Economic recovery: don’t trust the GDP figures

There are at least three ways used to determine the success of an economy. We deal with something abstract called economic growth, we look at the most common measure we have for production which is Gross Domestic Product (GDP), or we tally up the number of jobs across the economy.

GDP is the favoured measure of wealth creation but it is an entirely artificial construct. Flaws abound in the construction of the national accounts, but let me focus on just one.

For the private sector, what is included is the money value of goods and services sold on the market adjusted for movements in the price level. But for most of the public sector, no such money value exists since what was produced was never actually put up for sale. Instead, the actual amount outlaid by governments for whatever they purchase is simply included “at cost”.

In the private sector, expenditure is only recorded after a business goes to all the effort of production and has then found someone to purchase what has been produced. In the public sector, whatever the government spends, on whatever it happens to buy, is put straight into the accounts without making any adjustment to determine whether there has actually been an increase in the community’s wealth.

A stimulus package will therefore create jobs, at least in the short term, and lead to a rise in the measured level of GDP. But whether the community is really better off economically is simply an unknown.

I think most people will recognise the phrases, “there is more than one way to skin a cat” and “horses for courses”.The first comment applies to identifying which are the most important data for an assessment of the economy, but beware “lies, damned lies and statistics”. Most economists, politicians and business people would recognise these measures. New measurements such as Gross Value Added (GVA) and alternatives to (sustainable) GDP, or happiness indices are being developed currently to include measurement of human well being.Measures of poverty are also used, if they are of interest to your view point.GDP and unemployment are amongst the easiest to understand for lay people.

Would it matter if we didn’t have any ‘GDP’ statistics? Sir John Cowperthwaite, when Financial Secretary in Hong Kong between 1961 and 1971, refused to collect such aggregate economic statistics, for fear that they would only encourage politicians to meddle in the economy.How much less harm might Gordon Brown have done as Chancellor if he hadn’t been able to reel off long lists of ‘achievements’ often based on spurious numbers?Alternatively, what about ‘marking to market’ the value of government output? That is, trying to guess what people might have been prepared to pay for government services. Obviously hypothetical; but could be a lot less than ‘cost’!

Interesting. So if the Government spends an extra £100bn on pebbles, the nation’s GDP goes up by nearly 10%. Weird!

Another problem with GDP is what gets counted. Only paid labour is counted. Unpaid labour is “unproductive”.For example, if I walk my dog, I contribute nothing to GDP. If I pay my neighbour to walk my dog, it counts towards GDP. So how come my walking my own dog is unproductive but my neighbour doing so is productive?This has serious impact in the government’s childcare policy. The government argues that it makes economic sense to tax people so that mothers can go to work and pay other people to look after their children. However, if the mothers look after the children and the childcarers go to work, the same amount is produced yet the taxpayer is not troubled.

Re the problem of valuing government output, there is one simple rough-and-ready way. Estimate a labour supply curve and include the marginal tax rate alongside the usual determinants. If a pound taxed and spent by the Govt gives a pound of value to the labour supplier, he/she will require no recompense in the form of a higher wage. Hence the supply of labour will be unaffected. If, on the other hand, a pound paid in tax is regarded as a pound gone up in smoke, workers will require compensation one-for-one and the coefficient on the tax rate in the labour supply equation will be one. (Well, I did say it was rough-and-ready!)

I think most people will recognise the phrases, “there is more than one way to skin a cat” and “horses for courses”.The first comment applies to identifying which are the most important data for an assessment of the economy, but beware “lies, damned lies and statistics”. Most economists, politicians and business people would recognise these measures. New measurements such as Gross Value Added (GVA) and alternatives to (sustainable) GDP, or happiness indices are being developed currently to include measurement of human well being.Measures of poverty are also used, if they are of interest to your view point.GDP and unemployment are amongst the easiest to understand for lay people.

Would it matter if we didn’t have any ‘GDP’ statistics? Sir John Cowperthwaite, when Financial Secretary in Hong Kong between 1961 and 1971, refused to collect such aggregate economic statistics, for fear that they would only encourage politicians to meddle in the economy.How much less harm might Gordon Brown have done as Chancellor if he hadn’t been able to reel off long lists of ‘achievements’ often based on spurious numbers?Alternatively, what about ‘marking to market’ the value of government output? That is, trying to guess what people might have been prepared to pay for government services. Obviously hypothetical; but could be a lot less than ‘cost’!

Interesting. So if the Government spends an extra £100bn on pebbles, the nation’s GDP goes up by nearly 10%. Weird!

Another problem with GDP is what gets counted. Only paid labour is counted. Unpaid labour is “unproductive”.For example, if I walk my dog, I contribute nothing to GDP. If I pay my neighbour to walk my dog, it counts towards GDP. So how come my walking my own dog is unproductive but my neighbour doing so is productive?This has serious impact in the government’s childcare policy. The government argues that it makes economic sense to tax people so that mothers can go to work and pay other people to look after their children. However, if the mothers look after the children and the childcarers go to work, the same amount is produced yet the taxpayer is not troubled.

Re the problem of valuing government output, there is one simple rough-and-ready way. Estimate a labour supply curve and include the marginal tax rate alongside the usual determinants. If a pound taxed and spent by the Govt gives a pound of value to the labour supplier, he/she will require no recompense in the form of a higher wage. Hence the supply of labour will be unaffected. If, on the other hand, a pound paid in tax is regarded as a pound gone up in smoke, workers will require compensation one-for-one and the coefficient on the tax rate in the labour supply equation will be one. (Well, I did say it was rough-and-ready!)

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.