Wealth vs. GDP

I have been doing some random musings on economics partly because the snap to pearl clutching over small temporary targeted tariffs is annoying.  I took economics in high school, but the course was stupid and just taught Keynesian theory.  Since then I have read quite a bit of economic theory.  The problem with our economics now is that there is a major disconnect between informed economic theorists and people with common sense (I hope you caught the joke).

It is really easy to point to wealth, but kind of hard to define it.  I like one of the definitions from Webster – “the stock of useful goods having economic value,” although I still don’t like that term (it leaves out services altogether).  If you look at a gallon of milk in 1918 and a gallon of milk today the intrinsic worth of the milk is the same now (with the added benefit that we pasteurize and refrigerate it so you don’t get sick).  However, a gallon of milk costs a lot more dollars now.  But then when you take inflation into account it costs a lot less (it takes fewer hours of labor to make a gallon of milk).  In contrast a bar of gold was kind of useless then and is still useless today. A painting is at least pretty, a bar of gold?  The only “value” it has is the ability to get the stuff that you actually want when you want it.  Put another way, if you were going to be stranded on a deserted island would you prefer to be stranded with food or gold?

However, trying to compare value created over time is messy.  If all we had was milk then fine, you can ask how many gallons were produced?  But how do you compare the true value of something like an iPhone to what existed in 1945?  The best we can do is grab the price it sells at and use that as a proxy for value.  So, we do this for everything bought and sold and then say that is what our economy is worth.  I’ll admit, its not a terrible proxy, but it has some serious flaws.  For instance, one service you receive is the ability to drive.  So you go to the DMV, sit in a chair for an hour with 50 of your closest friends before finally being called up to one of the 3 open windows.  As you stand there working with the friendly agent you see 5 more employees in the background talking.  Those 5 are contributing to GDP because they are being paid for the “work” they are doing.  Another issue is medical care.  Two women walk into a hospital for a routine labor and delivery.  One woman is on Medicaid and the hospital gets ~$1,500 for the labor and delivery, the other is in private insurance the the hospital gets $15,000.  The good received is exactly the same (one healthy baby delivered) but the “value” is 10x for one of the babies.

The reality of all this noise is that if we can increase wealth (your stock of useful goods and your ability to purchase desired services) then that should be your goal regardless of GDP.  For instance… we pay twice as much as anywhere else in the world for health services.  We can get into all sorts of side discussions, but the bottom line is we ought to be paying much much less for what we receive.  Let’s imagine that tomorrow we could wave a magic wand and we had a truly efficient market that could deliver healthcare as good as Germany (which matches pretty much all our metrics) for the same cost point as Canada.  The reality is that we would have the same services, but 10% of GDP would evaporate overnight.

So then when we look at trade and tariffs we shouldn’t be asking “what maximizes GDP” or “what lowers the cost of goods” but instead “what promotes the general welfare?”  When it comes to that question the socialists are correct (and I don’t think we should be afraid to say that).  In a capitalistic system $2 earned by a millionaire is counted as better than $1.99 earned by a waitress widow with four children.  Socialists on the other hand would say that as a society we are better off generally as the least well off among us are better off.  Personally I think the socialists have the wrong cure – their cure is poison.  Using the government to guarantee jobs at the back of the DMV simply destroys wealth, and while some might be better off for a while the society is slowly strangled.  However, growing wealth as fast as possible regardless of whether it promotes “the general welfare” is not the right answer either.

Before posting anything on how to accomplish good economic goals I think maybe we should lay out some of what those are.

  1. Ensure universal access to basic necessities (food, shelter, clothing, heat, water…)
  2. Bring the price of basic necessities below the average income
  3. Ensure universal access to secondary necessities (transportation, electricity, sanitation, medical care…)
  4. Bring the price of secondary necessities below the average income
  5. Reach a level of development where all people of sound mind and body have sufficient opportunity to earn a sufficient wage to pay for basic and secondary necessities
  6. Everything else

I would like to first point out that in 1 and 3 I said access.  I don’t mean it in the leftist sense where access means the government gives it to you, rather I mean it in the third world sense where if you live in Venezuela right now you do not have access to food, even if you have “money.”  Next I would like to simply assert that a free market is the best means of accomplishing steps 1-4.  The point I have been approaching in my last couple diaries is that #5 is a real concern.  I don’t really care about the wage gap, and I don’t think the government should (or even can) grant a “living wage.”  In every economy you are going to have rules, and economic rules are never neutral.  The rules we enforce will always favor one group or another.  Our current rules favor large corporations simply by virtue of there being so many stinking rules.  They by nature then favor investors in those corporations, and the investors will always want to reduce the cost of labor.  When we have a segment of society where labor is favored by the rules (I’m looking at you healthcare industry) you will find that we overpay workers in that industry (your cardiologist) and the labor is highly protected (licensing, credentialing, and certificate of need).

I think that as conservatives we can find better rules that encourage upward mobility and wealth creation at the lower rungs of the ladder.  Tilting the field back in that direction will of course reduce the favored position held by bankers, lawyers, and cardiologists, but frankly that is a price I am willing to pay.

My next pass will be what some of those new rules could look like.