We all want to improve the economy, but what is a good economy?

Its been a while since I’ve heard a politician talking about wanting fewer jobs or a worse economy. In fact I can’t recall it ever happening. Which raises the question, when you cheer on your favorite politician as they talk about how they want to fix the economy what do you expect them to do and perhaps more importantly how will you measure it?

If you went back in time to the mid 90s you’d notice that everyone was talking about was the GDP. Per Capita GDP was then briefly in vogue. Today unemployment figures feature prominently in the news, while the ratio of government debt-to-GDP is sometimes used in more financially savvy circles. These measures still miss the mark, they’re easy to manipulate without changing anything. Which is why you hear that the US has both 10 trillion and 14 trillion dollars in debt.

Let’s start with GDP, as one might expect a nation’s gross domestic product is the total value of everything, all goods and services, produced within it per year. This figure is trivial to increase without benefiting anyone; simply build a lot of things that no one wants. Perhaps more interestingly, and we’ll find later more relevant, only produce things which can be used to produce more things. One could imagine a dystopian world where everyone works in mines and factories used to produce materials to build more mines and factories while all the workers live in absolute squalor. High GDP, wouldn’t want to live there. Clearly, GDP isn’t everything.

Unemployment is more difficult to mask. You can hire people to do useless work, like houses that no one will live in. A more subtle approach is to allow the work force participation rate to fall; this allows you to mask unemployment with steadily unemployed.

Of course we wouldn’t want to maximize work force participation either. That would mean a return to having pregnant mothers, children, and the elderly working, with little time for anyone’s education. In fact human civilization itself has been on a steady path to lower work force participation for thousands of years. We work shorter days, fewer days, spend more time learning, and enjoying life, we normally call this progress. One could easily imagine a utopian Star Trek like future where we have near unlimited energy and resources with most manufacturing automated in which most people devote their time to “improving themselves”.

If we peek back at GDP for a second, the reason it didn’t work was because it “didn’t benefit anyone”. We’ll that’s easy; lets maximize consumption! We’ve been trying that for years now, are you wondering why it isn’t helping yet? But clearly, consumption is part of the answer, what we really want to do after-all is improve our standard of living.

Which brings us to our next measure of economic prosperity, equality. There has been a persistent movement towards measuring a nation by how evenly it divides up its wealth. After all if you took our GDP, 14.7 trillion and divided it evenly by 312 million people we would each have about 47,000 dollars each year to live on. In practice this model has proven to be unsuccessful, most people will blame corrupt governing officials, and lack of innovation, both of which are true, but are not the real fault of this system. The real fault, is that much of that 14.7 trillion GDP does not get consumed by rich people living extravagant life styles though some of it certainly does, it gets consumed producing the next 14.7 trillion.

If we consider the sum total of all of everything we’ve built: buildings, cars, computers, roads, and power plants, we take them and do three different things with them:
First, we use them to replace things that we broke or consumed while building them. We drive on those roads to work, replace broken machinery, and old buildings. People vastly underestimate the percentage of our economy devoted simply to keeping our economy running.
Second, we take most of what is left over, and consume it. That is use it for things that don’t produce anything new, we live in some buildings instead of using them for work. Sometimes we drive not to work, but to a friends house, or a ball game. This is our standard of living.
Third, we take what is left, and use it to make more things than we could make before. This is where real economic progress comes from.

When we start “living beyond our means”, we start consuming things that otherwise would have gone into producing a better future. When we start consuming beyond that point we start consuming the things that make our present sustainable. That is what the US economy is doing right now.

I will continue this line of reasoning in another blog post, but I’d like for readers to ponder this question and post any ideas or reactions in the comments.

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Another quick post

Super busy at work today, so I’m just going to link drop again. I will be writing full posts up this weekend, in fact I’ve got half of one written that I was going to try to post yesterday.

Unaffiliated voters are rising rapidly America may finally be ready to consider options outside of the “core” of the two primary parties.

Looks like Turkey and Israel will not be rebuilding their relationship after all. Though all the military ties were already suspended so that part is not really new.

Another bad month for jobs.

http://www.bbc.co.uk/news/world-us-canada-14757926

China confronts India in international waters

China has “confronted an Indian navy vessel shortly after it left Vietnamese waters” in yet another clear attempt to exert power over seas that it claims but does not own under international law. China’s increased assertiveness is worrisome to some and to be expected of a rising power to others. I still see China as a country in danger of civil war. But it seems that for the moment that tensions between China and its neighbors are set to get worse.

It is true that China has been flexing it muscles, forged by a new found economic wealth. But no country in history has ever managed to hang on to a non-representative government, while allowing its economy to liberalize so much. The new middle and upper classes find they have wealth, but still no influence over their lives. Honestly, I had expected this to have started showing strains in China by now. I’ve linked to news of protests in China more than once, and it is entirely possible that things are worse than they appear, but so far China seems strong. The final blow may be the bursting of China’s own housing bubble. China has been sustaining its economy in a similar way as we did not to long ago. By fueling an even larger housing bubble than the US ever had. In the mean time China will continue flexing its economic power by doing things like trying to buy parts of Iceland.

This may not be such a bad idea. As the only western country to let its banks fail instead of foolishly trying to rescue them Iceland is currently suffering a severe downturn, but they will be the first country in the western world to recover.