In the aftermath of the outsourcing story, the biggest surprise to me is how many people have argued, in effect, that mismeasurement of real GDP growth and domestic productivity is irrelevant—what’s important is our access to cheap goods and services, whether made here or abroad.
When I raised this question with Bob Hall, a top-notch economist at Stanford University (who also serves as chairman of the NBER Business Cycle Dating Committee), he wrote back in an email:
Our command over resources in the world is measured by our real income, not real GDP. Improved terms of trade—cheaper imports—raises our real income even if it does not affect productivity or output. This is the difference between the GDP deflator, which does not respond to import prices, and the consumption deflator, which falls when imports cheapen. Real income is national income divided by the consumption deflator.
And what I asked him what the goal of economic policy should be, his response:
We should maximize the present value of real income
Now, this is a fascinating alternative perspective, since it seems to imply that real income growth should be the headline number for economic policy, and not real GDP growth (just to be clear, Bob didn’t say this—it’s my inference). This perspective also seems to imply that domestic productivity growth becomes less important, if there is fast enough productivity growth overseas to drives down the price of imports.
Now, I understand the logic, and I intend to write a piece exploring this perspective for BW (which certainly puts a different spin on the cover). But boy, after 18 years at BW writing about real GDP growth and domestic productivity growth as the appropriate benchmarks for economic policy, I’m left scratching my head a bit.
Update: Bob’s comment on reading the item: “It’s just as important to give US consumers access to cheap foreign goods as it is to make real GDP bigger.”