Saturday, August 27, 2011

Pitfall of the Invisible Balance Sheet

Lynne Kiesling relays a chat she has with Steve Horvitz. This is a point I’ve made in my macro classes for over a decade:

… The “government spending to create jobs” argument focuses solely on flows, and ignores the destruction of the stock of wealth that arises from exogenous shocks like this. Repairing damage creates a flow of economic activity, but our accounting has to include the cost of the destruction of the stock of wealth. The flow of economic activity devoted to replacing that stock does not create any net new value.

People with a business background get this idea right away; eating your seed corn is a standard practice of bad management that everyone is told to avoid.

I would add that ignoring that balance sheet is also behind a lot of bad thinking about pollution. Pollution does do damage, but it’s to the balance sheet not the income statement (national income and product accounts) of a country. So, environmentalists have a legitimate claim that our economic gains are overstated, but the movement to “improve” GDP by subtracting this damage out is just bad accounting.

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