Romney Economics

 

I want to comment on a phrase I read in the Washington Post a few days ago.  The phrase was from Mitt Romney's latest stump speech (which you can find here).  He said: "the economy is simply the product of all the nations' businesses added together". Earlier in the speech he says: “government at all levels consumes 38 percent of the total economy or GDP”, making it clear that his measure of the economy is the National Income and Product Accounts (NIPAs), which are recorded by the Bureau of Economic Analysis in the Commerce Department, and provide the official measure of the GDP.

The first thing that struck me about this was not that it is wrong---although it is wrong in several ways---but how tiny, how limited, this is as a view of the what the economy is, and what economists study.  If this were really all that economics was about my interest in the subject would never have lasted through the first week of my first economics course. 

I understand that Governor Romney wants to affirm his belief that business can be good, and on the whole does economic good for the country and for the world, and I agree with that.  He wants to affirm his belief that private property, used for productive purposes through privately owned businesses, is an efficient way to organize economic activity, and I agree with that too, although I’d add that there are some kinds of production that privately owned businesses can’t do or won’t do.  But private businesses are not the only way to organize economic activity, and they are not the only kinds of organizations that provide goods or services, or that do economic good.   Churches, charities, clubs, communes, villages, baby-sitting coops, households, and of course, government, all are active producers of one thing or another, sometimes as part of the recorded economy and sometimes off the books, as it were.  

Measuring the Economy, the Bureau of Economic Analysis primer on the NIPAs, available here, defines the GDP this way: “GDP is composed of goods and services that are produced for sale in the 'market'—the generic term referring to the forum for economic transactions—and of nonmarket goods and services—those that are not sold in the market, such as the defense services provided by the Federal Government, the education services provided by local governments, the emergency housing or health care services provided by nonprofit institutions serving households (such as the Red Cross), and the housing services provided by and for persons who own and live in their home (referred to as “owner-occupants”).”  (the emphasis is mine.)  So the idea of including product of other organizations, including charities and government, is not odd, and in fact to the extent possible those things are measured and are included in the reported GDP.  Far from “consuming” 38% of GDP, government expenditures are part of GDP as productive activities.  The government provides goods and services (defense, police, education, infrastructure, justice, health care and retirement income for the elderly, food and water safety, research into long-run concepts such as the internet in the sixties and seventies, etc.)

What about baby-sitting coops or production within a household?  The same primer continues, in the same paragraph:  “not all productive activity is included in GDP. Some activities, such as the care of one's own children, unpaid volunteer work for charities, or illegal or black-market activities, are not included because they are difficult to accurately measure and value.” (again, emphasis mine).  In other words, the BEA recognizes all of them as real economic activity, and if we could measure the value of unpaid productive work, including things like cleaning your own house or making your own dinner, they would be included in the NIPAs; they are activities that create a good or a service for which you would have to pay if you obtained them on the market.

And of course “the economy” is much more than just GDP.  The unemployed, for example, are at least temporarily not part of any business, but the rate of unemployment is definitely a valid economic study; wealth and poverty and the distribution of income are valid economic studies; the provision of public goods is a valid economic study. 

But the exploration of all the myriad topics that are excluded from Governor Romney’s definition of “the economy” but are central to mine would take many pages, and maybe many books, and this post is long enough.