in a free country. It may be unfair country, but in this vast frontier where anything can happen, people still hold to a sense of their rights. For some of them, this seed of dignity is a death sentence.

      In 2008 this young man and his friend had been offered work clearing land for a new cattle range. They worked hard for more than a month in terrible conditions, and the, fed up, they went to the landowner to demand their wages. The landowner promised he would send payment to them at the camp where they were working in the forest. Instead, he sent a gang to kill them. It took three years for the story to leak out and for the police to find their graves deep in the woods. The killers are long gone. Unable to tie the landowner directly to the murders, the police did what they could and jailed him for forty days, charged with the crime of cutting and clearing in a nature reserve.

      – Kevin Bales, Blood and Earth, pages 190-192

    • Richie says:

      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?

      • Anonymous says:

        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.

        • Richie says:

          Reading your posts are penance.

          • Anonymous says:

            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.

          • Anonymous says:

            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?

          • Richie says:

            LOL… IS penance.

  3. Capt. J Parker says:

    “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.”

    • Andrew_FL says:

      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.

      • Capt. J Parker says:

        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.

        • Andrew_FL says:

          I get the sense you’re not clear on what central planning actually is.

  4. Andrew_FL says:

    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.

  5. Keshav Srinivasan says:

    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?”


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