Make GDP great again – David Ruccio

Mainstream economics presents quite a spectacle these days. It has no real theory of the firm and, even now, more than nine years after the Great Recess- ion began, its most cherished claim to relevance – the use of large-scale forecasting models of the economy that assume people always behave rationally – is still misleading policy-makers.

As if that weren’t embarrassing enough, we now have a leading mainstream economist, Havard’s Martin Feldstein, claiming that the “official data on real growth substantially underestimates the rate of growth”.

Mr. Feldstein likes to illustrate his argu- ment about GDP by referring to the widespread use of statins, the cholesterol drugs that have reduced deaths from heart attacks. Between 2000 and 2007, he noted, the death rate from heart disease among those over 65 fell by one-third.

“This was a remarkable contribution to the public’s well-being over a relatively short number of years, and yet this part of the contribution of the new product is not reflected in real output or the real growth of GDP” he said. He estimates – without hard evidence, he is careful to point out – that growth is understated by 2 percent or more a year.

This is not just a technical issue for Feldstein: ” .. it is misleading measurements that are contributing to a public perception that real incomes – particularly for the middle class – aren’t rising very much. That, he said, ‘reduces people’s faith in the political and economic system’.

“ ‘I think it creates pessimism and a distrust of government’, leading Americans to worry that ‘their children are going to be stuck and won’t be able to enjoy upward mobility’, he said. ‘I think it’s important to understand this.’ ”

Here’s what folks need to understand: mainstream economists like Feldstein, who celebrate an economic system based on private property and free markets, build and use models in which market prices capture all the relevant costs and benefits to society. And, since GDP is an accounting system based on adding up transactions of goods and services based on market prices, for mainstream economists it should represent an accurate measure of the “public’s well-being”.

Mainstream economists can’t have it both ways – either market prices do accurately reflect social costs and benefits or they don’t. If they do, then Feldstein & Co need to stick with the level and rate of growth of GDP as the appropriate measure of the wealth of the nation. And, if they don’t, all their claims about the wonders of free markets simply dissolve.

Notice also that, for Feldstein, the problem is always in one direction: GDP statistics only undercount social well- being. What he and other mainstream economists fail to consider is that whole sectors of the economy, like financial services (or, more generally, FIRE — finance, insurance, and real estate), are counted as adding to national income.

As Bruce Roberts has explained [1], “.. because “financial services” are deemed useful by those who pay for them, those services must be treated as generators in their own right of value and output (even though there is nothing there that can actually be measured as output at all) … ” … the standard (neoclassical) approach embedded in GDP accounting means, in concrete terms, that profits in FIRE must be treated as a reflection of rising real output generated by FIRE activities, requiring a numerical “imputation” of greater GDP. And, worse, that ‘rising’ profits in FIRE then go hand in hand with ‘rising’ levels of imputed ‘output’ and hence enhanced ‘productivity’. ”

If Wall Street doesn’t add to GDP – if FIRE activities just represent transfers of value from other economic sectors (both nationally and internationally) – then its resurgence in the years since the crash doesn’t contribute to output or growth.

The consequence is that GDP, as it is currently measured, over-counts national output and income. Actual growth during the so-called recovery is much less than mainstream economists and politicians would have us believe.

That’s the real reason many Americans are worried they and “their children are going to be stuck and won’t be able to enjoy upward mobility.”

1. https://anticap.wordpress.com/2016/12/02/class-before-trumponomics-part-3/#comment-28751

Source: Real World Econ Rev blog https://rwer.wordpress.com/2017/02/17/ make-gdp-great-again/

Comments

1. Ecolecon (Feb 17, 2017)

I agree with most of David Ruccio’s critique of the position of Feldstein & Co. I agree in particular that we are on very dangerous ground thinking that profits earned in monopolistic and oligopolistic sectors (like much of the FIRE sector is) are in any meaningful sense an additive element in a measure of national income that purports to say anything about human welfare, given the zero-sum nature of so many transactions in that sector.

Nonetheless, I find it quite staggering, that any critic of neoclassical economics, when correctly pointing out what a ram- shackle measurement of well-being GDP is, can fail to also point out that the GDP accounting rules make no effort whatsoever to measure the degradation and depletion of critical stocks of natural capital.

I suppose that is in some sense subsumed in the critique that says you can’t measure anything that matters, using market prices. Natural capital stocks are never counted by mainstream economists – instead their depletion is only sporadically (and rather absurdly) counted as income when (after appropriation from nature) such stocks are sold, as if out of a reproducible inventory – so if we some- how were not so determined to be exclusively reliant on revealed market prices, we might naturally begin to get to grips with the issue of depletion of natural capital.

Still, if some form of national income accounting is to survive in mixed economies, we will probably have to start with market prices for a lot of economic activity. What we desperately need though, is to also account, via judicious adjustment rules, for unpaid labour, non value-adding, zero-sum transactions between households and economic agents with market power (or even among households) and certainly among firms, and above all else, for the dangerous depletion and degradation of stocks of natural capital.

Michael Barkusky
Pacific Institute for Ecological Economics (now a division of the Board of Change) Vancouver BC, Canada

1. Geoff Davies (Feb 18, 2017)

Ecolecon it’s worse than that. Not only do they implicitly attribute zero value to many valuable things, they count many negatives as positives. They count the cost of cleaning up pollution, storm damage, car crashes etc as positive contributions to GDP. It’s all just “economic activity” folks. They get the sign wrong!