Political Economy: Solutions and Purpose
This is intended to situate my commentary yesterday within a broader context. It isn’t much use to assert that GDP numbers, whether nominal or constant, are of no use to policy makers because the numbers, both over time, and by drilling down through the layers of synchronous activity, do not reflect comparables. When buying apples, no one makes the comparison to oranges, cabbages, or fish. It is still good to know that there's a problem there that ought to be borne in mind.
To come up with something useful two things are needed. The first would be a sense of purpose. What is a country for, and what are we doing here, why do we have an economy and financial system? The second would be to employ that purpose to construct a disaggregated kind of view of how useful categories can be sorted out relative to that same sense of purpose.
What is the purpose of the
Of these two, most would have to agree that money is not a purpose at all. It is a means. People want money as a way of buying things, and gaining power for themselves, and independence. So the problem isn’t the money per se. Without “enough” people can’t buy the things they need to live or provide families and children. With “too much” things get twisted in an altogether different direction.
Money can be a means for doing doing good in the world, building a more perfect world for those who come after us, as well as for ourselves. And it can be part of the pursuit of happiness and independence or self-sufficiency. There’s a necessary use for money which also contributes to such purposes. Our word “economy” or “economics” comes from the Greek word for household “oikos” and the word for custom or law “nomos.” It was employed to talk about wealth creation, producing the things or stuff that the males and females, adults and children, workers and dependents of households need to function as people. The necessary use for money is as a common standard for facilitating those kind of exchanges by making things that are different in kind, houses and shoes, comparable. Then there are other, excessive uses of money. Those kind of distinctions give us a first level of disaggregation of GDP numbers, if we concede that there are "necessary" transactions, and ones that aren't necessary..
“Necessary” though, that’s just another verbal sack isn't it. Food, drink, clothing, shelter, health, education, leisure/amusement/entertainment, transportation, these would all be considered necessary probably, but would also mean different things to different people at different times. FDR wanted to aim for the kind of living standard which would take the way middle class people were living as a goal for the country to achieve. Bringing up those below, and not worrying about those above, except to redress excess. Out of this kind of approach, the government started collecting data about household and personal income and expenditure so that decisions could be made about the kind of investments which would support the desired improvement in personal and household living standards and security, along with the physical and health and educational type infrastructure needed to support the consumption that went into the making of a better life.
There are money values which can be put on these kinds of reproductive transactions, reflecting an idea of a kind of causal chain, the goods and services bought in the stores and so on are produced by producers who buy goods from which they make their products from materials suppliers. Fuel, power, water, transport are needed to. Out of these transactions come workers’ wages, producers’ gross and net income, government tax revenues, direct and indirect, and debt service. A Russian émigré called Wassily Leontiev developed an input/output matrix for analyzing these matters around the time of the Second World War. Out of that we got GDP accounting systems.
It is not hard to think of this as a kind of cycle. Workers’ and employees' take home pay and salaries are the household or individual’s expenditure and savings. The household’s expenditure is the income of someone who supplies goods and services, that income buys the intermediate goods and so on. Building up wage and salary income by creating jobs which contribute to the adopted sense of purpose in improving our union for ourselves and those who come after is probably the most effective way of getting the economy going again.
People say, for example, “How are you going to pay for it all? We don’t have the money.”
Where I live there’s an influential and real backward section of opinion which opposes paying for schools. “We can’t afford it” is what they say. Think about that. If we can’t afford the money or investment for schools why are we having children? Isn’t that a bit off center? There is a better answer though. Students will graduate out of our high schools, colleges and universities with good educations in the disciplines which will make them good citizens. They will get good jobs with decent or better pay scales. If they work till 60 or 65 from 18 or 25 say, they will be contributing skills and talents and value to the society as a whole in a direct way for up to forty years. Their qualified activity will more than pay for the investment in 12-20 years of education. Compare total expected life time earnings with the total cost of educating the future earner. Since most of those life time earnings will be spent, and some saved, those earnings will help keep other people employed throughout the economic cycle of activity. Education through graduate school can be free without costing anyone a penny, because it pays for itself. Student loans are a swindle against the past, present and future. The country needs educated people to function as a modern country has to. Education is not a privilege which comes for some random individual having some money.
Education happens over time. People say time is money. But it isn’t really. Money is in your pocket or purse, cold cash and paper. The money relation to education is through credit and investment. The credit is paid back out of the income of the now tax paying graduates with their better job prospects. The credit is secured against the future improvements which will follow from educating people. The beneficial effects of the educated citizen's earnings power over their life-time are not counted as securing the crdit, but of course they do. The increased earnings power underpins the same power of others, etc. Over the longer term, these self-paying economic processes with their indirect benefits become self-sustaining and self-increasing.
Health care pays for itself in the same way. Healthy people feel better than unhealthy people do. They are more productive, happier and live longer. They do more for the world in a better way than unhealthy, unhappy people. This anticipated improvement, as it is realized in the direct nd indirect benefits of improved productivity is what secures the present investment in personnel, facilities and equipment.
Infrastructure investment, railroads, waterways, power supply, sanitation and water supply, pays for itself in the same way. The economists say you get so much money back for so much money invested, and they do a ratio of one against the other. “Money talks” is what people say. We all know that people without access to infrastructure walk. People who walk aren’t really employable in this American world of diffuse settlement patterns. Making work-places physically accessible and reducing commute times, increases labor productivity and worker happiness, makes possible a better home life before and after work with more options for both work and leisure. This improvement is what infrastructure investment needs to be measured against. The ratio is that improvement totaled over the life of the investment divided by the investment.
If we think about investment life-times relative to population life expectancy, improved educational capacity and increased happiness from both increased security and a better life, then there is pretty much no worthwhile project which could ever be conceivably dismissed because “we don’t have the money” or “it costs too much.” Any investment project that is worth making a commitment to do, in light of what we are assuming to be the kind of purpose that might be worthwhile, will more than pay for itself in both direct and indirect benefits over the entire life-span of the projected investment.
This brief discussion provides two ways of looking at nominal and constant GDP numbers in a partially disaggregated way. As a result, I hope I’ve encouraged people to think that firstly, there really is no problem with funding anything useful, as long as the investment cost is set against the life time direct and indirect benefits of the project. Since it is not possible to derive these kind of benefits from the GDP matrix, GDP numbers cannot really used in ratios constructed to project future performance. These long term direct and indirect benefits are continually changing the matrix out of which the GDP input/output model is made and also change the content of each of the cells. These are economic changes generated by human decisions and human activities. They change the makeup of the shorter term pay packet to pay packet, salary check to salary check and bill paying cycles which are a form household and individual earnings and consumption take. The numbers ignore changes in the shorter term composition of the cycle of household and individual earnings and expenditure's. Once upon a time cars could be financed in multiples of months, not years, and income could be saved to buy outright, TV's could be bought outright with no monthly fees to use them, banks paid for deposits and did not charge fees and service charges the way they do now. The changing use of finance and debt has changed the way sales transactions are carried out and accounted. What is bought and sold, and why has changed, and the way those transactions are done. Both kinds of changes go on continuously.
Neither of these activities are reflected in Gross Domestic Product data directly. As the country has moved from economic based activity to a service and trade dependent economy and on to a speculative financial service based disaster, the underlying principles which shape the activities from which the data is collected and processed which becomes the reported numbers have just vanished into the myths of some pre-historical age. Imagine, there are probably people alive now, quite a lot of them, who never used steam powered railroads, or traveled on a street car, or flew in a propeller driven plane, or know how to use a slide rule, or ever saw a late night movie that wasn’t on a cable channel, or had to go somewhere specific to make a phone call and wait in line and didn't have a dime. Those are the kinds of activities and things which are back there in the mists of myths. GDP numbers won’t ever tell anyone about their economic significance, and the benefits that have come about from replacing them. And of course the replacements open up whole new realms of possibility, like the elecronic systems which replaced slide rules did.