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Balanced Fare: We Report, You Deride

Friday, August 16, 2002

Harmonic Convergence, or "Deep Thoughts Ahead"

We have seen Paul Krugman muse about marking his beliefs to market. And we have seen him muse about "errors and omissions" in our national accounting. BUT, we have not seen him muse about marking our national accounting to market.

Meaning what? Well, we had a fairly spectacular tech bubble over the last few years, as you may have noticed. GDP growing, people working, many whiz-bang telecom widgets produced, many trenches dug to lay fiber optic cable - heady stuff, On To The Next Millenium!

GDP is, and I am working without notes here, the measure of the goods and services produced domestically. The value of these goods and services is ascertained from market prices. Now, a lot of telecom equipment and investment was made at prices that, several years later, seem ludicrous. For example, suppose that "Big Tel" spent $1 Billion on routers and fiber optic cable in 1999. That $1 Billion figure is still hanging around in our GDP for 1999. Big Tel, however, is gone, and after the fact it seems that the $1 Billion of output was really worth, I don't know, $1.75.

So, imagine that we reduce GDP by this $1 Billion. Accountants will clamor for an offsetting entry. OK, maybe a hypothetical "National Net Worth" account? Write down some notional "accumulated assets" by $1 Billion. But the offsetting entry will not be an increase in some other part of the GDP.

So, GDP down in 1999. Maybe similar adjustments should be made for 1997 to 2000, which seems like a lot of work, and is Quite Irregular. Still, if GDP is reduced, then what happens to the productivity boom of the late 90's? Suddenly our productivity miracle looks less miraculous, and a lot more like a bunch of folks digging ditches.

Well, I don't know. Our guiding motto is "Any fool can answer a question that ten wise men cannot answer". Wise ladies may also be stumped. But, if anyone has any thoughts on this, I would be fascinated.

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