Rehabilitating National Income Accounting

Troy Camplin has been busy doing a Hazlitt-job on Keynes here and here. He's focused mainly on the savings/investment issue. Now Keynes famously detested savings while simultaneously praising investment, even though Keynes himself defines them as the same thing in his GT. Now, after all my years of macro, I've discovered something that is missing from national income accounting that makes it abundantly clear investment and savings are not the same. So, I'm jumping on board this train (briefly) to make this correction, then it's back to micro and liberty!

First, let's do the "expenditure" side of national income (GDP or GNP) that we can call Y. I'm going to assume we are dealing with a large closed economy (i.e. the world). First we have households, then businesses, then government. So Y = H+B+G. H gets subdivided into consumption (C) and saving (S), but here I want to add a third element: change in cash balances (R). Before, S would have included R. But now, I want to be explicit in saying S are money flows, directly or through intermediaries, to borrowers. A finance person would call "S" a change to a person's investment portfolio (buying stocks, say). R now is the addition to cash balances that are not to be lent out. One could understand this as a bank's reserve requirement, if all S is held in the bank. R isn't small - it's 10% of bank deposits.

So now we have Y = C+S+R+B+G.

Let's subdivide B now. Business expenditure comes in the form of inventory purchases, wages, and capital expenditure. To avoid double counting, we focus on just the part we call investment (I), which (for Keynes) included fixed capital, working capital, and liquid capital. I'm going to subdivide I into capital expenditure (fixed + working, although working is a stretch) and money balances (liquid capital). Money balances aren't usually large for businesses, but they certainly are these days, and have been for a few years now. So call liquid capital L.

Now we have Y = C+S+R+I+L+G.

I don't have any plans to rehab G, so we can move to the income side. National income is still Y, but the right-hand-side changes. Household income is made up of wages (W) and returns on savings (Dh). Business income is made up of profit (P) and returns on savings (Db). Government income is taxes (T).

Y = W+Dh+P+Db+T

Equating the two sides gives: W+Dh+P+Db+T = C+S+R+I+L+G. Looks icky. Can this be cleaned up a bit? Why, yes it can! The way S&I have been defined, is that they are equal (now). Therefore, including both in the right-hand-side leads to double counting. So let's take away I.

W+Dh+P+Db+T = C+S+R+L+G.

Now let's group by by type.

Household: W+Dh = C+S+R
   Note that W and Dh are after taxes.
Business: P +Db = L
   Note that P for businesses is after taxes and payments to investors (Dh).
Government: T = G

It might seem strange that business doesn't have an investment expenditure anymore. Essentially what I am saying here is that the household ultimately makes the investment expenditure, but uses the business to do so on their behalf. Households, then, are the real capitalists.

Elizabeth Warren: Our Charming Central Planner

The WSJ did a piece today on Elizabeth Warren, the new central planner for the financial services industry.  That’s not her official title, just a more fitting one.  Warren will head up the new Consumer Financial Protection Bureau brought to you courtesy of Dodd-Frank.  Her goal:  to “make sure that there is a robust, diversified financial-services industry.”

This is great news.  We have finally found a human being with unlimited knowledge, boundless foresight, and infinite wisdom who can create through regulation and rules such an industry.  I wish her the best.

My Advice to Young People

Have you seen the ads, on TV and elsewhere, telling youngsters that going into politics or state employment is an ethically good thing? That it will be service to the people? That it is a "higher calling?" I'm sure you have, since I have and I rarely pay attention to television.

Another trend I've noticed is the reverence for non-profit organizations, and the people who start them. Supposedly such people are self-less, giving people who are altruistic at heart and they are to be held up as models of behavior. I'm sure that, by and large, such people are true humanitarians.

Finally, the trend has become that those who seek profit are not good people. Profiteers, or capitalists, or robber barons, whatever you want to call them, are getting rich by depriving others of an opportunity, or by getting the best of people in a deal. In other words, profit results at the expense of another. I see this trend popularized in movies and the media.

Thus the message to our younger generation is that it is ethically better to be a public 'servant' or start a non-profit (or work for one), rather than to be an entrepreneur or work for a for-profit business.

This message is wrong, and it will be to the detriment of us all if people follow this message in large numbers.

The best thing a person can do, and not all are capable, is to start a for-profit business and not take political favors. If you start a for-profit business, the only way to make a profit without enjoying political favor is by creating a product people want to buy. In the remainder of the discussion, I'm going to assume no political favor (i.e. rent-seeking) is sought. It is unethical, in my view, to use political power to game one's competition.

Now then; a business person can only succeed by creating a product or offering a service that others find valuable. The nature of business is trade - bilateral voluntary trade. Are people lining up for iPad 2 and other Apple products because Apple forces them to do so? Certainly not. People pay premiums for Apple products because they really really want them. Apple has made millions of people happier and more productive by creation of their product. And they are a for-profit business. The profit is a result of success in business. Many entrepreneurs do not start business to "get rich" but rather because they don't have a view to doing anything else. But profit is a measure of the entrepreneur's success in satisfying consumers' needs.

If you don't have a good idea, are not an entrepreneur at heart, or are not a risk-taker, does it matter which organization you work for? I suggest that it does. By participating in a for-profit business, you are helping to make consumers happy. You might be an engineer, figuring out ways to make a product more efficiently, thereby freeing up resources to make other products. You might be a manager, figuring out ways to deploy your work force more efficiently, ultimately achieving the same results as the engineer. You might be in marketing, figuring out ways to tell people about the wonderful products your business creates. But the main reason it is more ethical to work for a for-profit business is that you only work for a business that ultimately gets its money for voluntary exchange. You are not tax-funded. You do not exist by guilting people into giving you money. You create and are rewarded. This is marvelous.

Finally, consider the importance of for-profit business in an economy. It is the chief employer of people, and the creator of wealth. The state redistributes wealth, as do non-profit organizations. In order to redistribute wealth, the wealth must first be created. This is the role of the for-profit business.

In closing, dear reader: embrace commerce; embrace business; embrace trade; eschew politics and the "feel-good" trendiness. You will make the world a better place. If you think I am false in my view, consider this: has Bill Gates done more good by starting Microsoft, or by starting the Gates Foundation? Keep in mind - he wouldn't have the endowment for the Gates foundation if he hadn't started Microsoft.

Minimum Wage Woes

I knew the effect existed, but I didn't think it was this significant. See here.

The Broken Van Fallacy

The transmission went kaput on my 2003 Odyssey van last week.  We decided to repair it rather than going through all the necessary evil in getting a different vehicle.  My repair notwithstanding, I still place a lot of faith in Honda vehicles.

Together with some other work (timing belt, engine mounts, etc) I’m now $6,500 poorer, and I’m left with the same van I had before the breakdown.  There are some that might say this unfortunate event stimulated our economy.  Let’s examine this thought.

Yes, it’s true that Benson Honda is now $6,500 the richer (using simplified accounting for the sake of brevity), and for the job Benson hired a worker to perform the labor.  I’m certain many others were involved in the repair, such as the delivery truck driver who transported my new tranny in from Dallas and the service man who kept me informed of the progress.  Certainly many others were involved; in fact, too many to name here.  This is what is seen, but what about the unseen.

At the end of the day, I’m left with a functioning van, and nothing for the better.  I’m simply made whole again, and my bank account is $6,500 lighter.  Here’s the unseen.  The trip I was planning this summer to San Francisco is now on hold.  The new landscaping for my home – also on hold.  Braces for my kid – now on hold (sorry, KED!).  I had planned many things with this money, some for leisure and some for improvements, but now all is vanished.

Destruction does not create wealth, and for those who see economic prosperity in such, well then ~ as Frederic Bastiat would say, they fail to consider the unseen.  In some ways, I believe the current Administration is applying this same thinking to so-called Green Energy.  They are attempting to destroy the fossil fuel industry and replace it with “Green Energy”.  Many believe millions of jobs are waiting to be created and this is certainly possible.  But it will come at the expense of great destruction.

Soliciting for laws

Just the other night, a cheerful young lady knocked on my door.  After quickly introducing herself, she shoved a clipboard at me and asked (told) me sign up to save the earth from CFLs (compact fluorescent light bulbs).  I calmly asked her to slow down, as she seemed a little nervous.  I needed more information. 

She then explained, in her perfectly sound bite fashion, that CFLs, thrown carelessly into landfills, were leaking mercury into the soil and the groundwater.  And this must be stopped.  My signature would help secure new legislation aimed at manufacturers of these dangerous and poisonous little bulbs, compelling them to accept used/old/non-working CFLs, thus diverting them from landfills.  She explained this was the right thing to do.  She wasn’t expecting my reply.

First, I told her I wasn’t inclined to force manufacturers to do anything through coercion (legislation).  Second, I asked her if she knew why incandescent bulbs were being phased out.  She knew they were outlawed but wasn’t familiar with the legislation (Energy Independence and Security Act of 2007).  I asked her to instead consider repealing the law banning the incandescent bulb, but she wasn’t interested.

I then told her that her new law would serve only to increase the cost of the CFL, which were already quite expensive.  She flatly rejected this and gladly reported that her law would actually save manufactures money.  Really?!  I then quizzed her, and asked if recycling old CFLs was so profitable, why weren’t companies clamoring for my old CFLs now.  She couldn’t answer. 

 

After a few minutes of arguing, I kindly apologized and sent her away without my signature.  I can only hope that in time she considers our encounter and acknowledges that fixing bad legislation with more bad legislation is just bad policy.  The answer is quite often – get rid of the original bad legislation, which is exactly what Congress should do.

The Government to the Rescue!

Ha ha, made you look! I always thought cigarette companies weren't really worth defending. But this is a case of me making conclusions before understanding the situation. Here's another step on this road of understanding, courtesy of David Henderson at EconLog.