In one leading model, gains from educational investment added $3.7 trillion to our national wealth in 2009, more than four times the value of public education as measured in G.D.P. that year. The return on educational investment is clearly enormous, yet it is nowhere to be found in the G.D.P. story of growth. He just measured the return on educational investment, that $3.7 trillion, by evaluating the graduates' contribution to the GDP. I'm pretty sure his seemingly breakthrough logic is broken in that all of the govt's contributions to the economy-- acts like Clean Air and other nonmarket capitalization-- are intermediary actions that have no effect until what they're directed at beings to produce: graduates, manufacturers, etc. Those producers are private sector, the regular "traditional" factors in the evaluation of GDP, so I really don't think there's a mismeasurement at all. Maybe they haven't credited the government enough, which is the only claim that this evidence can back up really, but again govt investment that can be factored into the GDP always flows into the private sector anyway. In other words: Those publicly subsidized private sources are the primary factored-into's of the GDP. Therefore there is no discrepancy there, I just don't see what mismeasurement he's talking about.Human capital is the most closely linked to government activities, as it is mainly an output of public educational investments, combined with student and parental investments. The public money we spend on teachers’ salaries helps produce high school graduates, many of whom become college graduates (indeed, mostly public-college graduates); these graduates, in turn, have been our country’s most important asset for growth since the mid-20th century.
The first problem is that much of what G.D.P. measures as personal, private spending — which counts for two-thirds to 70 percent of the economy — is highly socialized consumption. It is not financed directly from households’ private earnings, but from public sources or from publicly subsidized private sources.
The discrepancy isn't about how we calculate GDP; it's about how we calculate government expenditure as a percent of GDP. He's talking about how those private expenditures would be greatly reduced were it not for public subsidies, and that those public subsides don't count as direct government spending as a percent of GDP. Therefore, when we measure the impact of government spending, we need to measure all government spending. Otherwise, when we make a calculation about austerity, for example, we can't possibly calculate its effects accurately (the old "garbage in, garbage out" adage).Those publicly subsidized private sources are the primary factored-into's of the GDP. Therefore there is no discrepancy there, I just don't see what mismeasurement he's talking about.
Aha, I think I understand. So, in an ELI5 sort of way, he is arguing that the govt. isn't getting enough credit;) Makes sense, thanks.He's talking about how those private expenditures would be greatly reduced were it not for public subsidies, and that those public subsides don't count as direct government spending as a percent of GDP.
To add one more thing to what kleinbl00 said below, there's another apt saying that applies here: "All models are wrong, but some are useful". I don't necessarily agree with that assessment for all cases, but the point is that a model is an attempt to put some physical phenomenon into mathematical terms. The level of accuracy depends on several factors. By far the most important factor is the assumptions upon which the model is based. There's no such thing as a model that can account for all variables, conditions, and contingencies. The best we can hope for is that the major contributing factors are accounted for so that whatever question we pose to the model (as one can think of a model as a fancy magic 8 ball) an answer is returned that agrees with reality to within our known error. This is impossible if your fundamental assumptions are incorrect, no matter whether we're talking economics, ecology, or electronics. The author's point, in a nutshell, is that when we view the government's contribution to GDP as a simple credit/debit balance sheet, the model is automatically incorrect, and it's not even useful. In fact, it's down right destructive, given that it produces a false sense of being able to cut modest amounts from certain programs without dramatically affecting the end result (see for example, my home state of MI, who spends more on prisons that higher education, willfully ignorant of the fact that there's almost no ROI for prisons for anyone but the shareholders in the prison business).
:( I definitely see what you're saying, I wasn't familiar with the full idea behind models and exactly how much they're applicable and reliable.(see for example, my home state of MI, who spends more on prisons that higher education, willfully ignorant of the fact that there's almost no ROI for prisons for anyone but the shareholders in the prison business).
The basic problem is that economics is a closed system. All we can do is model it. Those models are necessarily imperfect. The question then becomes what imperfections do you tolerate and what imperfections cause you to change the model? GDP wasn't the leading economic indicator when I was growing up. It was GNP, which measures productivity of a nation's citizens no matter where they are (as opposed to GDP, which measures productivity of anyone no matter their citizenship within a nation's borders). For whatever reason, the US flipped from GNP to GDP in 1991 and in doing so, altered the way the economy was measured. PDF Straight out of the horse's mouth - that's the Bureau of Economic Analysis, saying they're switching from one primary measurement to another - better compatibility with Europe, more data less forecasting, etc. In doing so, however, they fundamentally changed the tools used to shape policy. That's the argument here: GDP does not reflect the rules on the ground accurately enough to dictate policy when it comes to government spending. Whether an action is "intermediary" or not is irrelevant - economics is, again, a closed system and pointing out an externality does not invalidate the externality, in invalidates the model. Such as the personal-private spending thing. By pointing out that human capital is the primary economic asset of the US economy, and pointing out that said capital is refined via public school, and then illustrating that the value of the schooling is calculated based on what it cost vs. what it earned, the author is demonstrating a weakness in the model that is not factored into GDP. I'm most of the way through Piketty at this point. He made a couple of interesting points in the bit I read yesterday: 1) Between 10 and 20% of the world's economy is socked away where we can't see it in offshore accounts 2) The stock market crash of 1929 became the Great Depression because economic policy at the time was "survival of the fittest;" the Great Recession didn't become the Great Depression II because economic policy at the time was "liquidity will save our asses." The former statistic illustrates that our modeling and our measurement needs to be better. The second statistic illustrates the benefits of better modeling and measurement. Imagine what our social policy would be if we were measuring unemployment accurately?The emphasis on GDP is consistent with measmement considerations. Data from BEA’s direct investment survey, which is one of the primary sources for estimating factor income payments and receipts, are not avail- able for the first two of the three quarterly estimates of GNP. For these two estimates, factor income payments and receipts are based on judgments about trends in the pace of economic activity in the United States and abroad and about the value of the dollar in foreign countries, on announced profits of individual companies, and on other information. Even when all of the source data become available, BEA does not have the information needed to make a Ml set of adjustments to reflect the concepts underlying the NIPA’s. For example, the profits of foreign affiliates do not include inventory valuation and capital consumption adjustments, and they are affected by intracompany transfer prices and exchange rates.
I saw that Pikkety book displayed in front of a B&N the other day, is it worth a read? I'm afraid I've reached way past the end of my knowledge so I can hardly reply constructively to you, but this is a good way to put it, thanks for the clarification. And, just for the record regarding this How the hell would he know how much of the world's economy is held offshore if it's held offshore and nobody can see it -.-That's the argument here: GDP does not reflect the rules on the ground accurately enough to dictate policy when it comes to government spending. Whether an action is "intermediary" or not is irrelevant - economics is, again, a closed system and pointing out an externality does not invalidate the externality, in invalidates the model.
1) Between 10 and 20% of the world's economy is socked away where we can't see it in offshore accounts
1) Piketty is a slog. It's very dry. You have to care deeply about what he writes about or it will bore the fuck out of you. That said, it's likely to be important to economics the way Nate Silver is important to political polling. Like Silver, Piketty is kind of the first economist to go "you know, we have data. We could look at it rather than guessing." The conclusions he draws are not surprising, but they do put the lie to a lot of ideologically-driven political theory. 2) Economics is a closed system. Theoretically speaking, the amount of money all countries owe should exactly equal the amount of money all countries are owed. After all, neither a borrower nor a lender Mars be, right? however, when you add up current account surpluses for the planet and subtract current account deficits for the planet, you get a discrepancy of about 11%. That's money that goes from "on book" to "off book" as perspective shifts from "loan" to "debt." The only place it can go is offshore.
1) I'll work my way up to it then, I typically start things off with stellar enthusiasm and then let myself get lazy and demotivated. Don't want to waste time starting it and then dropping it. 2) Ho-ly shit. That's awesome!
If economics doesn't truly turn your crank, I'd start with some of the better populist literature. Michael Lewis is an amazingly engaging read, and considering you're hanging out with bank presidents and shit (how'd that go, by the way?) I'd say either Liar's Poker or The Big Short would be really engaging reads for you.
Read 'em both! The former was far better imo. I'm still hanging with 'em! Till the end of July. I should probably get off Hubski. These fuckers have really expensive lunches by the way.