Wednesday, June 30, 2010

Ticket to Ride

She said that living with me
Was bringing her down
For she would never be free
When I was around
--The Beatles

Students taking macroeconomics are presented with the following equation that expresses the composition of gross national product (GNP):

C + I + G = GNP

where:
C = consumption
I = investment
G = government

The essence of Keynesian theory is to ignore I and focus on C and G. And during economic downturns, the Keynesian solution for propping up GDP is always to increase G. We're doing it right now in multiple thirteen figure (read: $ trillions) size.

This article points out the folly in viewing government spending as accretive to aggregate output. Essentially government expenditures come out of the hide of personal expenditures. As such, perhaps the above identity is more accurately written as:

C + I - G = GNP

The real issue, however, is why we focus on aggregate measures like GNP or GDP in the first place. What does more national output or spending really tell us? After all, how much we have produced may mean little if production ill suits user needs. An increase in consumption may not be a good thing if we need to borrow from the future in order to consume more today.

Obsessing over a measure such as GDP, and doing whatever it takes to boost it period after period, seems a ticket to the poor house.

"All aboard!"

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