Check your knowledge about GDP

FIVE CULTURES LATER

NATIONAL DEBT IS NO BIG DEAL, OR IS IT?


We try to measure well-being in terms of economics and encounter some conflicting social issues not measured by GDP. Clifford Cobb, Ted Halstead and Jonathan Rowe point out that teenagers spend 5-10 minutes a day talking to dad and watch television three hours a day. Talking to their parents adds nothing to the GDP, but watching MTV turns them into ardent GDP enhancing consumers. They write:

Growth can be social decline by another name. Divorce, for example, adds a small fortune in lawyers’ bills, the need for second households, transportation and counseling for kids, and so on. Divorce lawyers alone take in probably several billion dollars a year, and possibly a good deal more. Divorce also provides a major boost for the real-estate industry. “Unfortunately, divorce is a big part of our business. It means one [home] to sell and sometimes two to buy,” a realtor in suburban Chicago told the Chicago Tribune.

By the curious standard of the GDP, “the nation’s economic hero” is a terminal cancer patient who is going through a costly divorce. The happiest event is an earthquake or a hurricane. The most desirable habitat is a multibillion-dollar Superfund site. All these add to the GDP, because they cause money to change hands. It is as if a business keeps a balance sheet by merely adding up all “transactions,” without distinguishing between income and expenses, or between assets and liabilities.
So far I put GDP in perspective. Khan Academy to the rescue: let's go to the economic side of GDP (the "Y") to understand its components. 


Starting with the “I,” it needs explaining what that means. The “I” stands for what firms invest to get their product (widgets) out: labor to make the widgets, as well as machinery, a building, supplies to construct it are all factors. The “C” stands for what households buy. The "G" stands for government expenses, and "NX" is the difference between imports and exports. NX can be a positive or negative.

Following are some examples for you to identify which part / parts of the equation they belong in.

Give your answers and I will discuss those next week


HEARING THE BELL, BUT NOT KNOWING WHERE THE CLAPPER HANGS

FIVE CULTURES LATER

NATIONAL DEBT IS NO BIG DEAL, OR IS IT?

When I was looking for a logo, I wanted it to include a bell. For other than Dutch speakers, the connection may be difficult to make. In English a bell rings or clangs. In Dutch it rinkels. Our family coat-of-arms includes a bell.  When I asked for opinions on Facebook and Twitter to make a choice out of 6-8 logos, the first four respondents were Dutch, and I don’t believe by coincidence! They immediately saw the connection. :)

The title of this blog is translated from a Dutch saying, which means that someone has heard of something, but does not know the specifics.

“Klepel” is clapper in English. The translation above is by definition. A literal translation would be meaningless. It was the same for me when we lived in the Czech Republic. A joke would be told, and I would understand some of the sentence, but not the meaning. I would ask:“what is so funny?” The standard answer was: “you wouldn’t understand it anyway.”

That is how I feel about this blog, sometimes. I recognize a lot when reviewing macro economics, but I cannot (yet) answer the question:

National debt is no big deal, or is it?

Deficit and the debt ceiling

FIVE CULTURES LATER

NATIONAL DEBT IS NO BIG DEAL, OR IS IT?

A country can have a deficit in a given year, if it spends more than its income, say from taxes and other sources. The difference will be a debt it owes.

The debt of a country is the accumulation over many years. Say the country spends $10, but has only $6 in income, to keep it simple. At the end of the year the $4 will be added to the debt it has accumulated over past years.

Above is a diagram from the Khan Academy showing the example of deficit vs. debt. It is pretty close to the deficit of the USA, where the deficit has been around 40% for a number of years. The amount gets added to the debt as shown in the graph. 

Congress sets a debt ceiling, which gets adjusted several times a year. It is a political game in which the minority party threatens not to raise the ceiling, unless there is also a debt reduction put in place. Jack Lew, the current US Treasury Secretary can manipulate some funds around to cover part of the debt, but at a certain point will have to tell Congress the treasury will run out of money by, say July 14. Then Congress goes to work and debate the next debt ceiling level.

One thing I never knew is that Denmark is the only democratic nation other than the United States that has a debt ceiling and borrowing system separate from its spending policies. What does that mean?

By this process, spending bills like budgets are passed and then a separate battle is fought over whether the debt ceiling should be raised to accommodate borrowing to allow such spending. There is nothing to require a correlation between the two. However, in nations like Canada, Sweden, the United Kingdom, and New Zealand, spending is directly tied to the national debt limit. The government in Canada is allowed to borrow only as much money as is approved to be spent in the yearly budget. In the UK and New Zealand, the Treasury departments can borrow only as much as is approved by parliament. These countries tie their debt limits to their spending numbers.   (Radio Free Europe article, August 26, 2014)

Where else is a borrowing system separated from spending? That is not something I learned in kindergarten.

If the debt ceiling is not raised, the government goes into default. It will have to reduce expenses in programs such as social security, Medicare, Defense, etc. The result is that the government is no longer trusted. It is risky and as a result the interest rate will increase, which makes the default situation only worse.