17.9.15

INCOME ACCOUNTING IS INCOMPLETE.

A #ThrowbackThursday on the challenges of doing macroeconomics, and the federal budget, with inadequate information.  Let's start at Voluntary Xchange, explaining that without a balance sheet there's no way to pontificate about, for example, the effects of an economic stimulus, or the hazards of borrowing several trillion dollars.
The reason people get to this point is that they are only thinking about flow variables (current work) not stock variables (past work embodied in current capital). Accountants are very careful about this: that’s why they use balance sheets and income statements. Public policymakers … not so much.

Think about it: we run our macroeconomies based on GDP. This is a flow variable. Where’s the stock variable? We simply don’t think about it much in macroeconomics. Mostly we do this because national wealth is difficult to measure. That’s a reason for being careful, not a reason for ignoring stock variables.
Indeed not.

What's victory in World War II worth? There's no analogue to "going concern value" for a state.

What are new coaches, dining cars, and sleepers on Amtrak worth?  The money gets borrowed in one year, the rolling stock produces passenger value for multiple years.

What is a pork-barrel highway widening worth?  Photo op for the politician that gets the earmark into the continuing resolution, but what comes next?

There's an intriguing elaboration of why having a balance sheet matters in this architect's takedown of the gold standard and tight money. Yes, there is plenty for the serious economist to quibble about, starting with whether an aircraft carrier or a super-railroad is the better public investment, or whether some of those things might better be provided privately (but credit expansion, one of his points, is still important.)

Missing: the miracles of exchange and innovation, but that gets complicated in a hurry.  Go, read it, enjoy it in the spirit in which it's offered.

Missing: the microfoundations.


Frank and Ernest, via Greg Mankiw.

Make sure you read and understand EconLib's Robert P. Murphy on the essential law of conservation inherent in MV = PQ.  Thus, be careful about dealing with underconsumption by printing money.  Facilitating investment by lending money is something else.

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