The New Orleans tragedy highlights the need for some better measures of national well-being. If our Gross Domestic Product (GDP) is rising we tend to think that the national well being is rising. Some of the problems with assuming this direct correlation are subtle. Mexicans are happy even though economically poorer, perhaps partly due to their strong family ties. An American who moves from his pleasant home town in the Midwest to the sprawling wasteland of Southern California is probably earning more and generating more economic output but perhaps his enjoyment of life has been reduced. It would be tough to adjust for these subjective factors. Calamities such as New Orleans or 9/11 might be worth adjusting for.
Consider a less emotionally charged example. In Case 1 you decide that your Jeep Grand Cherokee isn’t big enough to carry pretzels and walnut oil back from the Trader Joe’s. You give the SUV away to your sister and buy a Chevrolet Suburban. In Case 2 you get distracted listening to NPR complain about the cruelty we are inflicting on our Afghani guests in balmy Guantanamo Bay, skid on the ice in the subfreezing depths of a Massachusetts February, and crash that Grand Cherokee into a tree. You buy a Suburban as a replacement and the local tree company is hired to remove what remains of the tree. In Case 2 the GDP will be reported as higher. In addition to a new SUV being bought a tree company was paid. Never mind that in Case 2 your sister is still walking everywhere and people who had enjoyed shade from that tree are getting skin cancer (their treatments will further inflate GDP).
In New Orleans a tremendous amount of money will be expended on getting us back to where we were before. The same people will be living in substantially the same housing and working in substantially the same office buildings and yet $billions will have been spent to pump out water and shore up foundations. In New York at least $10 billion will be spent on rebuilding the World Trade Center site. It might be a little nicer than what was there on September 10, 2001 but functionally will be similar in terms of office space square footage. This $10 billion will be recorded as an addition to GDP but it won’t have the same positive impact the World Trade Center remaining standing and $10 billion of entirely new office space constructed in growing regions of the U.S.
What’s the point of this analysis? When you look at decades of GDP growth and can’t figure out why there are still so many poor people ask yourself what percentage of that GDP was spent on replacing stolen car stereos, reglazing broken windows, hiring extra security personnel after terrorist attacks, and other similar “get back to where we were” projects.
If you can, read Paul Krugman’s NY Times OpEd column from August 26, 2005 on this topic.
Sorry, I got the date wrong, and someone has an archive with the article:
http://www.pkarchive.org/column/072905.html
Krugman is writing about adjusting for the intangible stuff, which I’ve argued might be too hard for economists and government bureaucrats. We can’t be 100 percent sure whether folks are happier at work or at home with their relatives. But we can be 100 percent sure that a person whose car is broken into and has to replace the stereo with an identical one from the dealer is no better off than before he spent $1000.
I was double checking wikipedia on how gov’t savings (by not spending the tree removal money in case 1) factors in, and discovered the Genuine Progress Indicator — http://en.wikipedia.org/wiki/Genuine_Progress_Indicator
Unsurprisingly you’ll find this sentence at the end “The EU and Canadian efforts [to apply such measures for legislative decisions] are among the most advanced in any of the G8 or OECD nations.”
Clearly we need a GDD (gross domestic destruction) index to suplement the GDP.
You’ve discovered the broken window fallacy.
The ongoing, presumably enormously expensive military operations in Afghanistan and Iraq also generate, I suppose, an impressive addition to the GDP.
On one hand, the services provided by the military forces overseas could be said to be beneficial to Americans by protecting US economic interests in the Middle East region and preventing potential terrorists from reaching their goals and thus money well spent. On the other hand, depending on who one asks, the same military operations could be said to represent money spent recontructing and protecting countries few Americans have any relation to, generating perhaps even more potential terrorists along the way, and therefore to no benefit for the US (although certain companies in the defence industry luxuriate). In either case, such money spent on projects within the country could have quite an impact on the standard of living for many.
Out of curiosity, could anyone explain simply how the operations in the Middle East and Central Asia are actually being financed? By increasing the national debt, thus depending on the position of the Dollar as the preferred world currency? Or is it by diverting money from somwehere else in the budget?
It doesn’t matter how rich the country overall is when the people in charge are complete and utter morons when it comes to properly distributing this wealth and, as you pointed out a few posts ago, are generaly less than qualified for their jobs, making them unable the cater for the needs of the population.
Yes, but I would think that “false” GDP coming from the repair or replacement of broken stuff is mostly constant, excepting occasional disasters like Katrina. How would you explain the GROWTH of GDP from year to year? If it comes from replacement of goods, there would have to be an increase in the rate of destruction of goods, and I don’t see where that would come from. Given that the GDP is nearly $12 trillion, even something like 9/11 is a drop in the bucket, though Katrina probably isn’t.
While I agree with your point that GDP != National Well-Being, it’s worth pointing out that in your scenario #1 the sister is buying fuel and paying for insurance, maintenance, and repairs, all of which will exceed the payment to the tree removal company in short order.
1. Sprawl is another example of “getting us back to where we were.” When Exurbia builds their “brand new library, with over 10,000 books,” it counts as GDP growth. But there is no subtraction for the 8-story brick-and-marble Urbia Central Library that held 100,000 books and is falling into decay. Ditto for the new Exurbia Mall, which adds to GDP with no subtraction for the demolition of, for instance, the 25-story Hudson’s building in Detroit (which featured 9-storiesy/125 feet of Christmas lights).
2. Illegal immigration skews some calculations of GDP. When people hired poor and minority Americans to mow a lawn, repair a roof, or stock a hotel conference room buffet table, the worker would put about 100% of his/her earnings back into the economy. But the illegal immigrants who now do the same work collectively send about $30 billion of the “Compensation of employees (COE)” term in GDP to Latin America each year.
Philip, don’t forget secondary effects. Giving your car to your sister may not raise GDP directly, but it will tend to make your sister more productive. For example, she could take a job which she otherwise would pass over because it was too far away from her home. GDP is not a great metric, but it’s not as bad as that example makes it seem.
Remember the classic example in economics of a baker replacing a broken window rather than buying a new suit. Unless you take into account secondary effects, you don’t see a diffrence in the outcomes.
Phil, I LOVE it how you use outrageously surreal comparisons to drive a simple point home! This is in your books and your other writing and shows a colorful, fast, getting-there-at-any-cost train of thought with a raging 24/7 carnival in it. Keep it up! Oh, and come to Burning Man, you’ll love it.
— Andre
I’m with you there, Philip, the GDP isn’t a very useful measure of a nation’s general well-being. But I think it would be next to impossible to find a formula that measures all the relevant factors accurately. I mean, happiness is something that just can’t be measured quantatively, and it’s even difficult sometimes to tell whether a person or people-group is generally happy or generally miserable; sometimes individuals and communities can be both at once. Hell, sometimes it’s even difficult to put a finger on my own level of well-being…
just thinking… What would you use such a figure for? I mean, obviously it would be a cool figure to throw around over a drink with your mates, but other than that? It seems a little like an IQ; a single number to describe something with so many factors that they probably all cancel each other out anyway.
Bucky Fuller recommended counting gross national CAPITAL instead of PRODUCT. Wikipedia will tell you who he was, http://en.wikipedia.org/wiki/Buckminster_Fuller , but probably does not have a quotation about Gross National Capital.
“When you look at decades of GDP growth and can’t figure out why there are still so many poor people…..” The standard of living at all socio-economic levels continues to increase decade to decade. Today’s poor are much better off economically (can’t speak to happiness) than prior poor.
I think you are all falling into the trap of the “broken window” fallacy.
You have destroyed wealth. Resources that would have been spent on something useful is now non-productively diverted towards replacing the destroyed wealth that you once had. Non productive investments of capital sabotage future growth since your return is 0 (you’re replacing something that you already had). So while GDP might blip up – this is inflationary, since wealth has not gone up – what you’re seeing is an increase in nominal GDP, not real GDP.
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Doesn’t the broken window fallacy assume a zero-sum? In this case the people affected aren’t the only ones spending money What about when the government adds 100 billion dollars to the mix ?
Hi. I’m just wondering what on earth would possess you to make such gratuitous, ignorant, and just, well, absurd, comments about southern California. Then again, I’ve have really been missing that cold muddy slush that covers Boston for three months of the year.
32 Papa, the government can’t add money to the mix, because it doesn’t create wealth. That $100 billion was stolen from people who would otherwise have put it to productive use.
The Broken Window stuff is very interesting.
It seems to me this boils down to the difference between a business’ balance sheet and its income statement. Wall Street is fairly obsessed with income statements, and in the Enron and WorldCom scandals (just to name two prominent ones) we see that the fraud centered on the balance sheet, which was distorted to make the income statement look good.
This is in fact a very common maneuver in financial fraud. You hide things like liabilities, assets, debt and whatnot that should be on the balance sheet. This pumps up your income statement.
Much of the financial weakness in U.S. corporations right now has to do with weak balance sheets sacrificied to make income statements look good. For example underfunded pensions, now biting the automakers and airlines, were essentially unrecognized liabilities for decades (long enough for CEOs to cash out and say adios).
What you seem to be observing is that, like large corporations, the U.S. government spends a lot of time thinking about its income statement and a lot less time thinking about its balance sheet. A large disaster like Katrina or 9-11 will pump up the income statement (GDP, not exactly analagous but close enough) but there is or should be a corresponding drop on the balance sheet — due do destruction of homes, businesses, property and let’s not forget actual human lives, the nation’s assets have dropped significantly. However we don’t hear about the balance sheet and I’m not even sure if one exists under any name. Certainly the GDP figures seem to be what for example the Federal Reserve Board spends a lot of time looking at.
PS To take it back to your example, a national balance sheet would lose value in Case 2 because of the destruction of your vehicle. The tree would also be a loss on the sheet, but its value would be a point of much debate (do you calculate the lumber value or the likely sale value (less than the lumber value because someone would have to come out to cut this one tree) or the value of the tree to local property owners or the net CO2 reduction over 20 years, etc).
Ken, in this case it is more like the government is “borrowing” the 100B…though I could see that the debt may produce a negative effect in the long run
Government “borrowing” is simply a promise to steal the money from your children (along with a smaller amount from you, to pay the interest).
*** But we can be 100 percent sure that a person whose car is broken into and has to replace the stereo with an identical one from the dealer is no better off than before he spent $1000. ****
Yes, but the thief is better off, so I can live with that. There are now two stereos in the world instead of one.
What gripes me about GDP is that it doesn’t include damage to natural resources as a cost. If Sequoia National Park was chopped down and ground into a million dollars worth of sawdust then GDP would increase by a million dollars.
Even forgetting about the intangible and real economic value in keeping it standing, there’s still the issue that there might be a billion dollars worth of lumbar in the forest that would be destroyed.
***32 Papa, the government can’t add money to the mix, because it doesn’t create wealth.***
Another ideologically-driven fallacy. Government employees create wealth in precisely the same way that other employees do.
Not to beat a drum to death, but the government certainly creates wealth. What is argueable is whether the taxpayer or the government is more efficient at creating that wealth. But, in classical economics, a tax cut does not stimulate the economy. What does not add to the GDP are government transfer payments to the poor and elderly. It is strictly a one way transaction where no goods are services are exchanged. In other words, the government is taking away money from the taxpayer, giving to the welfare recipient w/o any reciprocal transaction. But, when the govenment spends more money on research projects for example, or spends billions to add 10 more US Army combat brigades, it is adding to the GDP. This is all classical economics which should be familiar to any Bachelor of Business Administration graduate who has taken Mic and Mac. I know some of you here won’t believe me:
http://www.answers.com/topic/transfer-payment
Goddamn that google is good !
Perhaps this is a better alternative to raw GDP.
The Economist Intelligence Unit calculated a complex quality-of-life index based on nine factors: material wellbeing (GDP), health, political stability and security, family life, community life, climate and geography, job security, political freedom, and gender equality. Best countries (#1 to #30): Ireland, Switzerland, Norway, Luxembourg, Sweden, Australia, Iceland, Italy, Denmark, Spain, Singapore, Finland, United States, Canada, New Zealand, Netherlands, Japan, Hong Kong, Portugal, Austria, Taiwan, Greece, Cyprus, Belgium, France, Germany, Slovenia, Malta, United Kingdom, South Korea.
http://www.economist.com/media/pdf/QUALITY_OF_LIFE.pdf
Also available is the human development index. This has been touted as an alternative to gdp for some time now.
http://en.wikipedia.org/wiki/Human_Development_Index
I’m coming late to the party, but the thing Philip isn’t really grounded in is the fundamental fallacy of the GDP, which is the ‘D’ in the acronym. This is much more important. Consider that economists used to use a now antiquated term known as the Gross National Product. This has given way, almost noiselessly, to a fundamentally different thing. With GNP, a automobile manufacturing factory in Alabama owned by a Japanese company is counted as part of Japan’s economy. With GDP, it is considered part of the US’s. If you think that doesn’t matter, consider the assets of a foreign bank when it has branches in this country. The assets of the branches are part of our GDP, even though the foreign country is primarily interested in using these assets to funnel money out, not in. This is precisely why you have a general situation in the third world where the GDP doubles and the poverty rate triples. Foreign countries come in and own everything and shut out the local population. This is why the World Bank and the IMF and USAid are all shams. They are, by design, reverse robin-hood organizations.