Today's Thoughtful Commentaries on the Economic Situation

Three op-eds this morning--two in the New York Times and one in the Wall Street Journal--offer worthwhile commentary on the economic situation.

In "G.D.P. R.I.P." (Times), Eric Zencey points out that Gross Domestic Product (or, what is similar, Gross National Product) is not a good measure of economic welfare. One reason is that it doesn't include nonmarket output, such as household production. If a woman who has been a full-time housewife (a "household producer," an economist would call her) takes a job in the market, her full salary in the job will be counted in GDP; the loss of her household production, which is a real loss in economic value, will not be subtracted. Volunteer work--any work done "for free"--is not counted in GDP at all, even though it has economic value. Also not counted properly is purely remedial work. Hurricane Katrina caused an enormous loss in housing values, but the expenditures on rebuilding New Orleans are fully counted in GDP with no subtraction for the loss of asset values.

Nonmonetary income and loss can, in principle, be monetized, but without the precision necessary to provide a welfare measure that could be determined on a quarterly basis and yield consistent estimates. So we are stuck with GDP. But Zencey's critique has an interesting implication for the current economic situation--which is that the fall in GDP since 2007 exaggerates the actual decline in output. Some people who lost their jobs substituted household production. The sum of their monetary and nonmonetary income fell, for otherwise they would have quit earlier rather than waiting to be fired. But it did not fall to zero.

It is tempting to take the next step (as some economists have done) and argue that really there is no such thing as unemployment; the unemployed are simply people who are working for something other than a wage--such as leisure, if they're treating unemployment as vacation time, or the nonmonetary returns from taking care of their children, preparing meals, making homne repairs, or producing other nonmarket goods and services. But in most cases I believe these are minor offsets to the reduction in money income brought about by involuntary unemployment, and ignore moreover the considerable nonmonetary costs of unemployment--in anxiety, fear for the future, embarrassment, and humiliation. Moreover, these costs are also born by people have not lost their jobs but fear that they will. On balance, my guess is that the fall in GDP during a depression or severe recession understates rather than overstates the loss in real income, which includes the peace of mind that is lost when a person is fired or fears that he or she will be fired.

In "Corporate Earnings Are No Sign of Recovery" (Journal), Zachary Karabell makes an important point that I had not seen before. He notes that the stock market has risen a good deal recently, and he attributes it to surprisingly strong corporate earnings. Nothing new, so far. But then he points out that much of the strength in corporate earnings is coming from foreign earnings, which do little for domestic production and hence employment. Foreign earnings must be distinguished from export earnings. Exports are of products made in the United States, and whenn demand for our exports grows this stimulates domestic production and hence employment. Foreign earnings are earnings on production by American companies abroad. That production stimulates employment in foreign countries, not in the United States. From the standpoint of shareholders, earnings are earnings, wherever derived, and so the stock market doesn't care if they are earned abroad. But to the extent that the increase in stock prices is reflecting increases in foreign earnings (Karabell does not offer statistics on the importance of foreign earnings in the current earnings of American corporations), it is not a harbinger of economic recovery in the United States.

Presented by

Richard A. Posner

Richard Posner is an author and federal appeals court judge. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. More

Richard A. Posner worked for several years in Washington during the Kennedy and Johnson Administrations. He worked for Justice William J. Brennan, Jr, the Solicitor General of the U.S., Thurgood Marshall, and as general counsel of President Johnson's Task Force on Communications Policy. Posner entered law teaching in 1968 at Stanford and became professor of law at the University of Chicago Law School in 1969. He was appointed Judge of the U.S. Court of Appeals for the Seventh Circuit in 1981 and served as Chief Judge from 1993 to 2000. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. His academic work has covered a broad range, with particular emphasis on the application of economics to law. His most recent books are How Judges Think (2008), Law and Literature (3d ed. 2009), A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). He has received the Thomas C. Schelling Award for scholarly contributions that have had an impact on public policy from the John F. Kennedy School of Government at Harvard University, and the Henry J. Friendly Medal from the American Law Institute.

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