Robert Reich on the Trans Pacific Partnership

I have posted on this topic here. For the problems of the conventional (mainstream) trade theory go here or the Ricardian here. For a discussion of alternative trade theories go here (and here).

The Flaw, inequality and the financial meltdown

Marie Duggan asked me about econ films the other day. Regarding the 2008 crisis Inside Job remains essential, but another documentary about the causes of the financial crisis, The Flaw directed by David Sington, is also worth watching. Around minute 22 you can see Louis Hyman (the short clip here is the initial part of that segment), Robert Wade and Robert Frank suggest that inequality was at the heart of the crisis. You can watch the whole thing on Youtube (for a fee) or on Hulu (with adds).

PS: An anonymous reader reminded me of Inequality for All by Robert Reich linked before here.

Stop bashing GDP!

So everybody hates the Gross Domestic Product! The New York Times and the Financial Times have recently published articles criticizing the main measure of production in the economy. This is certainly not new, and criticism of the value of GDP for certain purposes, as a measure of well-being, for example, have led in the past to the creation of other variables like the United Nations Development Programme's Human Development Index, which includes GDP per capita (actually Gross National Income per capita), life expectancy at birth and average years of schooling for adults.

In fact, the NYTimes article basis for the supposedly dramatic "Rise and Fall of the GDP" is it's inability to measure well-being, and in it the author emphasizes its disadvantages when compared to the HDI. The NYTimes piece quotes Sen, the godfather of HDI, complaining about the "silliness about identifying growth with development." Of course, since GDP is only about the material growth of the economy, it would be an incomplete measure of development.

The most common type of critique is that GDP does not count many things, like environmental degradation, or happiness (yep, I know; check Putnam's ideas in the NYTimes piece; talk about silliness), or almost all non-market transactions for that matter, or is slow to adjust to new products and services introduced in the market, and that it's not particularly good for understanding inequality (Robert Reich's complaint in FT's piece; check the full list of complaints in both articles linked above). The best defense is provided by William Nordhaus, who argues compellingly that: “if you want to know why GDP matters, you can just put yourself back in the 1930 period, where we had no idea what was happening to our economy.”

First, GDP is not a measure of everything, and it certainly has limitations. But it does measure relatively well the material production in a given year, and provides the basis for understanding the process of accumulation, which is central for understanding the dynamics of capitalism. And actually, if you look at functional distribution of income in the National Income and Product Accounts (NIPA), which are used to calculate GDP, you do have one of the best measures of income inequality! Yes growth of the flow of goods and services produced in a country in a year is not tantamount to development, but without growth developing countries cannot achieve the levels of well-being of advanced economies, so growth is kind of a pre-requiste (and yes, growth involves environmental degradation, and we should try to minimize it). Further, with GDP one can obtain a fairly good measure of productivity (labor productivity), which is the basis for the Wealth of Nations, if you believe that dude Adam Smith.

My beef with the profession is not the use of GDP growth as a measure of material progress, but the fact that a limited, supply-constrained, individual maximizing utility, market-friendly, neoclassical version of the process of growth and development is the dominant one. But GDP is fine. Like price indexes, which also are limited and sometimes inaccurate, is an essential tool for understanding the real world.

Inequality for All: comparing the Great Depression and the Great Recession

A short clip from Robert Reich's Inequality for All. Overall is fine. Mind you Reich uses the supply side fiction that education (skills) generates jobs, rather than demand. A very conventional neoclassical labor market story with an implicit Say's law argument. And he calls Alan Simpson, of the infamous Bowles-Simpson's National Commission on Fiscal Responsibility and Reform (which favors cutting entitlement spending, besides higher taxes), a lefty. But still a progressive guy with good intentions, and lots of relevant data and information.