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.
