What You Should Think About Gross Domestic Product

“If we command our wealth, we shall be rich and free. If our wealth commands us, then we are poor indeed.”

–Edmund Burke

One of the most frequent concerns in discussions of public policy is economic growth. The state of Texas continues to permit the sale of notary public stamps without verifying that the recipient is in fact a notary public. When one journalist confronted the Attorney General of Texas about this policy and its significant role in facilitating the work of grifters, the official explained that state government did not want to increase the regulatory burdens experienced by businesses. While this is a particularly shortsighted and ridiculous approach to laissez-faire economics, it also seems to be a microcosm for one form of widespread national myopia.

In some circles economic growth has become a sacrosanct virtue. Any policies that promote it are presumed good, and any policies that impede it are presumed bad, if not also dangerous, unpatriotic, etc. Part of this seems to stem from a poor understanding of what economic growth actually is and how the phenomenon is measured. The present standard for assessing U.S. national growth is the gross domestic product (GDP.)

Put simply, GDP is the sum of all investment gains, government spending, and commercial transactions that take place within a nation’s territory. Balance of trade is a factor, such that exports add to the final value and imports diminish it. It is vital to note that only the positive component of investment outcomes is included in the calculation — investment losses have no direct impact on GDP.

That is far from the only problem with this metric. GDP focuses keenly on activities that involve buying and selling. Thus a cancer patient who is diagnosed early and subjected to a simple yet effective treatment will register much smaller in GDP figures than a cancer patient diagnosed late and subjected to an array of extremely costly treatments.

Obviously it is better to live in a society where preventative medicine minimizes the severity of human ailments. Yet in the context of GDP, a society that makes optimal use of preventative medicine to promote public health is rated as less productive than a society that relies on emergency care and extreme measures to deal with health problems.

In the end, GDP is more a measure of the consumption of resources than the production of beneficial outcomes. In fact, it does nothing to directly consider the value lost through resource depletion. It is true that a nation that engages in overfishing to the point of exhausting natural fisheries will take a long term hit to GDP. Over time, the domestic fishing industry becomes less lucrative.

However, while that overfishing is actually taking place, GDP will be boosted by the brief spurt of elevated revenue that comes from taking more food from the sea than nature can replace by the next season. Given the way Wall Street drives American economic thinking to take place more in 90 day intervals than five year plans, intense focus on GDP promotes practices and policies with devastating long term consequences.

Yet the absurdity does not end there. Just as treating severe illness tends to be measured as “more productive” than preventing severe illness, violence and disaster are also blessings to the growth-oriented politician. Taking responsible measures to prevent a major metropolitan center from being ravaged by disaster almost never costs as much as reconstruction after the damage has been done. Precisely because of this, Hurricane Katrina acted as a significant GDP stimulus.

Of course residents New Orleans and many other communities in the area are not better off for lack of adequate precautions. The nation as a whole also does not benefit from letting buildings be ruined only to be rebuilt. Yet disaster relief and reconstruction efforts feed into the GDP picture just as much as if the hurricane had never happened and those same resources had been used to actually improve quality of life enjoyed by American citizens.

GDP becomes even more bizarre when applied in some international contexts. A nation could be bombed into the Stone Age, then partially rebuilt, and GDP would register those rebuilding efforts as economic growth. Of course Iraq is not a better place to live than it was before the commencement of Operation Iraqi Freedom. Yet peering through a GDP lens at the situation on the ground there would suggest that occupied Iraq is a tremendous economic success story!

In spite of the underlying realities, the war in Iraq also shows up as a positive on the American economic scorecard. This has nothing to do with whether or not the White House is correct in its assertion that maintaining a bloody military occupation somehow reduces the extent of terrorist threats from abroad. GDP assumes ipso facto that warfare should be viewed as having positive value. Obviously that position is absurd when subjected to reflection. Still, one might well ask if part of the reason the sitting President (not to mention more than a few Presidential candidates) favors a “stay the course” approach has to do with the GDP dip that would come from demilitarizing our Iraq policy.

This reveals another crucial flaw in the GDP perspective. Public morale is an enormous, if innately cryptic, factor in the economic well-being of a nation. Many analysts focus on “consumer confidence” indicators in order to try and get a handle on that factor. I believe one of the many significant failings of assessing growth by means of GDP is that it can paint a picture of continuous gains even when citizens know in their guts (and some in their heads as well) that their nation has taken a serious turn for the worse. Equating rebuilding with new building or killing foreigners with aiding foreigners may change the statisticians’ tune. Yet that sort of distortion only undermines the public’s ability to have faith in positive assessments that persist in the face of negative realities.

Yet the list of problems does not end there. As buying and selling activity is the essence of GDP, it is also propped up by economic churn. Aside from loose credit, part of the problem rattling the American real estate market this year involved frequent (and loosely regulated) repackaging and reselling of mortgage debt. The actual value created by this activity is minimal, yet every time one financial institution sells a bundle of debt to another financial institution, that activity feeds into the GDP indicator. When irresponsible loans are written off or the entire real estate market suffers a hit, there is no direct response from GDP. This strengthens an unhealthy separation between the world of high finance and what former Secretary of Labor Robert Reich would characterize as “the real economy.”

There have been some efforts to do better. Financial analysts with any real predictive success under their belt are aware of GDP’s many flaws and in touch with a host of other indicators informing their outlook for the future. Still, so many national debates tend to remain obsessed with GDP-measured “growth” as a paramount concern. In 1972, the King of Bhutan launched an effort to shift this debate by trying to quantify “Gross National Happiness.” This effort has suffered from some arbitrary distortions and the inherent difficulty of measuring a phenomenon like happiness. Yet it does represent a step in the right direction.

As economic growth is measured today, manufacturing and selling five appliances that will tend to fail after two years of operation is five times more productivity than using the same resources to manufacture and sell one appliance that will tend to remain useful for a span of ten years. As economic growth is measured today, producing and administering a lifetime of medication will tend to be orders of magnitude more productive than using a tiny fraction of those resources to produce and administer an outright cure for the same affliction. To remedy our national GDP-mania, political discourse must become much more informed about the differences between growth by that metric and real growth — activities actually leave the American people better off in some meaningful way.

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One Response to What You Should Think About Gross Domestic Product

  1. […] What you should think about Gross Domestic Product […]

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