The, like, totally weird “Y = C + I + G + X - M”

Y = C + I + G + X – M

where Y stands for “gross domestic product” (GDP).

In their text books macro economists define GDP as the monetary sum of all final goods and services produced within the geographic boundaries of the nation within the year and traded in the organized market place. Thus, the metric excludes much non-traded but valuable production, such as that of parents in the home or of volunteer workers.

Ever searching for meaning in data, economists have broken down their GDP-metric into (1) spending by households on all things other than new residential homes (C in the equation), plus (2) what households spend in the market place on newly built homes along with what business firms spend on new structures, new equipment and inventory of merchandise (jointly lumped into variable I), plus (3) what federal-, state- and local governments spend on goods and services produced within the borders of the United States (G), plus (4) what foreigners spend in the market place on goods and services produced within the borders of the United States (X), minus (5) what American households and business firms and governments spend on goods and services produced outside of the United States (M).

What drives this particular categorization? Why does your textbook make a distinction between household spending on, say, health care or education (part of C) and household spending on residential homes (part of I)?

Would not a much more interesting breakdown of GDP be into spending that enhances future labor productivity (e.g., repairing bridges or expanding airports or spending on public schools and colleges) and that which does not (e.g., buying health care for the elderly ) – regardless who does the spending?

It is often said that “Demography is Destiny,” that the age structure of a nation’s population is the most important driver of its economy. Is that really so? If you study economic demography, you will learn that demography is much less a nation’s destiny than growth in the productivity of its workforce. Therein, by the way, lies your generation’s economic future salvation, as you must pay back the public debt your parents’ generation piled on your generation.

There are many kids in our country with impaired hearing or vision or other ailments. Left undetected and untreated, these kids are likely to grow up to be much less productive than they would have been, had their ailments been diagnosed early and properly treated. Nashville song writer Thom Schuyler describes the consequences of this lack of treatment movingly in his “3/4 Me.” (If you e-mail dnexon@princeton.edu, Ms. Nexon will send it to you.) He may not know that he’s actually singing a fundamental lecture in economics.

Giving all American kids first-rate health care, along with a first rate education – even if it involves government spending (G) -- would for the most part be a solid investment in the future of labor productivity.

Yet the cosmic equation lumps such spending in with either household consumption (C) -- on par with spending on cheeseburgers or movies -- or with government spending (G), which, as Princeton colleague Paul Krugman recently argued (New York Times, October 9, 2009), increasingly has been viewed in our political scene as a waste of taxpayers’ money.

Contrast spending on children’s health care or education in the cosmic macro-economic equation with how it treats household spending on, say, adding a fourth bay to a three-care garage or building humongous mansions. Such spending is lumped it in with investment (I), on par with, say, business investments in information technology or robotics in automobile manufacture.

Can it get weirder than that?

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Yes, it can!

Consider again government spending (G). A waste of taxpayers’ money? Who do you think initiated the development of the Internet? Who finances the great Interstate highway system and much of basic science for medicine and defense? It is all part of G, as is spending on public schools and state colleges.

Was spending on the GI bill after WWII – also then part of G -- a waste of taxpayer’s money or one this country’s most profitable investments?

Is government spending on the Princeton- or West Windsor high schools more wasteful than private spending on, say, the posh Lawrenceville School, with its magnificent sports facilities and manicured golf course?

So my advice to you all is this: Study diligently the equations textbooks in economics try to tattoo onto your brain. But also switch on your own critical faculty, lest these equations do damage to your brain.

What textbook equations tell you usually is interesting. But what they omit can be vital.

Uwe E. Reinhardt is the James Madison Professor of Political Economy and a professor in the Wilson School. He can be reached at reinhard@princeton.edu.