Lesson 14: GDP Complaints and Super-Heroes

How are you doing? Excellent! Well, not exactly excellent. I feel great but my lower back is tight and my eyeballs are a little itchy. Okay my knee aches a little and my allergies have been flaring up.

Why don’t we have one single measure for how we are going? If we had such a single measure I could answer the above question with something like – my PSHM (personal single health measure) is up 15% this year. In August alone it rose by 15 points. Now that would be cool. But as you are questioning my sobriety right now – the point is well-taken when it comes to health. Health is highly multidimensional. We don’t really want a single measure of health. Nor do we want a single measure of how much fun you had last weekend. We clearly don’t want one indicator of how nice you are.

Then why in the world are people discussing the development of a new economic indicator to replace GDP? I see these articles all the time. The WSJ had such an article last week lamenting that GDP is too slim and there is so much going on around it. They mentioned how GDP tells you nothing about the distribution of income. It also is silent when it comes to investment versus consumer spending in China. It also says absolutely nothing about cow methane in Texas. (Betty says I can’t use four letter words starting with an F; thus methane).

I have heard similar statements since I started teaching macro in 1910. Critics lament that GDP is not a good measure of a nation’s overall welfare or happiness. They search for the Holy Grail of macro indicators. So with that as an introduction, let’s talk about GDP – what’s right with it and what could be improved.

Gross Domestic Product can be defined with one word – output. It is the output of a country where output is defined as the total amount of goods and services produced. The GDP for 2015 of about $18 trillion is the value of all goods and services produced in the 12 months of 2015. If a tall toilet got produced in 2015, it would be counted in GDP of 2015 – even if it didn’t get sold until yesterday. So be clear – GDP is not sales. GDP is output.

When we listen to complaints about GDP – keep in mind that it is pretty good at what it does – measuring national output. It is not supposed to be a measure of welfare or a measure of happiness. It’s output plain and simple.

A second issue has to do with laziness. While GDP is one number that gets publicized widely each quarter, the calculation of GDP involves at least two techniques and a large number of indicators. One approach (the Product Account) asks what happens after the stuff is produced. Some of it does not get sold and goes into inventories. The rest of it is sold to consumers, firms, governments, foreigners, etc. You can find and analyze all those details if you take the time and effort. 

A second approach (The Income Account) measures output in terms of what the factors earned/contributed in producing it.  So if you take a little extra time  you can learn how much of the output came from labor, ownership, and from barnyard animals. You could go blind reading all those details—there are so many of them published EVERY quarter. But you miss most of that detail because it is pretty boring to the press.

Is GDP perfect? Is Superwoman perfect? Of course not.  Superwoman often enlists the help of other super heroes to subdue evil. And even Superwoman has a bad hair day now and then. Even with all the details I mentioned above, GDP has two important limitations. 

First, it simply is not a good measure of welfare or happiness or distribution of income. Second, even as a measure of output, as the structure of the economy changes over time, so must GDP. Notice how over the years we have moved from producing mostly agriculture, to manufacturing, to services, to high tech, and even to pizza delivered by drones. To get the output number right, our methods of collection and estimation have to change. And that is why the Bureau of Economic Analysis has more economists than rats have fleas. 

So we continually try to improve GDP as a measure of output. And we also continue to develop measures of other important facets of economic health. If we are interested in distribution of income, the Census Department has a lot of data we can examine. If we are interested in welfare, then we know that economists have developed a number of measures exactly for that purpose. As for happiness, I know some monks you might refer to. 

The trouble with these broader measures is lack of consensus driven by varying definitions of somewhat hazy concepts like distribution of income, welfare, and happiness. We should keep trying to widen our scope of published super-statistics but keep in mind that all that activity has little to do with the usefulness and perfection of GDP, the nation's output of goods and services.