Student Questions: Measuring the Economy & Stimulus

BY Business Desk  November 11, 2009 at 2:03 PM EDT

Students in Salt Lake City; file photo

Editor’s note: This week, the Business Desk will feature questions from students in three high schools around the country.

Question: How is the economy measured? — Alex, senior, Judge Memorial Catholic High School, Salt Lake City, Utah (pictured right, on the left)

Paul Solman: By the Gross Domestic Product: the amount of goods and services it produces, as measured by their sales. Anything that gets bought counts as part of the final number, but what we buy from abroad is subtracted from what we sell abroad.

There are two famous problems with GDP as a measure of the economy. One is that it includes things that don’t necessarily make us better off, like cigarette sales. The other: that it excludes goods that simply aren’t traded in the marketplace. So a parent who hires a nanny and then goes to work himself adds to GDP two ways, but if he does the same job himself by staying home to care for his children adds nothing to the GDP.

Question: Is the stimulus plan a success or a failure? How can we tell? Are there other solutions to the economic downturn other than bailouts and stimulus packages? — Riley, senior, Judge Memorial Catholic High School, Salt Lake City, Utah (pictured above, on the right)

Paul Solman: We can’t tell for sure about success or failure, Riley, because, as with everything in human history, we can’t run an experiment that repeats the conditions we had when the stimulus plan was launched. It seems pretty safe to say that without the stimulus, unemployment would be worse and thus it’s a “success” compared to the alternative. The federal government has been spending money that consumers haven’t been spending, and that’s true the world over. In the short run, that would seem to helping rather than hurting economies like ours.

But will the stimulus be a success in the long run, you might ask. Well, in the long run, we’ll really never know. That’s because so many other things will happen to influence the economy. Experts still argue over why the American economy was so successful after World War II. They will be arguing over the impact of the stimulus when you’re my age.

Your third question concerns alternatives. One would have been for government to do nothing. Let labor, houses, commercial real estate and everything else in the economy drop in price until the point that people with money were willing to buy at the new low prices. It’s not easy to imagine that alternative being tried in a democracy like ours. Moreover, it’s far from certain that it would work.