RIP GDP?
by Benjamin on August 11, 2009
The crisis has struck home and once more there are calls to get rid of GNP as it no longer is representative of the economy in the year 2009, and because it misses all those textbook issues – as argued in a New York Times op-ed two days ago by Eric Zencey.
I am not saying that I disagree with Dr. Zencey’s argument, I am sympathetic towards it, and perhaps his best point is that “We could keep the actual number [GDP], but rename it to make clearer what it represents; let’s call it gross domestic transactions.” This is in the context that GDP doesn’t distinguish between costs and benefits, and only accounts for monetary transactions, while failing to recognise the cost to the natural balance sheet of digging ressources out of the ground. Zencey mentions the Hurricane Katrina phenomenon which cost $86bn to clean up, and claims this would have been added to the Louisiana GDP growth despite the wanton destruction and obvious poor state many parts of Louisiana and New Orleans especially still is in. His argument is fair, although government reports on the fall-out have emphasised slow-downs in GDP growth, so the exact numbers may be a bit controversial. The main problem about GDP for Zencey is that:
If you kept your checkbook the way G.D.P. measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together.
Technically speaking that is not exactly accurate, as we seperate out the income flows and expenditure flows into two seperate accounts of the same GDP – although there is something to Zencey’s argument that we only count the Cash Flow – something unimaginable in a corporate situation. That said, the system does do a lot of funny counting: For example, business retained earnings are treated like consumer savings freely available to spend – something they are obviously not – while, in the US accounts, public hospitals and state universities are treated as transfer income institutions, not adding directly to GDP while all military expenditure (capital and current) technically adds to the US ‘growth’.
There’s a lot of things about GDP that needs to be addressed, but the UN would probably just point to the 2008-09 SNA revisions currently being finalised, although they will not fundamentally change the system onf national accounting… It’s a long road ahead before we might replace GDP with something more socially useful. A tip of the hat goes to Juan Pablo Pardo-Guerra for pointing me to the op-ed.
Tags: Definition, Economics, Empirical Economics, Eric Zencey, GDP, New York Times, statistics, United Nations
Intresting about the differences in account between military and public welfare expenditures. Why is that exactly? Does it have to do with the way the federal government accounts for entitlement spending?
I agree with you on his best point, in a China context, here:
http://chirony.com/2009/08/13/rethinking-china%e2%80%99s-economic-activity/
The difference comes from back in the 40s and 50s, when the system was being set up, it was intended to count industrial output and the effective demand for that output (as well as how much output the government could afford). Military expenditure, which was the focus, entered the accounts as an element of effective demand, while public welfare institutions entered as a transfer to the population in lieu of income. Since then, the reason for keeping military spending as an expenditure were based on a two things: 1. The issue of depreciation on military capital is problematic as the oputput may be destroyed at any time, and has no equivalent civilian use if sold off, so the line was to avoid it in 1954 and 1968. I have a quote from Richard Stone where he talks about it, if you’re interested.
2. The U.S. government had, during the 1930s been calculating their national income in a radically different way from GDP: They were measuring consumption and welfare as economic growth – mainly through the work done by Simon Kuznets at the NBER and BEA. They discounted government expenditure and all capital formation as it did not directly add to net consumption of private individuals. In the fight to remove Kuznets and implement GDP at the Bureau of Economic Analysis (BEA), the young economists then heading the BEA refused to calculate the governments capital account. I’ve argued elsewhere that they did this because the BEA were worried that having the figures would allow the NBER and Kuznets to insist that the government capital formation should be discounted from the national income. This would re-ignite the debate on what national income was – a debate the BEA was still trying to win in favour of using GNP as opposed to net private consumption and welfare measures.
Does that make sense?
On a China related note, I liked the blog post, but there’s a danger, as the old Chinese GNP figures were based on the Soviet idea of national income, which counted only material output… That’s why the majority of the service sector had no impact on GNP in China until the 1990s, and even today the system is not completely streamlined to fit with U.N. standards. Yes, there has been modifications to the old time-series, but it is unclear how closely they approximate the idea of GNP as we defined it in the UN.