01 June, 2006

A growth to be happy about

I think it's obvious that Gross Domestic Product, or GDP, is an absurd temperature gauge of our economy. But for more than a decade, I haven't been able to put my finger on what it is that's missing. Here's a brainstorm that you smarter people can kick around.

I think the problem is that GDP shows only what is in the money economy. If something isn't monetized, like fresh air or sunlight or a lover's kiss, it has no value in the GDP. Conversely, an oxygen tank, lightbulb or prostitute's blow-job is part of the GDP. So we need a measure that accounts for the full range of wealth and income, not just the part that happens to go through a cash register.

I think we should come up with balance sheets for our geographic areas that resemble those for business, in which businesses need to account for inventory and physical plant. In business, such a balance sheet accompanies the income statement -- the equivalent of the GDPs and net savings rates that geographic areas frequently calculate.

A geographic area's balance sheet should include its resource base, including water, fuel, educated citizenry, public health, and so on.

Each year, along with reporting the increase or decrease in monetary wealth for the place, government should also report on changes in resource wealth, including both cultural and natural resources. And unlike most U.S. accounting, it should mark those resources to market. That is accounting jargon for this: The inventory should calculate how much the country's fresh water, educated citizens, topsoil, and so on are worth TODAY, not how much they were worth when they were purchased or conquered. (For various reasons, most companies need to be conservative in their estimates of wealth, so they say a good is worth what they paid for it. That's goofy when it comes to geographic administrative areas.)

Under such a system, scarcity (e.g., drought) would increase the present value of a resource (e.g., water). That way in a drought, a place will have to be more careful in spending its water, as reducing its supply in an aquifer will do more to reduce the place's reported net assets in a drought than in a flush period.

Increases in national/city/planetary wealth could be credited to the GDP. So services provided "free" by nature, families, and public services would get credit for increasing people's income as they really experience it. A politician or central banker could get credit for increasing cash income or for increasing the plenitude of resources, especially scarce ones.

If anything, free services have a higher felt value than those that cost money, due in part to the cheapening, desensitizing effect that money has on all relations. It would be good to credit our free services in our accounting of wealth and income.


The biggest problem with using GDP as an index of the health of an economy is that it assumes that economic growth is unambiguously good, and hence that all spending is wonderful. But think of a multi-vehicle pile-up in the San Francisco fog, with a hundred cars and trucks going to the repair shop and dozens of consumers forced to buy new wheels altogether. Such an event may spike the local GDP for a couple of weeks, but it does very little to improve individuals in the community or to bring the Bay Area closer to Nirvana (except, of course, for those poor unfortunates who do not survive the crash and who get sent off to deal with their Karma). You are right in saying that the economy is only a single measure of reality; only economists think it is a meaningful one. 

Posted by frisco

I don't know where I read it recently, but someone made the observation that a lot of lefty types are opposed to "unambiguous growth" for no reason. Growth, which we can take to mean an increase in wealth, is good. When the aggregate wealth of a society increases, we should be happy. The problem is not growth ITSELF, if we are agreed that we want to raise standards of living around the world, bring people out of poverty, etc. It is (a) how that growth is apportioned (i.e. is wealth being redistributed from top to bottom or bottom to top, and is there income inequality) and, as Hedgehog points out, how that growth is metered (i.e. what do you consider to be wealth).

I think I remember hearing that some Buddhist kingdom was going to switch to a happiness-based metric for an economic indicator. But I'm not sure this is really possible; I'm not sure how to measure ephemera like how well I get along with my neighbors, how much class tension there is between me and my grocery bagger, etc. All of which I think should play into measures of societal health. But it's a lot easier to measure economic things than these other things, which is what makes it so easy for them to simply vanish unnoticed. 

Posted by saurabh

so you are unhappy with GDP. join the club! it's not a small club but it's mostly outside ONE PARTICULARLY COUNTRY. guess which. (hint: GDP measures spent money, not saved money, not bartered goods. another hint: borrowing doesn't count against you - even impossibly high interest rates don't count against you. spend, mofo, spend!)

here is a long list of GDP controversies . it covers many i had not heard. links from that:

* the left-ish genuine progress indicator, addressing uneconomic growth.
* bhutan's gross national happiness.
* the UN's human development index.
* sustatinable development
* the penn effect, which to clarify i turn to a fave movie:
SHE: People around here are very poor I suppose.
HE: Not poor, they just haven't got money.
SHE: It's the same thing.
HE: Oh no, it's something quite different.
* utility

believe it or not, the world bank has considered your suggestions and applied them to its policies, a decade ago (after it became okay to let socialists into the bank). you can download one such article here. abstract:

This paper builds on the concept of wealth (or the asset base) as the foundation of generating well-being. National wealth takes on a much broader definition and is embodied in natural capital, social capital, and produced assets. The paper provides details on the methodology and assumptions used in estimating these magnitudes. The results show that human resources play a predominant role, thus lending support to investments in education and health. They also highlight the importance of agricultural cropland and pasture land, pointing to the need for sustainable land management practices. For countries rich in sub-soil assets the importance of investing, rather than consuming, returns from extraction of oil, minerals, coal, gas, and other exhaustible resources needs to be stressed.

searching their site for "national wealth" will get more info. it's a big research topic because it's so cute and fuzzy.

externalities still nag. my favorite quote about this problem comes from the mouth of uncle milty himself:

NPQ: In the end, your ideas have triumphed over Marx and Keynes. Is this, then, the end of the road for economic thought? Is there anything more to say than free markets are the most efficient way to organize a society? Is it the “end of history,” as Francis Fukuyama put it?

Friedman: Oh no. “Free markets” is a very general term. There are all sorts of problems that will emerge. Free markets work best when the transaction between two individuals affects only those individuals. But that isn’t the fact. The fact is that, most often, a transaction between you and me affects a third party. That is the source of all problems for government. That is the source of all pollution problems, of the inequality problem. There are some good economists like Gary Becker and Bob Lucas who are working on these issues. This reality ensures that the end of history will never come.


(i accidentally closed draft 1 of this. please forgive additional curtness.) ($&!%*# interface inconsistencies.) ("i wonder how much it costs the economy every year that web posts have no save/don't-save gizmo.") 

Posted by hibiscus

also, on the issue of determining the value of social assets (and the costs of putting stress on human networks), there was an entertaining letter in some recent magazine which it turned out was referring to an actual industry-funded study .

"While there is still a lot of uncertainty, the central values indicate that, in economic terms, a ban on the use of cell phones by drivers would be a wash when comparing the benefit of reducing crashes against the cost of eliminating those calls," Cohen said. 

or as analogized for a lay audience,

"It's like cars themselves," said Joshua Cohen, co-author of the study. "Cars kill 40,000 people a year. That translates into a one in a 100 chance that a child born today will eventually die in a car crash. Yet we still have cars. Why? Because they are very useful."

and because they look great on cooked books. 

Posted by hibiscus

Frisco: bingo. Alas, it's not just economists but also politicians, investors and to some limited degree voters who take GDP seriously. And note that in my proposal, the car crash would likely turn out to be negative-sum on the balance sheet, even if it temporarily boosted the income statement. This would give a much more nuanced view of reality.

Saurabh: You're dead-on, and unfortunately most "new economic indicators" are just as absurd as that happiness index. I am talking about a way of measuring the size and wealth of an economy without regard for distribution, just like GDP. Distribution matters, of course, but that's not what I'm looking to measure here. I am looking to present accurately the flow of wealth and to include natural and cultural wealth in the picture, which would hugely improve our ability to know whether policies and lifestyles are on the whole making us better or worse-off. 

Posted by hedgehog

Hibiscus: Thanks for that World Bank link. Sounds fascinating. Too bad they didn't take it past the ivory tower stage.

I agree that externalities nag, especially geographic ones. But at least on a global scale, it's possible to internalize most of them other than extraterrestrial stuff like "oh wow, a diamond-studded meteor just fell on my hut." I know that externalized pollution and other forms of destruction are the order of the day in the developed world. But as the World Bank link hints, the developing world might be the best place for such measures.

And yes, blog comment interfaces are costly in many ways, not leastly by making me late to work. 

Posted by hedgehog

the borders talk applies here. any state-level index will potentially be as gameable as GDP (where a piece of mail moving from one post office box to another can significantly change the measured standard of living). i would think you'd want the index and  widely held goals for sustainability, popular involvement, transparency, recourse, and such.

"national wealth" seems to be actually used, even if the bank's purpose interferes with its ability to apply the information helpfully.

outside the industrial world, it's like the rubble after WW2 all over again. you can build bad infrastructure or good. build good and it pays for itself a hundred times over. inside the money boundary, new infrastructure requires demolition of old - even if it's just in spirit as with bikes, it has a cost to the soul, apparently. easier to just die. hang on. there's a call on the other line. okay sorry i have to go, i can't take the call, type and change lanes in the escalade at the same time. CUL8R 

Posted by hibiscus

I agree with GPI-like goals, but the fact that a car crash adds to GDP isn't that terrible. If clothes or a light-bulb wear out and they're replaced, then that shows up as new spending. You might argue that people wreck their cars or throw out old clothes too quickly, but it's hard to make that judgment in general.

One way you sort of can make the judgment is in GDP growth. If we only spent our money fixing cars after they crashed then we wouldn't be able to finance productive investments to sustain this forever. So GDP growth means that we have more money to spend, even if we make ever-worsening decisions about how to spend it. 

Posted by aram

You might argue that people wreck their cars ... but it's hard to make that judgment in general.
Actually, I think the argument makes itself. I've wrecked every car I've ever wrecked much too quickly.

Posted by Tai

in spring life quickens
to secure thawed ties before
nonliquid summer 

Posted by hibiscus

which is to say, evaporation is a constant. to create infinite liquidity is to invite a long summer spent drinking clouds. 

Posted by hibiscus

I think it's obvious that Gross Domestic Product, or GDP, is an absurd temperature gauge of our economy.

I like Jane Jacobs' point that economies don't function in a "national" way, but are social systems. This makes the standard use of GDP (e.g. the GDP of the U.S.) methodologically absurd because it tries to do economic analysis by identifying subjects politically (i.e. states) rather than economically. I'm not sure how you would go about doing the latter, but it seems to me it would be much more illuminating.

Growth, which we can take to mean an increase in wealth, is good.

Growth as normally construed means an expansion in the level of activity and resources used. Just to play devil's advocate, I think some people would raise the objection that the creation of scarcity of a finite number of one or more resources or a correlated negative effect with growth (like emissions) can make the idea of unfettered economic growth at least problematic. Of course, even if they're right, that doesn't exactly yield to an easy solution. 

Posted by Saurav

more here  because that version of the proposal knocked me on the head about what hedgehog meant 

Posted by hibiscus

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