By Karl Smith, Contributor Daniel Mitchell writes: Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable? The same principle is true – or should be true – for a country. That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income. Now, some of you no doubt sympathize with Matt’s Yglesias’s lament that conceptually GDP=GDI, but you are missing the much larger point: Gross Domestic Income (GDI) has the word “Income” in it. That’s a big deal. We could spend the rest of our lives attempting to explain that after adjusting for net exports, total expenditures must equal total income.   Such an attempt has the virtue of being futile and hence ensuring constant employment for those who teach and write about macroeconomics. Yet, critically it has the vice of leaving the populous dangerously exposed to poor reasoning about how one can’t improve and economy by spending more. So, for the sake of the Republic let us have the serenity to accept the things we cannot change and the wisdom to know that its entirely possible to ditch GDP as the headline number and go with GDI. Then we can talk about whether fiscal and monetary stimulus boosts wages and profits. When the discussion turns to nominal targeting, we can say Nominal Gross Domestic Income Level Targeting (NGDILT)ensures that total Wages and Profits grow at smooth steady rate. The distribution is of course subject to the laws of microeconomics, but we we are trying to make the total steady and predictable. Is someone going to object and say they prefer an economy where total wages and profits are subject to booms and busts? Or that we should get-the-rot-out by letting both all wages and profits fall? Will our real business cycle brethren find it so hard to believe that we think a sudden unexpected shortfall in all wages and profits might create some problems in servicing nominal obligations? Just one letter (and the courage to admit our hard fought efforts at national education have failed and will continue to fail.) That’s all it takes.
Source: FULL ARTICLE at Forbes Latest