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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.

But this conclusion has to be qualified in the following respect, which I have emphasized in my book and in my blog. Because much of Americans' savings nowadays is in the form of direct or indirect ownership of stock (in brokerage accounts, retirement plans, college savings plans, health savings plans, and other investment vehicles), an increase in stock values, by increasing the market value of Americans' savings, makes them (makes us) less likely to divert income from consumption spending to saving, and so increases spending, which in turn increases output and employment.

In "Averting the Worst" (Times), Paul Krugman argues that government has saved us from "a second Great Depression." He points out that in the fall of 2008, economic indicators were falling at a rate comparable to the early days of the Great Depression of the 1930s. Now it is doubtful that they would have fallen as far, even if the government had done nothing. Unemployment is worst in industries like manufacturing and construction, since both the purchase of durable goods, and construction projects, are easily deferred. Unemployment in government and in services was much less in the Great Depression than unemployment in manufacturing and construction, and that is true in today's depression as well. But the difference is that manufacturing and construction account for proportionately far fewer jobs today, and services and government for proportionately for far more, than in the 1930s. In addition, we have unemployment insurance, deposit insurance, and (relative to the early 1930s) high income tax rates. Unemployment insurance buffers the loss of income from unemployment, income tax declines with income rather than operating as a fixed cost, and deposit insurance provides considerable protection to bank solvency by discouraging runs.

Still, there was an acute danger of a deflationary spiral last fall and winter, and it could have carried the economy very low, as I explain in my book. The bank bailouts and the Federal Reserve's aggressive monetary policy (for example, pumping cash into the economy by buying private debt and long-term Treasury debt, after pushing down short-term rates nearly to zero with little effect on the amount of money in circulation) undoubtedly had a positive effect on the economy. Less certain is the effect of the auto bailouts and the stimulus package. Krugman says that a reasonable estimate of the effect of the stimulus, though little of it has been spent so far, is that it has saved a million jobs, but he does not explain how he derives that estimate, and I do not believe that the number can be estimated responsibly. Still, his conclusion that "the government has played a crucial stabilizing role in this economic crisis" is almost certainly correct. Of course in doing so it has run up enormous debts which it now wants to compound with a trillion-dollar (and that's just the beginning) health-care program that no one seems to know how to fund. And Krugman neglects to point out that it is government, through unsound monetary policy and lax regulation, that is mainly responsible for the depression that government is now trying to pull us out of.