If I invented a cheap machine that did all your housework and fixed your car for free, GDP would fall. Despite the fact that everybody's lives would be permanently improved.
Say a person saves his money and lends it to people in another country. He's creating wealth for himself. The other country is getting further into debt. Maybe the money is spent frivolously or invested in a soon-to-collapse bubble. Or it's spent on productive investments. Either way, the effect on GDP is the same. And it goes to the borrowing country, not the one accumulating assets (unless the borrower makes successful investments).
As individuals, trying to maximize our own GDP would mean spending every dollar we get and avoiding investments that could reduce how much we need to spend to live our lives. That's the opposite of our best interests.
> If I invented a cheap machine that did all your housework and fixed your car for free, GDP would fall.
Probably not, because people would redirect both time and resources currently spent on housework and car repairs to other pursuits; this would most likely by GDP neutral or positive.
> As individuals, trying to maximize our own GDP would mean spending every dollar we get and avoiding investments that could reduce how much we need to spend to live our lives.
Technically, no, for several reasons. First, “your own GDP” (what might be called “gross personal domestic product”) is not increased by spending that goes to anyone but you, so maximizing it is just maximizing what people pay you for goods and services, not what you spend.
But to maximize your personal activity reflected in national GDP, your description is still wrong. Certainly, you are going to want to maximize spending on domestic goods and services, but spending on capital goods that reduced future cost doesn't hurt. Since economic wants are unlimited, any cost reduction has no necessary effect on your total future spending, it just increases the realizable utility at any level of spending.
Yes, the saved resources can be redirected to other uses. But not necessarily in the same economy.
As for your second point, I should have said "your own contribution to GDP" rather than "your own GDP". And with that, you CAN invest what you don't spend on yourself in other economies, as I said. It may reap benefits in the future. But GDP calculations can credit some other economy's GDP, as I said.
Sure it is. It's captured by its effect on our overall productivity.
A significant share of the growth in U.S. GDP since the 1970s can be attributed to women leaving the home and entering the workforce. It's not that they were doing any less work beforehand, but a woman who sucked at housework but excelled at piloting an aircraft could work more productively, improving overall efficiency of the economy.
GDP didn't grow simply because her work was now measurable in dollars and cents. People lament that to have a similar standard of living today as 60 years ago, a family needs two wage earners. Yes, and part of the reason is because women entering the workforce _depressed_ wages. In other words, as women earned more money men began earning less. (Except it happened slow enough that men's absolute earnings never declined, they just grew more slowly.) Nonetheless, we're all better off when a woman can make better use of her unique skills. Our economy became more efficient overall, so overall GDP went up commensurately.
Many of the criticisms in that article aren't pertinent to a large, diverse economy like the United States. No economist believes that the GDP figures for a natural-resource intensive economy are as meaningful as for the U.S. They can absolutely be meaningful in some contexts, but are obviously less meaningful in others. Kudos to the journalist for admitting his young naivety, but he's assuming that the his elder contemporaries at the time were similarly naive about the limitations of GDP. The better assumption is that economists in the 1990s that had the same amount of experience as he enjoys today were similarly wise to the limitations of GDP.
Analogies about personal GDP don't work very well. GDP is a macroscopic view that is predicated on various behaviors averaging out. If you had an economy of a single person who only did housework, GDP is obviously useless. But so what? That doesn't say much of anything about it's utility for measuring the overall productive capacity of a huge, diverse economy.
Regarding the relevancy of GDP to Japan... that's why we have metrics like per capita GDP and metrics like the Gini coefficient. Japan is shrinking thus their rate of growth in GDP will slow if not shrink. As a population grows you can asymptotically approach a more efficient allocation of labour and resources, but if its not growing or shrinking you lose out on that avenue for improved productivity. If your entire economy is a single, two-person household, someone will invariably have to specialize in doing housework all day while the other works outdoors. If you have an economy of 300 million, you can out-source both mundane housework and mundane outdoor work and everybody gets more work done overall; certainly more so than an economy of two, but also more so than an economy of 200 million.
But population growth isn't the only opportunity to improve productivity. Japan has a high quality of life partly because of low inequality and thus a low Gini coefficient. Higher inequality tends to signal a more inefficient allocation of labor and resources. Which isn't to say that Japan doesn't have room to improve efficiency (sex inequality is still a big thing), but in many respects they're in a better place than the U.S. to begin with.
Like the the case with natural-resource intensive economies, the Gini coefficient tells us something about the accuracy and meaning of GDP, except in a quantified way. (And if you can't quantify something, you can't easily apply that knowledge.) A high Gini coefficient (and high inequality) suggests that we should be more careful about the conclusions we draw from GDP. In particular it suggests that our presumptions about things "averaging out" are more questionable. Inferences about particular details of the economy will be less accurate, and predictions more volatile. So it's not so much the case that GDP is a poorer way to measure quality of life in Japan, it's that because of our higher Gini coefficient it's a poorer way to measure quality of life in the U.S.
OTOH, it also follows that over the period where GDP growth in Japan has slowed relative to U.S. GDP growth, quality of life in the U.S. has probably in many ways improved faster. The effects mitigated, of course, by our inequality. Likewise, we can find all sorts of fault in how accurately GDP reflects particular details about China, but in relative terms if quite obviously reflects (as expected) a rapidly improving quality of life.
Do you actually do “housework”? You have some strange statements in here from the perspective of someone who lives in a dual income family with shared responsibility in the home. All the time-consuming chores of yesteryear take much less effort and time today. It takes me roughly 20 minutes to do a load of laundry, and we have to do 3-4 of those a week. It takes me 30 minutes to wash dishes once a day and the dishwasher is effectively a few minutes per day at most. Grocery shopping takes an hour or two, and that is getting serious tech applied to it lately, to the point that we may well not need to spend more than 10 minutes a week on it in the near future. Also it takes me about 15 minutes to make tea the way I like it. ;)
There are a lot of factors that contributed to women entering the work force, and one big one is home automation that left them with more free time.
I ask this as a general question, as someone with a passing interesting in history, but no formal training: how do we know that free time caused women to enter the workforce, rather than women entering the workforce gave them enough money to trade money for time in household work, thus craeting a housework automation economy?
In history, things seem so... fuzzy[0]... that identifying the cause from effect seems so arbitrary.
[0] More formally, we never really know the full history, we generally rely on unreliable/biased narrators, and we don't know what information we don't know.
In general we can establish causality for socioeconomic theories using natural studies. For instance your question can be answered by comparing the timing of introduction of technology into the home and the rise of women in the workplace. You can ask people how much time they spend doing housework and compare to what people with technical alternatives spend. This is a relatively easy natural study since so much of the data was well collected at the time. Harder ones that are more recent ask things like whether or not raising the minimum wage increases unemployment. You’ll be able to find studies that used Seattle’s minimum wage law to determine the answer to that question.
In the narrow case of women entering the work force, the biggest factor was the employers being willing (forced) to hire women because they were the only workers available quite suddenly. Women would have entered the work force in more substantial ways before that but they were perceived as taking jobs from men. WW2 changed all that. One reason they were able to keep working after the war is because they had money and the products were available to allow them to get the housework done in less time. It was a status symbol in the 50s (and probably still today) to have a very bored wife at home.
FWIW, my point isn't predicated on why women were able to enter the workforce. I was merely arguing against the claim that informal labor isn't reflected in nominal GDP. See my reply elsethread.
IIRC, I first came across the claim about women disrupting the labor economy in one of Francis Fukuyama's books, probably either "Trust: The Social Virtues and the Creation of Prosperity" (1995) or "The Great Disruption: Human Nature and the Reconstitution of Social Order" (1999). It's been awhile since I read it, however; but I've read many books since then and while I don't know if any other source I've personally read made such a straight-forward claim, I think the contention is largely accepted and, especially more recently, widely acknowledged that women entering the workforce (for w'ever reason) substantially suppressed the nominal wages of men.
It doesn't matter _why_ women entered the workforce. I was arguing against the idea that GDP only reflects nominal wages, and doesn't reflect the value of labor outside the formal labor market. My point was that when women were primarily homemakers, the average salary of the man indirectly reflected the work of the entire household and thus was actually reflected in the GDP. Not perfectly, of course, because she wasn't as free to participate in the labor market as men, and thus society systemically undervalued her labor. But to a large extent it was indeed reflected in nominal wages.
Likewise, when the article discussed how the per-capita GDP of Kenya, at only $2, clearly didn't reflect the "real" amount of labor and wealth in Kenya, it's wrong and misleading. Much of that value is reflected in $2 in that $2, in nominal wages, is all you need to subsist. Remember, there's no such thing as "intrinsic" value, not in economics. If $2 is all the Kenyan labor market is willing to pay, then $2 reflects rather well how the Kenyan labor market is structured, and reflects what value any investments can leverage in the short-term. (Would you invest $100 million in Kenya in exchange for help harvesting your fields and babysitting your kids?) We don't need some ad hoc system to quantify the potential of the Kenyan labor economy because the potential is implicit in the huge difference between the Kenyan GDP and the GDP of richer countries.
Look at it another way: if I sit here and pour myself into writing HN posts all day rather than participating in the formal labor market, can I complain that GDP isn't accurately reflecting the value of my labor? It's nonsense. I would be neither wrong nor right. My complaint would only beg the question, value by who's reckoning?
There's a debate to be had, at the margins, about the limits and accuracy of metrics like GDP, but the notion of trying to quantify wealth outside the formal economic system is fundamentally and hopelessly flawed. Rather than trying to create some framework to guesstimate the value of supposedly hidden wealth, people should be working to plug these systems of labor and exchange into the formal economy. A free market economy based on supply & demand and a fungible currency is fundamentally a pricing system. It's a giant calculator with a built-in unit for determining and expressing "value". For all its many flaws, it's foolish to believe anybody can do any better by trying to tally behaviors individually. Such systems are invariably worse in terms of systemic biases. It's why communism failed--at scale no system of pricing the "value" of objects and labor is more honest, accurate, and consistent than what people manifestly are willing to freely accept in exchange; and no system of quantifying that value is more honest, accurate, and consistent than a nearly perfectly fungible, nearly perfectly substitutable commodity--currency. It's not perfect, but it represents the best that is achievable.
If you find flaws in how the system prices those things, it usually has something to do with 1) the lack of freedom of accepting or rejecting exchange or 2) the medium of exchange (i.e. currency). Thus debates about whether, e.g., healthcare should be considered some sort of right (forcing government or employers to express the cost, previously hidden by silent pain and suffering, in nominal currency) so that people would be more free to change jobs. The issue and task is to figure out a way so that these things can be more transparently priced into the formal economy, rather than spending time trying to quantify these things in some ad hoc, contrived model. What good would such a number be, anyhow?
In general, the effect of new technology is to increase the output of the economy - we get more stuff.
This translates into a higher GDP.
Now, consider your specific example.
The effect of the machine would be to free up time for people to do other things.
Some of this might be increased leisure (not capured by GDP) , while some of it will be increased output in the economy, which will show up as increased GDP.
Your comment about individuals striving to increase GDP is silly - GDP is an aggregate statistic and the result of people trying to maximise their own personal welfare.
If someone invents a machine that does some necessary consumer-level work (say, a washing machine) and the result is not increased leisure, something is Very Wrong. Sure, we could spend the time we save doing dishes on productive labor, but this wasn't time we owed to the workforce in the first place.
"Increased activity occupies surplus generated by increased efficiency" works for corporations, which is why economists like it, but not for humans, which is GP's point. In fact, GDP is only of practical utility at all insofar as that equation does not hold, since leisure and autonomy and generally not-being-beholden-to-work is the economic end of "human welfare."
There's other points, which I think GP was referencing in a less clear way, about how GDP measures all sorts of economic "activity" that is useless altogether- financial speculation in bubbles, competing advertisement campaigns, etc. But the main point is that GDP is a measure of output, not welfare, and for humans (all else being equal) we're better off the less that we're required to do.
We know what happens when labour saving machines, such as washing machines, were invented - married women, who used to spend most of the day on housework entered the workforce.
Who is to say fixing your neighbors machine is not leisure time? With the added benefit of increased social capital ( if I’m going to be clinical about it ).
>someone invents a machine that does some necessary consumer-level work (say, a washing machine) and the result is not increased leisure, something is Very Wrong.
Leisure isn’t free though. Increased leisure time is going to create work/spending in other areas. So you save time on household chores due to the cheap machine, that means you probably end up spending more money on your leisure activities. You buy more books, video games, hiking boots, sports gear, etc.
Or sleep. Or studying. Or taking a walk with a loved one.
The point is that a lot of the benefit to us of such an innovation is not going to show up in GDP, even if some of that time is used for fun activities. GDP doesn't count increases in fun either.
You're aware that your response here is atypical, and the exact kind of problem that is addressed by behavioural economics, yes? While what you're describing (using new found free time to engage in free leisure activities) is what you see as desirable, it is emphatically not what humans as a population do.
When discussing macro things like GDP, the homo-economicus minimax behavior of the few is inconsequential and has no place in a discussion of what would happen. However much we might not wish it so.
OK. So let's keep going. You are correct, what I'm describing is atypical. Why is it atypical?
Is it because they need more stuff? Or is it because their brains are under near-constant assault from a barrage of advertising that melts their willpower and creates a link between having a free moment to themselves and consumption, a desperate instillation to keep up with the Joneses?
I would contend, and I'd fight about it, that the answer is the latter and that it is an overwhelming, brain-breaking external imposition. And it's in the service of making that particular number that's the topic of that article just a little bigger.
We need to stop fucking ourselves up as people and as communities and measures that do not take that into account are bad measures that should not be fetishized. (And they are fetishized. They are drooled over. And yet nobody dies taking pride in how they made GDP bigger.)
> Is it because they need more stuff? Or is it because their brains are under near-constant assault from a barrage of advertising that melts their willpower and creates a link between having a free moment to themselves and consumption, a desperate instillation to keep up with the Joneses?
Generally, increasing incomes in developed countries lead to increased service consumption or at most indirect manufacturing. While some of this is "keeping up with the Joneses", I think a lot of it is just rational time valuing.
e.g. I've found that as my income has gone up considerably in the last half-decade (several hundred percent), I am spending more - but not on buying more goods. Generally it is bucketed under:
Spending more to save more time (increased value of time):
* online grocery shopping
* spending more to live close to work
* use of more expensive cab-services (lyft/uber) rather than public transit or biking
* flying direct rather than multi-stop.
* Spending more on childcare to maximize time spent on more intellectually stimulating endeavors (including work) or at times traveling
Higher quality:
* higher end food and restaurants
* more expensive travel options (distance/exotic)
* larger housing units to feel less cramped that also offer time-saving amenities (in-unit laundry, gym/pool, 24/7 package delivery)
I'm getting more leisure -- and directing a lot into the GDP numbe.
Because capitalism. Even the mountain you hike keeps business hours, requires vehicular propulsion to get to, and charges a fee for parking.
Laws and social conventions alike discourage simply standing around doing nothing in particular in most public places, and loitering ordinances sometimes expressly forbid it. There aren’t that many places to go or things to do, both as a matter of practical exigencies and sociocultural rituals alike, which don’t involve some business to transact.
This is the only answer that is possible within the narrow view of capitalism. If you have more time, you should spend more, according to them, otherwise the economy will flounder. It's not a surprise then that capitalism societies strive to have most of their population earning only enough so they don't have the temptation of forgetting to spend all the money they receive.
Ugh, that sounds terrible. In my utopia, machines do all the work, and everyone in the world gets to do whatever they want, which will mostly be leisure. Yes, there will be some people for whom leisure means work, and more power to them. I still don't understand the drive to be "productive". What's the point of technology if not to shift the need to be productive away from humans?
It sounds like a very sad world to me where people automate their jobs away in order to just find new jobs to fill their time. Of course, that is the world we _currently_ live in, just on a smaller scale than I'd hope we'd eventually achieve. I think it'd be a wonderful world where we can only dream up jobs for a tiny percentage of the population, assuming the wealth created by automation is distributed so people who don't work can still live great lives.
People 100 years ago, if they teleported to today, would look at our lives, our possessions, the conveniences offered to us every single day by all of this increased productivity... They would probably wonder why we don't cut the hours we've worked by half or more. I don't quite understand it myself. Why does all of the time we've gained go to working, when it seems to me the cost of a "whole lifetime" has gone down by so much in the past 50 years.
Machines seem to already do most of the work necessary for a human life for us.
Karl Marx anticipated the machines would allow us to live lives comprised largely of leisure by now, but here we are all working. The thing is, if we were content with middle class living standards of the 19th century we'd be working a whole lot less. So when it becomes possible to do something crazy like build out an asteroid mining industrial complex, or something, will we say 'ahh, we don't need to do that, let's put our feet up', do you think we'll take it easy or will we keep working? I think we'll keep working.
You might be interested in reading about the hedonistic treadmill, if you haven't already heard of it. Effectively, good things don't make us very happy for very long before we need more.
The hedonistic treadmill is someone's hypothesis. I am very skeptical that it is actually correct, as working around it seems fairly simple (certain video games are a good example).
I would rather we didn't base major social attitudes on someone being convinced that a normal, healthy human wouldn't be able to make themselves happy.
A sibling poster covered this, but a maybe-not-terrible analogy occurred to me: it's like writing software. Even when you've finished building out all the features you want to build, it's still never done. There might be bugs that need to be fixed, or you might want to make some slow parts of the code more efficient, or users have come up with some new use cases that require you to add new features. It just never ends. It's rare to find a software project that's "done", aside from abandoned projects.
I guess people are just never satisfied with some kind of end state. And I guess that's a good thing; life is pretty good these days (if you're reasonably well off in a developed country), but, well... we still don't have our jet packs or hoverboards or flying cars. All progress depends on people not being satisfied with the status quo.
It's definitely bad to live in a society where violence and robbery are common. We'd rather be without those things.
But if everyone spends money on bodyguards, that ends up in GDP.
In a comparable society where violence and robbery was not common, you would use the money for other things that are definitely preferred over giving it to bodyguards, security camera shops, locksmiths, and so on.
So measuring GDP in the way we do is defective; it gives near equal figures for both societies when clearly one is better than the other.
Everyone knows GDP (and all other existing economic measures) are imperfect, limited tools that don't capture all meaningful variations.
That's not a meaningful criticism of using GDP at all, or of using it as the headline measure of economic performance.
To validly criticize using GDP as the headline measure, you need to show not merely that GDP is flawed, but that there is an alternative measure that can be practically calculated that is on-balance better at capturing the overall picture.
To validly criticize using GDP at all, you need to go further and make the case that there is no purpose for which there is not a better measure available.
“GDP doesn't capture the whole picture” is an easy but meaningless criticism.
>To validly criticize using GDP as the headline measure, you need to show not merely that GDP is flawed, but that there is an alternative measure that can be practically calculated that is on-balance better at capturing the overall picture.
Why? Maybe we should be more humble about what metrics can and can’t do for us.
Maybe we should admit that many of the things that matter to us are subjective rather than avoiding the difficult questions by fixating only on things that appeal to positivists?
Because if it's the best tool we have for a purpose, then it's the right tool for that purpose even if it's not the platonic ideal of a tool for that purpose.
> Maybe we should be more humble about what metrics can and can’t do for us.
Not only do I agree with that, I've made the same point elsewhere in this thread:
Umair Haque proposed an option in his HBR essay “Betterness: Economics for Humans.” He uses the analogy that GDP is like the RPM gauge on a car, hard to use without the context of a speedometer. He proposes new measures to supplement GDP and help indicate if real wealth is being created. Not sure how these ideas have developed since 2010.
The biggest flaw of GDP is that governments around the world try to maximize it. And, as we see in many cases, making it bigger doesn't necessarily make it better. Take education for example: you can have free schools and free universities for everyone, bringing zero additional GDP. Or you can have for profit schools and universities that will be afforded only by a few, but with big GDP impact. Another clear example is given by the USA: nationalizing health care would be great, but it would also reduce the GDP because of destruction of the for-profit industry. In this case, however, lower GDP could bring better health outcomes for most people in the country.
But why are you hand waving away the compounding GDP value of those other things??
Buying things which allows for employment and investment to invent yet other things is pretty obvious capitalism 101. Safe societies have a value which shows up in GDP long-term, see also spillover benefits.
The biggest beef I have with GDP is that it does not capture how we run down natural capital to create financial capital. Pollute our seas, cut down our forests, poison our air: this is all a capital loss, but reflected as a financial gain in GDP statistics, even though finance is a human abstraction and our natural capital is real. In Swahili, the word for nauture is maliasili, also translated as ‘genuine wealth’. We have something to learn from that.
Something I always find interesting is the word Eco-Nomics which is a greek and latin mashup for "study of the home", but still the Eco prefix seems to have a similar meaning here.
GDP wouldn't necessarily go up nor down due to such an invention. However, a useful invention that increases productivity (as yours undoubtedly would!)... frees up resources (capital and labor) for other uses, which, if they're actually put to such other uses, may well lead to additional production.
Don't fall for the ATM fallacy (that ATMs killed the bank teller job, therefore made people poorer -- they did not do the latter!).
It's true that malinvestment initially shows up as growth, but later turns into a destructive, recessionary force.
Maximizing current GDP is not the same thing as maximizing future GDP. The latter is a much better activity, while the former can lead to ruin. Exactly as you say.
But, at the end of the day, with all economic activity aggregated, measures like GDP are actually useful and meaningful. Of course, context helps. Growing GDP in a context of massive malinvestment is definitely not a good thing!
If I invented an expensive machine that destroyed your house then GDP would increase because manufacturing the machine (and rebuilding the house) count as economic activity. This is a big problem with military spending as reflected in GDP. GDP isn't a measure of wealth or quality of life it's a measure of economic activity that is mostly relevant in regards to trade and almost nothing else.
> If I invented an expensive machine that destroyed your house then GDP would increase because manufacturing the machine (and rebuilding the house) count as economic activity.
This is again a faulty assumption; while they would count as economic activity, it likely wouldn't be additional economic activity, but displacing economic activity that would otherwise take place, especially the house rebuilding.
Also, destroying someone’s house doesn't guarantee it gets rebuilt, anyway.
Why are you building a house destroying machine (let's say tank) in the first place? Let's say it's because your nation is going to war, and has gone into deep deficit spending to finance high levels of production of war materiel. That's a lot of economic activity that wouldn't have happened otherwise. Similarly another nation going to war and paying you to build them tanks might be a similar situation.
This isn't hypothetical. In the US GDP and military spending went way, way up during WWII though overall quality of life remained stagnant or went down (due to rationing). Only after the war when production capacity was re-allocated toward consumer goods did quality of life and wealth start to increase.
The same is true for houses. Not having a house (or lots of people being recently deprived of houses) is great motivation for building houses. Lots of resources get leveraged that would not normally have been leveraged. The economy isn't a zero sum game, even in regards to production capacity. You notice this all the time when there's a recession or a boom. Total capacity (manufacturing, home building) is elastic, it responds to demand, and that can vary a great deal on a huge number of factors. Destroying a house doesn't guarantee it gets rebuilt, but destroying lots of houses will typically be associated with a lot of home building in response.
> If I invented a cheap machine that did all your housework and fixed your car for free, GDP would fall.
This experiment has (partly) been made, not that many decades ago, actually. The introduction of many household appliances like the washing machine, the dishwasher, and the vacuum cleaner reduced the amount (mostly women) spent doing house chores, and allowed women to enter the workforce.
> If I invented a cheap machine that did all your housework and fixed your car for free, GDP would fall.
If we take "free" to mean something along the lines of [Negligible compared to current cost] - i.e. no free lunch: Is it not the case that this has already happened, at least in terms of technological advance (of a similar magnitude), and overall GDP has not fallen.
Or, by GDP falling, do you mean in ideal conditions where nothing else changes (i.e. All other variables held constant)?
A child goes to the doctor for a checkup. The nurse weights the child and measures their blood pressure. After the doctor checks out the child, the parent picks them up and asks, "So, how much bigger are you than last year?" Smiling, child replies "120 over 80!".
GDP is important, because it is a measure of economic activity. That is like blood pressure for the economy. Unlike humans, where our blood pressure is pretty constant, the economy has periods of with lots of money flowing and times with little. This is the reason why politicians and smart media people focus on it, because it indicates are we in recovery or recession.
That is not the same thing as measuring change in wealth. That is like gaining weight (in the healthy sense of a child growing). When the GDP goes up, it doesn't mean more wealth, it means more money changed hands.
Like managers are taught, what you measure is what you get. We as a society focus too much on moving money around and too little on generating wealth.
The point is that the flow is not the same as the change in stock. If A is the stock of wealth, people tend to think that GDP is dA/dt. It is not. It is more like dA/dt + dD/dt - dW/dt + ...
These extra terms are things like increase in debt, change in mean velocity of money, usage of non-durable goods, etc. Confusing GDP for wealth flow is ignoring some of the largest factors in its calculation.
That's some extreme cherry-picking. What about sugary drinks versus house construction? There are good and bad consumables, and there are good and bad durables.
The author brings up a good point wrt GDP not accounting for debt. If the US were to borrow $1tn from China and splurged it all on military spending, we'd see a massive increase in GDP next year, but we would only be impoverishing ourselves in the long run.
Adjusting the GDP figures to account for foreign-debt, and investments held by foreigners, seems like something that can be computed objectively, and would still serve as a superior metric.
Another way to think of it is that China would be giving us $1trn worth of stuff for only the cost of servicing that $1trn of debt (remember to subtract inflation). Does that make us or them poorer? Think carefully.
It really depends on what we use it for, what strings are attached to the money besides interest (official or otherwise), how that would affect our credit rating / percieved value of the dollar with other countries, our effectiveness in spending that money, etc. I’d submit that it isn’t a question we can really predict the answer to. Way too many variables.
I wasn't suggesting we default. Besides, countries that only borrow in their own currency can... "default" by inflating (and they do it all the time), so they never actually default in the sense that you have in mind.
The U.S. does not borrow dollars from China without China having exported that many dollars' worth of trinkets to the U.S., for how else would China get those dollars to lend back to the U.S.?
Today's mercantilism is all of this form: country X maintains a long-term trade surplus with the U.S., forces its exporters to exchange their dollars for local currency, and then country X's central bank buys U.S. treasuries (i.e., lends to the U.S. government) with those dollars. Yes, those central banks could purchase other dollar-denominated assets, and if the U.S. Federal government did not engage in deficit spending then those central banks would have to buy other dollar-denominated assets -- or they would have to let exporters keep their dollars and figure out what to do with them, or perhaps trade would have to balance.
Another way to put this is that Congress' deficit spending drives the U.S. trade deficit. If the U.S. budget suddenly went into long-term surplus then the mercantilist nations would have to start buying other dollar-denominated assets, or else the trade deficit would have to swing into surplus (which would then see the U.S. become a mercantilist nation...).
So when someone says "what if China lent the U.S. $1trn and ..." what they're saying is equivalent to "what if China exported $1trn worth of trinkets to the U.S. and ...". And look! It's what actually happens. China maintains a long-term trade surplus with the U.S., so it's continually selling $$$$' worth of trinkets to the U.S. and continually lending similar amounts of $$$$ to the U.S.
Compare to "what if China lent the U.S. 10trn Renmimbi and ..." -- completely different idea, though, of course, the U.S. only borrows in dollars.
Yes, I didn't say all this earlier, but people should really know this (people really don't). EDIT: The 15 upvotes above are from people who do know these basic facts of economics.
China could just as easily export oil to any country inn the world in exchange for us dollars. They could then buy US treasuries with those dollars. No need to conflate trade deficits with loaning money. They could also buy any number of things around the world with US dollars earned from selling us stuff. Given all that, I really think someone in This discussion is counting some dollars twice.
> They could also buy any number of things around the world with US dollars earned from selling us stuff.
Yes, I said this ("dollar-denominated assets").
> China could just as easily export oil to any country inn the world in exchange for us dollars.
Let's think this through (ignoring the fact that China is a net importer of oil, so they wouldn't export any oil). China sells stuff to Europe for dollars. Whence those dollars? Europe probably had treasuries, sold them, and paid China... except that actually they'd just transfer the treasuries -- why pay extra fees? Whence those treasuries? Well, Europe sold... stuff for dollars and so on.
(Actually, Europe borrows in euros, so euros too are a reserve currency, but let's ignore this. So it's not right for me to use Europe in the example above, but let's pretend for the argument's sake.)
Few things in economics are zero-sum games, but one thing that is a zero-sum game is international trade. If China maintains a trade surplus with the rest of the world, then the rest of the world maintains a trade deficit in the same amount. The U.S. dollar is a reserve currency because there is nothing else now to use as gold used to be used, and the rest of the world insists on maintaining a trade surplus with the U.S., which means they... have to accumulate dollars or dollar-denominated assets.
Because of this, the rest of the world can also trade with each other in treasuries, and so you're absolutely right about that. But new lending of dollars to the U.S. most likely stems from exports to the U.S. Certainly that would be true for any sufficiently large sums: the creditor could not accumulate such sums without exporting to the U.S.
So I stand by the assertion that for China to lend $1trn to the U.S. means to export a similar amount to the U.S. as well.
>> So I stand by the assertion that for China to lend $1trn to the U.S. means to export a similar amount to the U.S. as well.
OK, if I accept that then I'm left with the idea that it's a really bad policy. The stuff we bought from China has a useful lifetime (food gets eaten, products wear out), but the money we owe them does not - barring inflation of course.
China exports N dollars' worth of trinkets to the U.S., then buys N dollars' worth of dollar-denominated assets, the majority of which are U.S. treasuries (so China lends them back to the U.S.).
Therefore "what if China lent the U.S. $1trn ..." is roughly equivalent to and interchangeable with "what if China sold $1trn worth of trinkets to the U.S. ..." and vice-versa.
So the only way the US comes out ahead in that situation is through playing games with inflating the currency while lying about it to recoup the costs of servicing the debt.
In the end, once the US is caught with it's pants down it will definitely not be making the US any richer.
All fiat currencies have significant inflation though. Few also benefit from mercantilists incessantly wanting to sell products for that currency.
Mind you, mercantilism can have significant detrimental effects on the importer -- no doubt. But it's not all roses for the mercantilist exporter either.
Really, a multi-decade trade imbalance is not a good thing for anyone, but it's not that clear who is the worst off.
The only way you can use those IOUs is if the roles are reversed and the U.S. starts maintaining a trade surplus with the rest of the world (and so the rest of the world a trade deficit with the U.S.).
Before the dollar became the reserve currency of the world, the world settled trade in gold. With gold as the reserve currency it was very important to not run out of gold, and this served to keep trade balanced in the long term (and probably also served to keep the lid on growth of international trade, since to buy one kind of thing you'd have to sell some other kind). Incidentally, the concept of comparative advantages is probably a lot more meaningful in the context of balanced trade...
But the dollar is the reserve currency. Which means that the world maintains a trade surplus with the U.S. Which means they export things to the U.S. in exchange for IOUs that will get them nothing much (it does help to defend their currencies during crises, but not much more).
Meanwhile, Chinese people (in China) are effectively paid less than they should be for the labor they put into manufacturing things to sell to the U.S. This is obvious in that China forces exporters to exchange their dollars for Renminbi, which means those exporters can't buy other things with those dollars than Renmimbi. Also, all those factories in China make things people want in the U.S., not things that people want in China (though maybe there's a lot of overlap).
So my take is that mercantilism hurts the mercantilist. It does also hurt the importer in different ways: by reducing employment, for example, and removing productive assets for another, and these things might hurt more when it comes time to rebalance world trade. Who knows, maybe Chinese people in China and Americans will gladly continue this state of affairs. But somehow I doubt it.
> So the only way the US comes out ahead in that situation is through playing games with inflating the currency while lying about it to recoup the costs of servicing the debt.
Or, you know, investing the funds in infrastructure and other improvements that yield more benefit than the debt service costs.
Or—though there are ethical issues with this—using some portion of the borrowed funds to subvert or other displaced the lending government and cancel the debt. [0]
There's probably other mechanisms besides these, as well.
[0] Although eventually this was reversed by an outside coalition, Iraq did the brute force version of this to Kuwait in 1990.
I mean, GDP shouldn't account for debt. GDP is a measure of how much we produce. If people within our borders spend a year building $1tn worth of tanks, then we have produced $1tn of GDP that year. In terms of measuring what we produce, it's irrelevant how much we promised to pay China in the future. (Though of course in terms of predicting our future wellbeing, our promises to China do of course matter.)
If your production was only possible with the injection of foreign funds, why should the value count towards your nation's GDP and not the lender nation?
GDP measures (traded) production. If you produce $2tn of tanks, in tanks, then by definition that production is part of your GDP. Now if China sold you $1tn in tank parts in exchange for future payments, then sure, that $1tn will be part of China's GDP.
If that trillion dollar investment earns more than the cost of interest on it, then we are better off.
You seem to equating "military spending" with "lighting a mountain of money on fire", which is intellectually dishonest. To put things into perspective, a medium-sized military base will generate roughly $5 billion in economic activity and contribute to ~50,000 full time jobs. A trillion dollars is enough to put a new city on the map.
Military spending isn't limited to tanks, it also directly contributes to scientific research, technological advancement and improvements in manufacturing techniques.
Agreed, but the OP said that giving a trillion dollars of borrowed money to the military would impoverish the nation in the long run.
My counter-argument is that that money will still find its way into places that truly drive economic, technological, and productivity growth. And if the ROI from that is greater than the cost of the debt, the nation will not be impoverished, but will be better off.
I agree that its not the most efficient means of investing in these things, but it is a way that has worked in the past.
A military base buys labor, technology, services, raw resources and produces defense/security. You're conflating what the military base spends with what it produces. (the point of the argument against GDP)
Just because I spend money on something, does not mean that I produce that thing, even if my spending increases demand for said good. That results in double counting production, which was already counted once by the seller.
Military spending also creates new technologies and improves economic productivity. Thus, it drives growth in the economy, not just through direct purchasing and salaries, but also by making traditional investments.
I'm not focusing on what is produced (in fact, I made an explicit statement to this effect), but on investments made that drive productivity growth (which is considered the most direct driver of economic growth). And if those investments made earn more than the costs of interest on the debt, then it's a net win for society.
But what if it's mostly domestic spending?
The money spent for salaries flows in whatever those individuals need/desire to spend (groceries, barber shop, you name it).
The part of the trillion dollar injected in any economic activity in a closed system stays in that system.
(The part of that sum that is used to buy imports is another thing, although I guess it's far more complicated to properly account for)
Honestly, every time I think about this my mind just melts; I'll be really glad if somebody can clearly explain where is the catch.
except you can't account for debt without accounting for assets.
Japan, Greece, and Italy have the highest portion of debt to GDP (235%, 182%, 133%) except that Japan and Italy are very rich countries, Greece less so...
Japan issue its own currency, so it's in the same position that USA.
Italy or Greece are in the same position that California or any other state. Actually worse, because the FED work for the USA states, the Central European Bank, for the European states, not so much.
May be GDP wasn;t designed for this usecase. But since you have mentioned this I have an stupid idea, Could we theoretically measure countries like Stocks, and each countries get its Debt, Asset, Cash, Profit Loss Account as well as P/E and PEG etc.
That's what they used in the US when I was a kid. There are some legitimate-sounding reasons to switch to GDP instead, but I think the real reason was GNP turned negative.
> There are some legitimate-sounding reasons to switch to GDP instead, but I think the real reason was GNP turned negative.
GNP never turned negative. If you mean GNP growth rate turning negative, well, if you look at real GNP and real GDP historical charts, the places where GNP growth goes negative line up pretty much with those for GDP growth, though GDP tends to have lower peak and higher trough levels.
GDP measures of the value of the total economic output. Take two countries with similar population in 2016 [1] - Mexico (127,540,423) and Japan(127,748,513) and compare it with the GDP of the two countries[2] - Mexico(1 Trillion USD), Japan (4.9 Trillion USD).
This says nothing about the wealth of Japan or Mexico. It does say that the Japanese economy is producing 4x more than the Mexican economy.
This metric is interesting in itself. When taken alongside the resources consumed by Japan and Mexico, or the population of Japan and Mexico, one can determine which country is using it's resources more efficiently and which population is more efficient at producing things of value.
When historical GDP numbers are taken into account along with a history of government policies, it provides insight into how efficient the government bureaucracy is, how efficient the financial markets are, how education and computerized tools are impacting the economy and so on.
The author appears to have completely missed the point behind GDP.
> This metric is interesting in itself. When taken alongside the resources consumed by Japan and Mexico, or the population of Japan and Mexico, one can determine which country is using it's resources more efficiently and which population is more efficient at producing things of value.
Except you can't, reliably. If I mow my lawn and cook my dinner, and my neighbor does the same, it has no contribution to GDP. If I mow my neighbors lawn for $5 and mow mine as well, and my neighbor cooks my dinner for $5 and cooks his own as well, well, look, $10 of GDP.
GDP measured value of traded output, not total output, and so doesn't measure how effectively resources are used. You can make assumptions about the relations between the two values being constant, but that's probably not true across societies with different cultural patterns, or even in the same country over time given cultural change.
GDP is, for many purposes, apparently the best measure we have. But we shouldn't delude ourselves into thinking it tells us more than it does.
Use GDP (PPP) please. Differences in GDP are heavily influenced in differences in exchange rate but the vast majority of economic activity is domestic and doesnt involve trade with other countries.
That is an interesting comparison, because, I thought Japan would be a lot higher then Mexico, given the numbers of Multi National corporation in Japan.
The best metric we used when optimizing low latency systems was fixing the slowest outlier. Maybe a similar metric could be used for economies eg focusing on the worse off person.
The Gini coefficient is about the relative inequality in a distribution. If everyone were brought down to the level of the person who is currently worst off, the Gini coefficient would improve, although everyone's quality of life decreased.
One of my pet peeves are people who try to reduce a vector to a scalar, with no admission of the information loss. For some reason, this has become accepted practice when it comes to estimating our standard of living.
Suppose the economy grows 5% but violent crime goes up 10%. Has the standard of living increased?
Suppose the price of gasoline declines 30% but people stop going to church. Has the standard of living increased?
Suppose the price of cell phone plans decline 90% but the people who speak your language become a minority, and people who speak a different language become the majority. Has your standard of living increased?
Suppose your wages increase 10% but the amount of air pollution increases 200%. Has your standard of living increased?
Suppose your wages increase 20% but the government changes the law to make it easier for companies to fire workers, so you face a greater risk of losing your job. Has your standard of living increased?
In every case, we are talking about a vector that can not be reduced to a scalar without information loss.
The very first impression after I land at any US airport is - why everything is so inefficient and of such a low quality? Roads, hotel rooms, transportation, food - everything looks inferior to what you see in an average European country. But still, US has higher GDP. Strange.
The total US GDP is higher because the US population is gigantic compared to typical European countries.
The US GDP-per-capita (adjusted for purchasing power) [1] is only somewhat higher than highly developed European countries.
Given the relatively small GDP gap, the differences you are seeing have to with different cultural and therefore political priorities around spending on public infrastructure and social goods like education and job training. Different as in less.
Also, a lot of the US pattern of production and consumption is based on premise of disposability (with the notable exception of some infrastructure built leading up to WWII).
That has an effect on the durability and perceived quality of the things you see and experience in the US.
Even by your source, US GDP PPP per capita is quite significantly higher than most European countries. Most larger European countries are ~75% of the US as a rule of thumb.
Fair enough, and I suppose that strengthens my explanation of the OP's observation, that the differences in quality are a result of different national priorities, not lower means.
Still, the American GDP per capita is by far the highest in large countries with more than 20 million people. Countries with a higher value either have a small and easily manageable population, like Norway, an extremely large number of non-citizens as workforce, like Qatar, or a population so small that it's possible to create a generous welfare state from funds by tax evaders, like San Marino.
The two closest countries to America in this category are Australia and Germany, and a trip through Berlin or Melbourne won't make you particularly excited for the countries' infrastructure.
Norway is because of oil and gas not small population. Qatar again.
The US is an extremely natural resource rich country as is Australia which explains a lot of the difference in GDP per capita.
Germany is quite a bit behind the US in GPD per capita, much closer to the UK and France than the US.
One thing to remember though is that the way GDP is calculated means that selling the same service for a higher price leads to more GDP so it's a very imperfect measure.
US GDP is comparable to that of the EU, but the US has six times the land area and a lower population. That leads to very different overall patterns of development. I’ve noticed similar differences between the UK and France, which has the about the same population as us but double the land area.
This clearly varies quite a bit, particularly between countries in Europe. Roads, in my limited experience, are often more efficient in the US thanks to higher typical travel speeds and generally more accessible parking. However, they are certainly of less consistent quality compared to at least western European countries.
A lot of this spending priorities. America doesn't prioritize public infrastructure at all. Our public transportation is shit, but we spend a lot on cars. To our sensibilities, non-luxury European cars are tiny and ugly.
Maybe it's cultural bias, but I find American hotels of significantly higher quality dollar for dollar. Same goes for food, except for some of the European countries with rich food cultures.
US airports are pretty shitty. I wonder why? Maybe they are older on average?
Also if you are primarily visiting NYC, its sort a shithole by American standards. The hotels are tiny and ridiculously overpriced.
The US is a large country with poor and rich areas. Older airports will be dirtier than newer airports. Generally public transit will be worse as most people drive cars.
Also, per capita GDP is comparable or lower than parts of Western Europe, which will affect how nice/poor it looks.
Per capita GDP is considerably higher for the US than everywhere in Europe except for a few small nations. Norway and Switzerland primarily.
It closed out 2017 near $59,000 for the US. That's nearly 70% higher than the European Union's GDP per capita.
Germany is around $42,000. Austria $44,000. Finland $43,000. Netherlands $45,000. Belgium $41,000. UK $40,000. France $38,000. Italy $30,000. Spain $26,000.
Denmark and Sweden get the closest otherwise at $54k and $51k.
To put it into further perspective, France, Italy, Belgium, the UK would be among the poorest US states on a GDP per capita level, comparable to West Virginia and Arkansas.
The US problem is allocation of resources. $200+ billion should be chopped right off of the military budget and redirected to infrastructure. Another $100 billion could be redirected for infrastructure by altering war on drugs / policing policies.
$300+ billion extra per year into US infrastructure would result in the US having among the best infrastructure on the planet.
To put it in another perspective, US is so inefficient in using resources that they spend relatively more amount of money to get an almost equivalent or in someways inferior quality of life.
I went to Paris and at the train station a con artist team stole my luggage. To me, European transit is far shittier than USA; Europe can't even keep criminals from terrorizing its major ports.
Do you really want to compare crime rates between most Western European nations and the US? I think you'll find that the figures don't come out well for the US.
(I can't access this article, so I hope people will excuse this comment that is not informed by the article.)
That all depends on how much Person A and Person B enjoy watching coprophagia performances, doesn't it? If either Person A or B wanted something more with that $20k, they could have gotten that instead.
The $2k I spend at the opera each year doesn't increase "wealth, prosperity, or productivity" from the view of people that don't enjoy opera, but I certainly feel that it increases my prosperity.
The bigger problem with the GDP is it not counting serious economic activity that does not have an exchange of dollars, such as child care in a family. A stay-at-home parent does not get compensated for their work, but that work definitely has value as evidenced by the cost of day care.
Yeah, the more canonical counterexample/paradox about GDP is different... and you hint at it at the end.
Imagine I stay at home watching my kids and you stay at home to watch your kids. Nothing is added to GDP.
However, what if I pay you $20 to watch my kids for the night, and you pay me $20 to watch your kids for the night? The same amount of work was done, we each up with the same amount of cash as before, but we've somehow added $40 to GDP. (There are no new performance arts events in this case, everything's literally the same as it was before.)
You might think at first this is a quirk of child care... but you can run the hypo with other industries.
Imagine two bakers on the same street in friendly competition. Each of their families goes through a loaf a week, one from their own production.
What if, one day, each baker wants to check out the competition, buys one of the other bakers' loafs? Each family eats the same amount of bread and each baker produces the same amount of loaves. GDP goes up by the full price of the loaves.
Right, so in the baker example, there is some value exchanged, checking out the competition.
The costs of transactions serve as a check on meaningless loops of transaction. And all transactions have a cost; even if it's not monetary it is a time based one.
With the case of parents watching the others' child for the night, now that work has been valued at some amount of money, and presumably the $20 is a better valuation than the $0 that you get for watching your own child. And in this case, the practicality is that since the transaction is under the table, it does not get added to GDP.
So yes, GDP can fail this way, but it's the same type of failure as activities that are not captured by GDP: individuals derive value that doesn't match the economic transfer.
I would posit that these looped transactions represent a tiny fraction of GDP in practice. Whereas the 0-dollar "transactions" where there is value represent a huge amount of potential potential GDP, if that value were put in dollar terms. There are so many examples of 0-dollar value transactions with value, such as the case of family-based childcare, or just good solid friendship, or getting physically assaulted (negative value, 0 dollar exchange). I don't pay others for friendship, but I do pay for opera. I don't pay people to not get physically assaulted. I think these are far stronger and real examples of how GDP is broken. Transaction loops may be a problem in simplified theory of economics, but in practice I can't see them as being anywhere as big of a problem as the non-dollar values that we have.
> Transaction loops may be a problem in simplified theory of economics
I think if you generalize it, it's not the loops per se as the failure to baseline against opportunity cost or counterfactuals, which could have a small impact on the value of almost all transactions.
I'm not sure though, will have to think more about it...
This is what’s missed in most of these criticisms. Arguably you could use movies, or video games, or TV shows or any entertainment instead of stupid examples like ‘eating poop’. The point is the money is (generally) taxed and the people receiving it spend the money to support their livelihood, it flows onwards into government spending, goods and services.
Even if I paid someone a salary as my personal poop eater they would pay income tax and rates, pay rent, buy food, pay bills, etc. That’s all valuable economic activity that wouldn’t occur if I kept the money in a mattress. Contrived examples where people just hand money back and forth aren’t a significant factor in reality and even if they were, they’d have to happen as a significant part of measured economic activity much more in some countries rather than others to be relevant.
Question is how strong the argument is that it isn't.
To pick up on the examples provided above, you could live in a friendly caring community where you occasionally babysit family B's babies and they occasionally babysit yours, for free.
Or you could live in a materialistic community where you won't babysit family B's babies unless they pay you, and they won't either.
1. GDP would still be useful to show growth in the same community over time.
2. It sounds like an edge-case, and when talking on national scales across most of the big economies very few countries actually operates like that to a significant degree. GDP is of not too precise but still pretty alright on a big picture level.
3. If there is a demand for it an adjuster can be made. Well I'm not an economist so there might already be one. I'm sure someone thought of this at some point.
4. GDP values are not cumulative, so even if there's an error in one year it does not stack and fixes itself in future years.
A recent trend here on HN is complaining about the loss of free-range childhood. Quality of life is dropping in this dimension, but it isn't seen in GDP.
Agreed, I don't think these thought experiments are coming from nihilistic economists who want to toss it out completely, but just trying to safeguard against ways it might be systematically biased, or identify ways we could improve its utility.
I think the theoretical critiques get refined down several layers and end up leading to to practical shifts, like the reweighting of intellectual property in 2013.
That must have been a hard trade off between consistency with earlier GDP measures and accuracy (read: more enduring consistency for coming decades, facing shifts in the economy).
Regarding your childcare example: while in theory interesting, it is not a good real world example, I definitely don’t think “the same amount of work is done”
- we need to transfer to our locations, this will cost money and time
- who takes care of the children in the meantime?
- watching someone else’s kids is quite a task, if they’re not yours chances are very high it won’t be smooth
So, chances are quite high that the amount of work will be quite different than watching your own kids
The GP example was more to show that a paid b, and b paid a. So despite the transaction neither are wealthier. They have exactly as much as they began with. Replace eat poop with anything.
Let's suppose A pays B $20 to play a song for them. And then B pays A $20 for a haircut.
They have exactly as much money as they began with, but it does increase prosperity, they both are better off, they got something useful that they desired, they each received (and also produced) valuable services worth $20; and thus the total prosperity (and also GDP) grew by $40.
If watching someone eat poop isn't worth $20k, then they wouldn't pay each other to do so, and the scenario wouldn't happen; but in general the analogy for exchanging services is quite spot on.
I think the danger is that if you then give both A and B an incentive to increase GDP and tell them that the GDP measures wealth, then they will start paying each other $20, then $40, then $100.
In and of itself that isn't harmful, but if you conclude from this that you are getting wealthier and wealthier then you might end up lying to yourself and making bad decisions based on this.
As a concrete example, women have slowly moved out of the domestic sphere and into the workplace. At the same time, child care and rearing have become booming industries. Both these things increase GDP.
But the question is whether all the increase in GDP is real economic value, or whether a significant portion of it is just recording value that used to have $0 attributed to it (e.g. domestic housework, rearing and educating children, home-cooked meals).
And a secondary question is whether continuing to push women to work even if they would rather stay at home is the right approach, because if you are a government policymaker, the latter choice will lower your economy's recorded GDP and might make you look bad/incompetent, even if the real value generated by domestic housework is very high.
Problems with metrics create problems with incentives, which eventually may lead to skewed or wrong choices.
> I think the danger is that if you then give both A and B an incentive to increase GDP and tell them that the GDP measures wealth, then they will start paying each other $20, then $40, then $100.
Prior to the headline of this article, I've never seen the idea that GDP measures wealth as opposed to activity anywhere.
And I don't think anyone is going to be convinced that spending more money for no stuff and ending up with no more money in the bank at the end of the day is increasing their wealth, no matter what you tell them about GDP. In fact, I suspect the main outcome of what you suggest would be to convince people that you were wrong that GDP is a wealth measure (although people with a strong pre-existing belief that GDP does measure wealth might incorrectly be convinced that you just don't know what GDP means).
So let's say A pays B and B pays A for "nothing," i.e. there's no transaction except for the payment of goods, and neither derives any pleasure out of such a transaction.
Such transactions would be meaningless, but they also have very little chance of happening in our economy, don't they? Presumably each would pay some sort of tax on this, and if not, the only way that it would be recorded by GDP is if the Persons are business entities that do not make profit, and don't pay sales tax.
If such transactions do happen, they must be used in order to exploit tax loopholes, I would suppose? I wonder what percentage of GDP could be attributed to such transactions.
I think it also serves to illustrate that there are things that can be paid for that don't increase quality of life.
Likewise, if person A and B buy from each other at the same monetary value, but the subjective value of what they "traded" is valued more by the other party, then each party is wealthier despite no change in pure monetary wealth.
Yes, because ultimately GDP aims at measuring the value of the performance.
What is the value of a dollar, anyway? The only reason this example would be odd is if the person paid the $20k for something they did not want. Which would mean that they did something they did not want to do, perhaps under duress?
The presupposition of the GDP is that (except for things like taxes), the transactions measured are things that individuals want to do, and they get something out of that transaction that they value in dollar amounts.
The total amount of dollars at the end is irrelevant, and who has them, is less important.
The failure of the GDP is where people get "value" and the amount of value does not correspond to the dollars exchanged.
But there is also presumably value lost by the people performing, otherwise they probably wouldn't have had to be paid so much for the performance.
Let's say that the two people absolutely wouldn't have done the performance for less than $15k and absolutely wouldn't have paid more than $25k to see the other performance. Then one person is giving up $15k of value to get $20k of value for a net of +$5k and the other giving up $20k of value to get $25k of value for a net of +$5k, so it is really only a creation of $10k of value per performance while the GDP increase is $20k.
This is a common misconception that I think is worth highlighting.
Economic production does not increase the money supply.
No matter how much economic value you create in a transaction, the amount of money in the economy is constant (putting aside the activities of the Fed, Mint, and banks).
That's a very good point to make in this entire thing. They both earned 20K, therefore they should each pay x% of those earnings over to the government due to income tax.
Does that lead anyone into conspiracy-theory territory regarding why government seeks to increase GDP? Other than the obvious benefit of having Yet Another Silly Variable to optimize through various programs and policies?
what? What use is a "counter-example"? This is simply a bizarre response.
The claim is that GDP is only an approximate measure. Why? It fails in certain cases. A humorous example of such a case is provided. I don't see how your comment provides any value in this context.
Is eating poop supposed to be the analog of government expenditures? Something that is not really wanted by the market but bought and paid for anyway? Many critiques of GDP I've seen lament the fact that (taxes) government spending is included.
*Note to the downvoters, I'm ignoring the more obvious interpretation that three other commenters have already mentioned, that someone actually wanted to watch someone else eat poop. For the sake of interestingness I'm proposing a different meaning.
Wouldn't not including government expenditures make GDP a worse metric? They are the largest spender in every country and I don't see why it should matter who is buying something for GDP purposes
The argument typically goes that "because most government services are not sold in markets, they have no market-determined prices to be used in calculating their total value to those who benefit from them." In fact "some government services have negative value: given a choice, the people victimized by these 'services' would be willing to pay to be rid of them."
Wouldn't the value be calculated as whatever the government payed for them just like the rest of GDP? Maybe I'm misunderstanding how government spending is added to GDP but the fact that the amount spent on something doesn't always correlate to the value doesn't seem to be a problem unique to the government and hardly seems a reason to ignore what is in the US up to a few trillion in spending
The GDP is not invariant to the “Sound of Music” case: a widower marries his children’s governess. Before the wedding, her work was paid, and it counted towards the GDP. After the wedding she puts in the same work, or more, and her implicit pay is probably higher, but she is completely invisible to the GDP.
Similarly, when a company aqcuires a supplier, the flow of products and cash between them stops counting towards the GDP. Conversely, if Target creates a real estate company and starts paying rent to it (Bill Ackman’s idea when he was Target’s largest shareholder), a few billion dollars would show up in the GDP from nowhere.
The GDP is an accident of the granularity of the economy. All things being equal, a more vertically integrated economy will have a lower GDP than a more granular one.
If we are going to stick with GDP we should at least use GDP per hour worked [0] so we look at the only thing that matters in the long run - labour efficiency.
Looking at this I am amazed how much more efficient Australian labour is than New Zealand labour $55.87 verse $36.83.
No business is going to fire a worker they need to increase the nation's GDP per hour worked, but as an aim for the nation it would be better if everyone if we worked towards increasing the efficiency of labour.
We should have a number that combines numbers like GDP, average net worth, average wage and inflation. This may give a better balanced picture of an economy. The current GDP growth is pretty useless if it goes mostly into the pockets of a few.
Or we could have multiple different numbers (including all the things you describe, plis employment measures, plus medians where you've already named averages, plus gini coefficients of wealth and income, plus other distributional measures, plus...) and recognize that the economy is multidimensional and how to balance the importance of those dimensions is a matter of ongoing debate.
Which is what we—when we choose to look beyond what mass media focus on as the headline number—already have.
The current economy including GDP does not account for garbage and co2 emisssions. If we only optimize in one dimension for maximum GDP output then we will have huge economic output and also destroy the planet we are living on.
We should optimize for gross happiness and long term sustainability. Gross happiness include more vacation, using sustainable materials like wood and metal instead of cheap plastics. Recycle more materials in the goods we consume so that its a continuous cycle instead of buy consume and throw.
If we prized the carbon emission on the production and transportation of all goods we would have a totally different economy.
The automation economy allows us to be both rich and have more spare time.
All of this seems to be well-known and convincing. Yet, GDP is still the only metric media and politicians seem to care about. Is it a another case of the "emperor has no clothes"?
We want a number, and GDP is a well-known number. As the article notes, there are various replacement proposals, but all get significant push-back from economists, and none of them have gained enough critical mass to rival GDP as a thing people quote. So GDP wins by default even though many people are unhappy with it. People are also unhappy with it for pretty different reasons, which doesn't help in consolidating an alternative.
A lot of cameras are sold solely based on the simple metric of "megapixels". Of course, there's a lot of trash out there that has tons of pixels but severely underperforms.
Sometimes we need to simplify reality in order to make decisions. The question is - how simple is too simple? It seems like an exclusive focus on GDP as the sole indicator of the well-being of nations, just like the focus on megapixels as the indicator of performance of cameras, might be too simple indeed.
I think unemployment is more politically significant. The followup question for anyone reporting a rising GDP is "sure, but what does this do for job growth?"
Unemployment is even less useful then GDP. At least GDP is some sort of proxy for how well-off a country is.
You can have 0% unemployment (I hear North Korea is currently there), with mostly poverty-line wages with everyone making a meager third-world living, or you can have 30% unemployment with everyone being relatively better off, with fewer people working more productive jobs, and paying for an overall social safety net/others to go to school/raise children/retire. I'd far rather live in the second society, then the first.
While it's true you can't have 0% unemployment in a free market, going from, say, 8% to 5% is a big deal that helps in a lot of ways.
30% unemployment, the way it's normally defined, means 30% of your population are looking for jobs and unable to find them. Which is an unmitigated disaster.
There are millions of Americans who have given up looking for jobs, because they are unable to find a job that pays enough for them to stop caring for their children/relatives/take time off schooling/pay for costs of working.
They are not represented in unemployment numbers (Because as it turns out 'I need to earn $25/hour to be able to afford daycare for the kids, but I could never get a job like that, and I've stopped looking') does not get counted in UE stats.
Putting those people to work would not actually make any of us better off... Yet it would reduce unemployment.
The point of my post was that jobs are not created equal. 0% unemployment because everyone is working jobs that pay very little is an unmitigated economic disaster. 30% unemployment because a smaller group of people are only working productive, highly remunerative jobs is an incredible economic success.
It does, however, raise the hackles on a few people.
>There are millions of Americans who have given up looking for jobs, because they are unable to find a job that pays enough for them to stop caring for their children/relatives/take time off schooling/pay for costs of working.
>They are not represented in unemployment numbers ...
Depends on the set of numbers you're looking at. DoL produces different numbers that encompass different assumptions. Normally these people are not considered unemployed, so putting them to work wouldn't change the unemployment statistics.
And I don't believe having 30% of the population carrying the other 70% is at all an economic success. That's an unstable situation that can't continue.
It dominates, but it's not the only one. (i)HDI is also used, which has improvements over GDP per capita, but still with some of the limitations described in the article.
AFAIU (prolly not much), GDP measures money that comes and goes to/from a country. If, let's say, products/services were exchanged directly, without moving money, that wouldn't be counted; OTOH, if certain country, say the US, gave money to another country only to buy products from US companies, that would count doubly... Which is why it's really bad as a tool for comparing wealth of nations.
I really don't understand the point of this criticism. Isn't GDP the best way we have of measuring the volume of work being done?
If I exchange production of some craft for money in the bank and then exchange that money for some other product I fancy, we've not only moved the money around, but created real quantifiable new value through the production purchased.
GDP - Gross Domestic Product. Producing things. That's what it's all about.
Adam Smith defined wealth ... well, several ways. But his initial definition is "the annual produce of the land and labour of the society". Which, as numerous commentators have comentatored, is a flow rather than a stock.
For those looking to read the content but stymied by FT's paywall, the author has just published a book, The Growth Delusion, and discusses it in numerous other articles.
In the opening example, Pilling discusses income vs. wealth of a banker and gardener. One of the more interesting (and novel) approaches I've seen to this question comes from Yonatan Zunger based on discussions over the past few years, and culminating in his Medium essay, "What is Your 'Financial Shock' Wealth?", which examines financial security by an individual's (or organisation's) capability to withstand financial shocks of various sizes, and then looks at the likelihood of such shocks.
So far as moving the discussion of poverty forward, this strikes me as a significant advance, and one I'm not aware of having been made elsewhere in the economic literature.
But that's still not GDP.
On that front, I've been looking at combining a number of concepts, a key element of which is the idea of tiers or levels of economic activity. There are classifications ranging from 3-5. One of the first such I'm aware of comes in Alexandre Dumas, The Count of Monte Cristo (I'm exploring the origins of that notion), and one of the latter being the one James Beniger gives in his 1986 book, The Control Revolution Breaking that out as bullets, but other wise quoting Beniger.
* The primary sector -- agriculture, fishing, lumber, mining, oil and gas -- represents the extraction of matter from the environment to produce energy, including the calories to sustain individual organisms.
* The secondary sector -- processing primary goods, as in construction and manufacturing -- represents the synthesis of matter and energy into more organized forms (negentropy).
* The tertiary sector, including transportation and utilities, represents the infrastructure for distributing matter and energy about the system, while ...
* the quaternary sector -- trade, finance, insurance, and real estate -- constitutes a parallel infrastructure for the collection, processing, and distribution of information that is necessary in all living system for the control of material flows.
* Finally, the "highest" of all sectors in its remove from the physical environment is the quinary sector, including government, law, and education, representing the societal programming -- socialization, education, law making -- and collective or representative decision making to effect control.
You can quibble over which activities should attend which tier (trade and commerce are often classed with #3, giving #4 exclusive domain of the FIRE sector, which has certain coherences). There's a strong correspondence between these levels and classifications of industrial sectors (the SIC, NAICS, or ISIC). There's also some correspondence to the classifications of goods early classical economists derived (particularly Smith), and perhaps to technological mechanisms.
What I see, though, is that actual useful benefit derives from the first two tiers, with the others being necessary but not of themselves directly of use -- they're coordination, management, and information flows. Moreover, you can divide the primary sector into stocks and flows, where virtually all extractive material and energy sourcing is drawing down of some natural stock, whilst agriculture, forestry, fishing, and renewable energy are (or at least can be) sustainable, taking from a flow as that flow is replenished.
Accounting for the stock draw-down, and not counting the outputs of the 3rd - 5th sectors as "useful", would tend to arrive at a much-modified measure of GDP. And one almost certainly much smaller than is presently computed.
I'm looking at how valid such measures might be, and the history of GDP formulation. It's interesting. (Kuznets is among those who argued for a three-tiered economic classification.) More discussion at the link below.
The approach of Sir John James Cowperthwaite, Financial Secretary of Hong Kong in the 1960's, who famously "refused to collect economic statistics to avoid officials meddling in the economy." He is subject of a recent well-received biography, The Architect of Prosperity.
Say a person saves his money and lends it to people in another country. He's creating wealth for himself. The other country is getting further into debt. Maybe the money is spent frivolously or invested in a soon-to-collapse bubble. Or it's spent on productive investments. Either way, the effect on GDP is the same. And it goes to the borrowing country, not the one accumulating assets (unless the borrower makes successful investments).
As individuals, trying to maximize our own GDP would mean spending every dollar we get and avoiding investments that could reduce how much we need to spend to live our lives. That's the opposite of our best interests.