National Accounts, Inflation, GDP
Yes, all our macroeconomic data is measured in dollars. But what is it we are measuring with all those national accounts statistics? What is inflation, really? And, aside from ranking purposes, does GDP matter? Is GDP growth important to anybody besides a few rich capitalists?
I have been scratching my head over the past year about some of these questions. I wrote about them in “Please Help Me, I Don’t Understand Macroeconomics” (July 2021), then again in “What Is Money?” (November 2021) – now it’s time for a third amateur take. What are we counting here? And does it even make sense?
Dollars, after all, measure “value” – pricing to maximize value to both producer and consumer. And, derived from that principle, markets succeed or fail based on perceptions of value and costs. But value, of course, is always subjectively determined. We know that consumers impute value from many fuzzy psychological and social factors. And producer costs, likewise, largely depend on gambles made about expected customer (or supplier) preference. Market forces beyond producers’ control also contribute to total costs — as do their “profit margins.”
If there was a baseline value assigned to every good or service by some central Values Authority, there would never be inflation and manipulating the “cost of money” would never be necessary. But there isn’t such a thing as baseline value. Nobody will set such a baseline because the marketplace is supposed to be “free” – costs and profit margins are intended to fluctuate.
Hence, we have National Accounts statistics. Income, debt, consumer expenditures, all contribute. Wealth comes from excesses of income and the price that the market assigns to certain classes of assets. These assets must be owned by somebody before they have value — unless your philosophy allows for communal ownership of that asset by all! And, even in those cases, the challenge is to define who “all” is. We are still burdened with nation-states so “all” is usually construed as residents of a given country – or even less, maybe just its “citizens.” National Income Accounting is calculated from a combination of business/corporate revenue, tax revenue (all types), and wages paid. It is intended to measure standard of living – along with GDP growth. But inflation is noticeably absent from this accounting. It must be calculated separately.
GDP (Gross Domestic Product) figures do usually include measures of inflation, called Real GDP, as opposed to Nominal GDP which doesn’t include inflation. Why is inflation not always included? Indeed, why are official inflation figures often given as Core inflation rate vs. plain old inflation rate? Core inflation doesn’t include commodities traded on exchanges, namely food and energy! Yet, those are the very things that most affect average consumers. GDP also excludes imports — it is supposed to be domestic product. Both core inflation and exclusion of imports speaks volumes about the purpose of GDP calculations. Its main purpose is to make comparisons of one country to another – it’s about ranking and international competition, not absolute well-being of the nation’s residents. And it’s about politics, about selling your stewardship of the “economy,” or attacking it from the outside.
Then there is debt. If we owe a debt to a creditor, we usually live in fear that the creditor will somehow manage to enforce repayment. Such enforcements as bankruptcy, foreclosure, or on a more mundane scale, credit card interest rates, are the contemporary norms for that enforcement, more than the antique debtors’ prison or mob hit man of our fantasies. But government debt is a different matter. Who are the government’s creditors? Certainly, the Federal Reserve can control the “cost of money” through interest rates and control of the banking system, and the Treasury Department can issue bonds, but who are the bondholders? And does the Fed really control the banking system? The answer is no – banks are private entities; they may set rates however they want. That, plus Treasury’s peculiar powers to print more of a fiat currency, make the true meaning of “public debt” somewhat ethereal, to say the least. Modern Monetary Theory (MMT) highlights these weaknesses in its conception of government debt. Anyway, private individuals’ or corporations’ decision to buy government bonds is entirely at their own discretion. The rationale may be completely independent of interest rates.
In the realms of sociology and political economy, it’s easy to intuit many of the basics of national income accounting. Taxes, for instance, are surely income for society at large, so long as the revenue is put to good social use. Redistribution might be one of those social uses. They are not costs to anybody, really. Exports represent receipts from consumers in other countries, and wages are clearly inputs that enable consumer spending, hence can accelerate growth of future national income. Savings, when invested, can also contribute to future growth (to wealth). But some wealth measures do not contribute to growth – land, human, and technological capital may count as wealth, but must be deployed for productive purposes before the contribution can be realized. Manufactured capital only counts as wealth based on its expected value when sold. In sociology and political economy, standard of living may have a material component, but also contains inputs from many non-material factors like tradition, culture, family, education. It seems that an accurate measure of Real GDP should account for more than inflation. It should also include happiness – whether net or gross.
If we can invent quantitative measures of happiness, then we might be able to define what constitutes a “healthy economy.” Until then, all those charts from FRED are merely toys for economists, lacking anything more substantive than the paper $20 bill in your wallet. Of course, we can’t ignore the fact that some quantity of Benjamins is necessary in everybody’s wallet before they can ever contemplate “happiness” in a market-based society. Let’s hope we can continue to enjoy enough material abundance so we can at least begin to imagine the non-material side of a healthy economy.
— William Sundwick