By Karl Smith
I wanted to make some more points about GDP. They are all sort of related but I am not sure that I will get a chance to tie them in a nice bow.
GDP by Any Other Name
Bryan Caplan notes
a big part of the philosophy of GDP is to eschew philosophical arguments about what’s "really productive."
On reflection, though, the standard approach is anything but agnostic. Official stats tacitly make an extreme assumption: waste does not exist. Astrology counts, even though astrologers can’t predict the future. Every penny of health care counts – regardless of its efficacy. The whole defense budget counts – even if it’s provoking war rather than deterring it. Indeed, if two countries’ militaries mutually annihilate, both countries count the cost as a benefit.
Question: Suppose you had the chance to redefine the GDP formula – to create the real measure of real GDP.
The short answer is that the official measures have it more or less right.
Whether the product is wasteful or wasted is of no concern. What GDP attempts to tell us is the extent to which the US economy is able to transform the basic resources of land, labor and capital into output of someone’s design.
I think the confusion comes when we try to measure output in a single unit – in this case a sort of dollar-value metric.
However, imagine we were in a country that produced only Apples. If we produced 100 Apples last year and 200 Apples this year then GDP has doubled. It does not matter whether folks want to eat the Apples, use them as projectiles to hurl at neighbors or simply grew them by mistake and are now letting them rot.
These might be questions you are interested in, but they are not questions that GDP answers.
If that doesn’t seem deep enough to be satisfying consider this. Most people consider TVs to be an important part of GDP. However, should they be slashed because I believe that TV rots your brain?
If an astrologer gave me advice that saved my marriage should we up the dollar per hour value of that service to be equal to a trained therapist?
If I love war and live for the sight of destruction should military budgets count? If our military sweeps across the globe and rids the world of the oppression of women should that count for more?
If our military unearths a trillion dollars in rare earth metals that lie under what otherwise would have been grazing ground for goats, how does that count?
GDP is simply not a measure of social welfare. That’s not what it is. That it is correlated with social welfare is an important empirical observation, but GDP is not defined that way and so the process of estimating it should not attempt to take that into account.
Austerity and Beauty
There has been a lot of debate over whether government spending can boost the economy. Much of it has been confused over the dynamics, a topic I hope to return to. However, there is just as much confusion over the aesthetics.
For example Cardiff Garcia presents this chart.
Which shows Goldman Sach’s best guess of the effects of fiscal policy on growth. We can argue over whether these projections are correct but what people really want to argue over whether we should find this chart beautiful.
If government spending is distasteful to you – for whatever reasons deeply ethical or mindlessly trivial – then watching government be extracted from the economy is beautiful thing even if nothing replaces it.
If the US economy is less because there are fewer prisons then Bob Murphy’s point should not be that austerity can grow the economy, but that austerity is beautiful.
An economy which shrinks because it produces less pain is better even if it produces no more of anything else.
Now, you may say: yes, but what about the mulitplier? Surely that matters. Perhaps, I think too much is read into the concept of multiplier but even assuming a straight forward reading, the simple fact is that good things often come at a price. If the price of fewer prisons is that former prison guards by fewer cars and houses and shoes, then perhaps this is worth paying?
Now these are not all prison guards but teachers, and tax cuts and other things. However, the question people want to ask is, is reducing these things a good idea? Or, even more basically, do I desire a world in which there are fewer of these things?
This is not a question that GDP or multipliers can answer for you.
The Japanese Question
There are many things that make Japan an fascinating if tragic case study. However, a major issue that I only see Dean Baker bring up and that is the service flow from capital.
But there is an area in which Fingleton may actually understate his case. I remember refereeing a journal article at the end of the 90s about Japan’s price index for passenger trains. (Wait, this is not that boring.)
The article purported to show that the official Japanese index overstated inflation because it missed quality improvements. The main quality improvement was that the trains were less crowded.
This issue is deeply fundamental and can help us understand GDP.
Suppose that a massive flu sweep through the United States and reduced the population by half within a week and then burned itself out and was gone.
There would be “adjustment costs” to be sure, but what would we expect to be the major effect on US GDP say two or three years out.
Well total GDP would decline, but properly measured per capita GDP would almost certainly rise.
There are a couple of ways to see this but I think the easiest is this. The vacancy rate in the Northeast corridor would skyrocket. Rents would collapse. This in turn would lead to a massive migration of Americans into the corridor – essentially taking the place of those who died.
This would mean the fraction of America living in the corridor would rise from 17% to likely as high as 30%. Since, the GDP per capita of the Northeast Corridor is 20% higher than the rest of the nation, that would tend to drag up the entire nations GDP per capita.
This phenomenon would be repeated around the country with people taking advantage of lower rents to move to places they previously could not afford and enjoying the agglomeration benefits.
The thing is, however, this does not mean that the standard of living will tend to rise for all groups. It will rise for people whose skills, talents and preferences fit well with urbanization.
The standard of living for uneducated men for example may very well fall, as the relative demand for construction, warehousing, vehicle manufacturing falls. These fall not only in absolute but in relative terms because the population is now more concentrated.
All of this is to say that the relationship between GDP, national prosperity, and the living standards of citizens is a complicated affair. There are many ways that a rising tide could sink some boats without calling on the bugaboos of big government or big business.
Indeed, I don’t have time to go into it here but I think that part of the issue with Japan and America is that people conflate the fact that rising Industrial Production has historically produced rapid gains for everyone with the idea that rising GDP will do this.
For example, if we compare the growth of Industrial Production per Capita in the US to Real GDP per Capita in the US we get a pattern familiar to Tyler Cowen and Lane Kenworthy.
There is nothing in here about Wall Street or family size or unions per se. Nor does it say anything about employment in various sectors.
It simply contrasts the part of the economy that is, as like to say, coal-fired, with the part of the economy that is not.
Japan shows some similar patterns but I have to let this go for tonight.