Blog 130. GDP is a faulty measure

Why GDP is a faulty measure of success.

That’s a headline in Time magazine of 2/5/218. Thinking of “success,” I wondered whether Time really sells more magazines by dating them a week later than the actual publication.  If so, another fake fact sells well.

GDP—the Gross Domestic Product—measures dollars, not successes.

  GDP counts dollars  paid* for:

personal consumption,

business investment (not replacement of old equipment)

government spending (17% of U.S. GDP in 2017), and

net exports (a net U.S. outflow of $600 billion in 2017).

If I wash your windows and you wash mine and we pay each other $100, the GDP increases by $200 and both of us pay income tax. If we each wash our own, the GDP doesn’t change but the physical results are the same—clean windows. You might therefore regard GDP as a way to measure taxability, but that’s not quite right. The amount of tax depends on whose money flow is taxed. Some people are more equal than others, some are more taxable than others.

If corporate bonuses pay two billion dollars to a hundred executives, ($20 M each) that boosts the GDP. Is that success? If a drug prevents the flu but sells for pennies, it contributes almost zero to the GDP. Is that success? If a tech business invests five hundred million dollars to build a new campus on the site of a former low income trailer park, is that success? Wikipedia and the city library distribute information, but contribute little to the GDP. Are these successes?

Interpretations of success.  You get the point. “Success” depends on what you want. An increase of GDP, claimed as a “success” by politicians, is not the same as the well-being of the society. Only a small part of the GDP (e.g. education, highway construction, smog prevention) represents care of the commons. The GDP might also be boosted through increasing the national debt to purchase missiles of Armageddon, which might be either a defense of the commons or a political opiate for a population that feels powerless.

Unfortunately, we have a federal Bureau of Economic Analysis but no bureau for Gross National Happiness, although the nation of Bhutan maintains such an index. Traffic jams, medical costs, and reconstruction after catastrophes all increase the GDP, but would detract from any accounting of happiness.

Other popular indicators.  

Like GDP, other politically popular indicators do not always indicate beneficial progress—or sometimes even factual truth.

Jobs.  The number of new jobs can increase when a full-time employee is fired and three part-time employees are hired.  Are the workers better off?

Weather.  The heat balance of the earth is not indicated by a single weather event or even by a senator’s snowball in Washington.  Heat balance is indicated by measurements of the incoming solar radiation and the outgoing infrared radiation back to space, that is, the net energy gain. But the current administration regards scientific earth monitoring as a “waste” to be reduced.

Dow Jones. A booming stock market measures speculation, not productivity. It’s the prices folks will pay today in hopes someone else will pay more tomorrow, even if the productivity of a rising stock doesn’t change.

So what?

Beware the interpretation of an index.  “Success” and “beneficial” depend upon your point of view, and you should extend your view far beyond the accounting.

* In 2017, the U.S. GDP was $19.386 trillion. (One trillion = one million million.)  Read reports carefully. Many of the reported numbers are “seasonally” or other adjusted rates, scaled to dollars per year, not annual totals.

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