A Note on GDP (Part 1)
One cannot turn on the news these days without hearing some talking head blathering on about how the US is either in a recession or headed for one. To me the debate is ridiculous. I think it can be argued quite persuasively that we have been in a recession for 30 years.
Sounds like a overstatement, huh? Let me explain.
GDP or Gross Domestic Product is the statistic that economists use to determine the growth of "wealth" within a particular nation or society. Its growth rates are carefully charted and measured. GDP growth is the sole determinant in deducing whether the economy is expanding or in recession.
The problem with GDP is that it is composed, in part, by junk. Literally. But allow me to start from the beginning. The components of GDP are:
C (consumption) +I (investent)+G (government spending)+NX (net exports)
This expression covers just about everything that goes into what a country can produce. So what is the problem?
The problem is that GDP is used not only to determine total production; it also used to determine the wealth of a given society. If you divide GDP by the country's population, you will arrive at per capita GDP. Per capita GDP is the de facto statistic used to compare the standard of living across countries and societies.
Currently Qatar has the highest per capita GDP of any country in the world ($80,870). The US currently ranks 8th at $45,745. Those numbers seem plausible. Qatar, with all of its massive quantities of oil reserves and a small population; should be able to deliver the highest production per person of any country. For a country the size of Qatar, the GDP calculation is relatively easy. There are less than 1,000,000 citizens of Qatar and the entire economy is essentially based on one product: oil.
A country like the US has an economy that is far more complicated to calculate. To properly calculate GDP, in addition to the mundane factors, the following exotic / non-traditional costs need to be measured:
Imagine a steady increase in the level of pollution over a period of 25 years. During that time, incidents of cancer increase dramatically. Productive workers are forced to leave the workforce in order to receive treatment. The real effect of such an example is that society suffers. We are indeed made "poorer" because people are getting sick at greater rates.
However, GDP does not capture the effect properly. Instead of going down, GDP will in fact increase as a result.
Let's assume the cost of cancer treatment is roughly $1 million dollars per patient. In order for GDP to go down, a sick worker would have had to earn more than $1 million dollars in salary during the time that they were unable to work (currently less than 1/10 of 1% of the US population).
As this example illustrates, the problem with GDP is that all of the negatives in society are lumped in with the positive. It doesn't take an economist to figure out that putting too much weight in this statistic could lead a society off track. If positive factors decrease (technological innovation, cures for disease, etc.) but negative factors increase to make up the difference, then GDP would dictate that society is static or holding steady. That is a dangerous assumption to make as it can lead to bad decisions about future investment and consumption.
People have a right to know the true costs and benefits of all the inputs that make up their Country. Armed with that knowledge, citizens may be able to make better decisions about how their government operates and the decisions it makes.
Presidents often win or lose elections based on the strength of the economy. When GDP is the sole determinant measuring the economy; then we are being lead astray. It is certainly easier to artificially boost GDP in the short term by doing something negative (like borrowing billions of dollars to fund a war) than investing in technologies that take time to turn into a positive (like inventing alternative fuels to stave off climate change).
Perhaps the most frustrating aspect of the GDP conundrum is that there are perfectly good alternatives that value each contributing factor to the economy accurately.
In Part 2, I will examine how all of these effects should and can be counted and how from a historical perspective, American Wealth has been in decline for decades.
Sounds like a overstatement, huh? Let me explain.
GDP or Gross Domestic Product is the statistic that economists use to determine the growth of "wealth" within a particular nation or society. Its growth rates are carefully charted and measured. GDP growth is the sole determinant in deducing whether the economy is expanding or in recession.
The problem with GDP is that it is composed, in part, by junk. Literally. But allow me to start from the beginning. The components of GDP are:
- Consumption- all the goods and services purchased by consumers.
- Investments- all capital investments both in financial products and physical assets
- Government Spending- all tax receipts and government borrowing
- Net Exports- always negative in the US thanks to Chinese manufacturing and our oil consumption.
C (consumption) +I (investent)+G (government spending)+NX (net exports)
This expression covers just about everything that goes into what a country can produce. So what is the problem?
The problem is that GDP is used not only to determine total production; it also used to determine the wealth of a given society. If you divide GDP by the country's population, you will arrive at per capita GDP. Per capita GDP is the de facto statistic used to compare the standard of living across countries and societies.
Currently Qatar has the highest per capita GDP of any country in the world ($80,870). The US currently ranks 8th at $45,745. Those numbers seem plausible. Qatar, with all of its massive quantities of oil reserves and a small population; should be able to deliver the highest production per person of any country. For a country the size of Qatar, the GDP calculation is relatively easy. There are less than 1,000,000 citizens of Qatar and the entire economy is essentially based on one product: oil.
A country like the US has an economy that is far more complicated to calculate. To properly calculate GDP, in addition to the mundane factors, the following exotic / non-traditional costs need to be measured:
- Cost of pollution clean-up (estimated to be as high as 4.3% of GDP in China)
- Increased medical costs due to higher rates of cancer
- The costs of treated injured Iraq War veterans
- Kevin Federline's legal fees to gain custody of his children
Imagine a steady increase in the level of pollution over a period of 25 years. During that time, incidents of cancer increase dramatically. Productive workers are forced to leave the workforce in order to receive treatment. The real effect of such an example is that society suffers. We are indeed made "poorer" because people are getting sick at greater rates.
However, GDP does not capture the effect properly. Instead of going down, GDP will in fact increase as a result.
Let's assume the cost of cancer treatment is roughly $1 million dollars per patient. In order for GDP to go down, a sick worker would have had to earn more than $1 million dollars in salary during the time that they were unable to work (currently less than 1/10 of 1% of the US population).
As this example illustrates, the problem with GDP is that all of the negatives in society are lumped in with the positive. It doesn't take an economist to figure out that putting too much weight in this statistic could lead a society off track. If positive factors decrease (technological innovation, cures for disease, etc.) but negative factors increase to make up the difference, then GDP would dictate that society is static or holding steady. That is a dangerous assumption to make as it can lead to bad decisions about future investment and consumption.
People have a right to know the true costs and benefits of all the inputs that make up their Country. Armed with that knowledge, citizens may be able to make better decisions about how their government operates and the decisions it makes.
Presidents often win or lose elections based on the strength of the economy. When GDP is the sole determinant measuring the economy; then we are being lead astray. It is certainly easier to artificially boost GDP in the short term by doing something negative (like borrowing billions of dollars to fund a war) than investing in technologies that take time to turn into a positive (like inventing alternative fuels to stave off climate change).
Perhaps the most frustrating aspect of the GDP conundrum is that there are perfectly good alternatives that value each contributing factor to the economy accurately.
In Part 2, I will examine how all of these effects should and can be counted and how from a historical perspective, American Wealth has been in decline for decades.
posted by Golden Boy at
9:24 PM
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