If only the Egregious Professor understood any economics

Are those two events linked? I would suggest that quite emphatically they are. My reasoning is simple. One of the identities that describes the make-up of our gross domestic product is:

Y = C + G + I + (X-M)

where)and I know I simplify, but not in any way that changes this argument):

Y = GDP

C = Consumption

G = Government spending

I = Investment

X = Exports

M – Imports

In other words, government spending is part of our national incomes. And that has to be the case precisely because what our government spends does, literally by definition, or because of the inevitability of double-entry book-keeping, become someone else’s income.

And what that means is that when a government deliberately shrinks its spending in an attempt to balance its books it shrinks national income.

No, the G in the GDP equation is not government spending. It is government spending upon final goods and services. It does not include transfer payments. What is it that is being cut? Transfer payments to hear the squeals about welfare spending, no?

In fact, theoretically at least, the government could eliminate all transfer payments entirely and while that would definitely close the deficit – produce a very decent surplus in fact – it would make no difference at all to the G in the GDP equation.

Snippa’s just charged off into the mist of his own ignorance again.

11 comments on “If only the Egregious Professor understood any economics

  1. Could you look at Government spending as just a part of consumption and investment, it’s just pulled out as it’s a large number and centrally directed not individual spend

  2. @Tim,

    Why are Gov’t wages & productivity measured as they are:

    Teacher’s salary doubled = productivity doubled – why?

  3. “In other words, government spending is part of our national incomes. And that has to be the case precisely because what our government spends does, literally by definition, or because of the inevitability of double-entry book-keeping, become someone else’s income.”

    If it’s “by definition”, then it’s a truth about words and/or concepts – not about the world. A truth of logic, not of economics.

    Logic tells us nothing about the world. It is the science of the formal relationships between propositions and the concepts they contain.

  4. We know there’s no way of measuring the value of their output. There’s no market price, GDP is based upon market prices.

    So, we assume that the output is worth the inputs.

    No, I did not design this system.

  5. As well as being a classic example of the Dunning-Kruger effect we should now add a obsessive compulsive disorder as that appears to be the only way to describe his fixation on allowing government to spend without limit.

  6. “In other words, government spending is part of our national incomes”

    Where does government spending overseas fit in? If the government buys our passports from France or a few jets from the USA how is that part of our national income?

    I’m curious.

  7. “and I know I simplify, but not in any way that changes this argument”

    Classic Murphy. Translates as;

    “When you tear huge holes in my argument I will say that I have already explained that I simplified and will deny that you have proved me wrong, will accuse you of pedantry and then ban you”

  8. Buying a passport from another country is an import… But if it is cheaper than buying it from de la Rue, who cares?

  9. @Tim

    So, we assume that the output is worth the inputs.

    No, I did not design this system.

    What should the system/methodology be to correctly reflect Gov’t employees productivity?

    Please do a blog article.

  10. Pcar: for most government employees it could be modelled as an enormous incinerator with teams of burly men working day and night to throw sackfuls of tenners into the flames.

  11. It’s something I have discussed before often enough. And the short answer is there’s really no other useful way to do it. It’s obvious enough that government is economic activity, so it needs to be counted. Some of it definitely adds value too, it should be there in GDP, our measure of value added. But we’ve not got any market prices on output. So we can’t use them. Best rough guide we’ve got is to use market prices on inputs.

    That really is it.

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