Monday, July 7, 2014

Deeply Misunderstanding How Our Economy Is Measured

A complete muddle in today's New York Times, where Lew Daly of the Demos Institute demonstrates that he needs to book up on some basic economics.  His motives are OK: he wants to show that the government plays (or at least should play) an important role in enhancing our economic well-being.  Alas, he gets just about every concept wrong.  To avoid overkill, I'll document just the biggest howlers:

1. GDP is not a measure of well-being.  It's a measure of monetary flows through the economy.  It was developed to tell us how fully employed our resources are, not how beneficially they are employed.  It measures bigness, not goodness.

2. True, government services are recorded at cost.  But there are no monetary flows beyond that as there are in the private sector (consumer payments).

3. Complaining that we don't recognize consumer expenditures financed out of transfer payments from the government is bonkers.  If you want to do that you should also deduct consumption that would have occurred if not for tax payments.  In fact, the economic definition of government spending used in GDP calculation excludes transfer payments, and taxes are measured net of transfers.

4. Economists measure the public capital stock (like publicly owned infrastructure) the same way they measure the private capital stock.  (There are lots of data in Piketty about this, for instance.)  But GDP is about the flow of income, not the stock of wealth.  If you want to get the stock data you have to go to the Flow of Funds accounts assembled by the Federal Reserve.  They measure balance sheets.

Well, at least we know that the right doesn't have a monopoly on nonsense.  (But why does the right's nonsense cast so many more votes in Congress than the left's?)

1 comment:

blissex said...

«It's a measure of monetary flows through the economy. [ ... ] government services are recorded at cost. But there are no monetary flows beyond that as there are in the private sector (consumer payments).»

Oh please this is as grossly wrong as anything:

* GDP is an attempt to measure *value added* at an aggregate level, not "monetary flows", a rather different concept; and most people use "real" (after inflation) GDP in an attempt to wring out the "monetary".

* Government "activity" is recorded in GDP at cost not at all because "there are no monetary flows beyond that" but because it is really hard to define government value added; so the cost of government services is taken as an estimate of value added.

The latter point is not quite precise either, but leads to an even bigger issue with GDP that has nothing to do with the grossly wrong "monetary flows" idea.

In most modern economies the largest part of economic activity happens in government and services,and it is extremely difficult to find a good measurable definition of value added in government and services.

The statistical bodies of some countries don't even try and simply make up the numbers, and some others estimate them almost equally arbitrarily, e.g. assuming the value added to be equal to labor and profit costs; but the end result is that the majority of GDP is a rather fuzzy, fairly arbitrary number.

But then national capital stock depreciation and the inflation index used to estimate "real" GDP are also pretty arbitrary too.

So in the end GDP is a very coarse, often manipulated, estimate of a country's value added ("product"), and for any sensible discussion other indicators should be used to complement it.