The economy isn't everything

A lot of attention is paid to growth of the economy. When the economy grows, people celebrate. Economic growth means more jobs and increased prosperity. So many people, especially policy-makers, pay a great deal of attention to economic growth. They use it as a measure of the economic health of the nation. And perhaps it is. But perhaps the economic health of the nation is not necessarily the same as the well-being of the nation.

Sometimes we assume that "the economy" includes everything important that people do in our country. That's a bad assumption. It's possible for things to occur outside the economy, and they do. We need to remember that. The assumption that the economy is everything can get us into trouble, and can make us overlook possible ways to get out of trouble.

A simple example of activity outside the economy is the making my bed in the morning. Nobody pays me to do it. When I make my own bed I have absolutely no impact on the national economy.

So what? Why does it matter that making my bed is outside the economy? Here's the answer: One way the economy grows is by pulling activities that are outside the economy into the economy. So economic growth doesn't necessarily improve our well-being!

Here's an absurd example: Suppose I make a deal with my neighbor, Joe, that I'll pay him five dollars a day to make my bed, and he'll pay me five dollars a day to make his bed. And assume that 100 million American households make the same deal with their neighbors. Overnight, the U.S. economy would grow by $500 million per day. Instant economic growth! 100 million new part-time jobs would be created! But we wouldn't be any better off. The same number of beds would be being made. No one would have any extra money. All we would have done would have been to pull activities that had been outside the economy into the economy. This would help the economy, but it wouldn't help us.

In recent generations many activities that used to be outside the economy have been drawn into it. Two-income families used to be the exception; now they're the norm. Much of the work done by 'stay-at-home moms' was outside the economy; now households pay others to cook for them (restaurants and convenience foods) and to take care of their kids. This is neither bad nor good. And that's the point. We assume that economic growth is vitally important. But it doesn't have to be. The possibility exists for the economy to shrink without negatively affecting our national well-being. An activity doesn't necessarily disappear because it leaves the economy. We need to remember this, especially in light of sustained high unemployment rates. We shouldn't assume that people don't and can't do anything unless they have a job.

Comparing Federal Budget to a Household

The following letter to the editor appeared the San Antonio newspaper recently.  I think the letter-writer had a good point, but overlooked something, too.  Here's the letter, followed by my response:

"I want to provide some interesting information regarding the federal budget.

At the end of June, the government's income was $2.17 trillion. The budget was $3.82 trillion. New debt was $1.65 trillion. National debt was $14.27 trillion and recent budget cuts ($38.5 billion) totaled about 1 percent of the budget.

Now, let's take the above figures, cut off nine zeros and apply the results to a fictitious clan called the “Smith family.”

Total annual income of the Smith family is $21,700.

The amount of money the Smith family spent is $38,200.

The amount of new debt added to the Smiths' credit card is $16,500.

The outstanding balance on their credit card is now $142,710 and the amount they cut from the family budget was $385.

Do you know any family that would cut $385 from its budget in order to solve $16,500 in deficit spending? America's economic situation becomes more frightening with each passing day.

Harold Estep"

Here's my (unpublished) comment on Mr. Estep's letter:

Harold Estep's letter (The'Smith Family', 9/3/11) that puts the federal budget in terms of a family budget is helpful and apt. A family spending $38,200 a year while earning $21,700 DOES need to cut spending dramatically. But it would be stupid for the parents to say "it's unfair to ask us to work any harder: after all, we're bringing in $21,700, and the children aren't bringing home a thing! We can save a lot of money by dumping the kids and Grandma and moving to a tiny apartment."


We shouldn't expect the parents to suddenly start earning an extra $16,500 a year. But we also shouldn't assume that all $16,500 of their expenses are unnecessary. There's a middle ground somewhere: less spending AND more income. At the federal level, we need a committment to balancing the budget, not a committment to 'no new taxes.' Mr. Estep is right: we DO need major cuts in spending. But that's not the entire solution."