GDP Fetishism is Anti-Economic

While I will never deny that GDP and other measures of national income are useful metrics, I tend to fall in line with the view that economists, and to a greater extent, people in the public sphere greatly overrate its significance. My view is a relatively critical one because 1) there are important goods that GDP leaves out, 2) there are definite wastes and evils that it counts as goods, and 3) there is no mechanism in the calculation of GDP that serves to cancel the effects of 1) and 2).

The goods left out: production for exchange in kind or by volunteers, any untaxed monetary exchange, the cost of work and the value of leisure. I feel I’ve listed these in ascending order, with the latter two being the most significant. I realize that theory dictates the only reason we work is because the utility of consumption outweighs the disutility of having to work for it, but the ambiguous size of the spread between them really does make all the difference.  Still, shouldn’t everything listed above remain relatively stable in proportion to GDP? When GDP shrinks can we assume that any deference to the underground economy only highlights its status as an inferior market? Certainly the preference for leisure is stable…

A sturdier retort to the fetishists hones in GDP inclusion of various evils. In recent years, government spending in the United States has directly accounted for ~20% of GDP. Factoring in transfer payments and Government spending not contributing directly to GDP, and the figure could easily be 40%. My point is not to say that Government = waste, but there are both some clear-cut instances (half the worlds military spending for 4% of its population, mayors’ extended families always see lush parks and smooth roads popping up in their neighborhoods, etc.) and powerful theoretical explanations (No market test, government slack, favor doling) for why we’d expect government to be more wasteful and even destructive than some other parts of the economy. Also, it’s safe to assume that production would be marginally but significantly lower if actors bore the full social costs of production; we could easily slash GDP by making oil companies pay for the right to pollute…

But just as GDP can be slashed by altering our social institutions in a beneficial way, so to can it be increased by altering those institutions in a destructive or wasteful fashion. Whats odd is that this is the basic economic insight into almost anything, but it seems lost on most economists when it comes to GDP: like any good, we face a marginal trade-off between it and other goods. I presume most economists don’t see it the way I do, not because they’re unaware of all the criticisms I raise, but rather because GDP is the best macroeconomic metric they have and the intradisciplinary norm has been to trivialize its shortcomings.

The consequence is that economist regard any increase in real GDP growth as positive and and decrease as catastrophic. What an unbiased analysis should show is that their are times when GDP grows too quickly and the public has inefficiently shifted their resource allocations away from leisure/non-monetary exchanges/risk-aversion and towards frivolous consumption/investment. In most introductory macro classes, students are taught to fear the “contractionary spiral:” Mike gets laid off, he can’t spend as much at the bakery, so they lay off Juan, who can’t spend as much somewhere else and so on until we’re all paupers. Never discussed is the “expansionary spiral:” Mike thinks his assets will appreciate rapidly in perpetuity, thinking he will be rich forever, his willingness to pay leads him to spend far more than he would otherwise; consumer prices are bid up, followed by factor prices, wages and asset values rise more rapidly, more people feel like Mike. Eventually the market finds a highly leveraged equilibrium and only a small decrease in the speed of the spiral growth will send it all crashing down, leaving people worse for wear and deferring to less preferred consumption, i.e. leisure, barter, etc.

So it turns out GDP is just as easy to manipulate as macroeconomists believe it is. The problem is that GDP has been interpreted as prosperity itself, rather than an indicator of it, largely because few see a problem with the expansionary spiral if only it can be kept going. Unfortunately, in real terms, such a spiral will eventually make leisure (foregoing the disutility of producing) too cheap, and once people start to cash out of the spiral and into happiness, the instability of the thing is revealed. As far as assessing the state of the economy goes, it’s truly an exercise in knowing the current trade-off between measured and unmeasured activity. There’s no doubt that real GDP per capita growth should be the norm, but at what rate is very unclear if you’re not taking sides; 1% per year is well below out running average, but would still see the average person’s income double in the course of one lifetime. As with every decision, quality matters. We can’t just aggregate people’s decisions and say the more the merrier when there may be a lot left on the table.

  1. October 14th, 2013

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