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12/14/2009

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Ted H

Firstly, I don't think that the recession being declared "over" recently means the GDP is a bad metric for what it intends to measure. It may mean people need to rethink the definition of a recession rather than GDP. I'll admit it's tricky to find a consistent metric besides negative GDP growth, but perhaps someone can come up with something that characterizes the dire economic situation better by combining the GDP figures with unemployment numbers or something so when someone declares that the recession is over the rest of the country looks at newspaper or television and agrees, rather than like right now where massive confusion comes across most people's faces when Bernanke or Summer's declare the recession is over.

Secondly, I think the criticisms of the GDP metric are completely bogus. GDP is quite good at measuring what it's intended to measure, the overall output of a nations economy. Yes, it doesn't measure other important factors such as externalities, depreciation, the distribution of income, the quality of life, quality of goods, quality of healthcare and education, the non-market economy, etc etc. But it's not intended to measure those things and combining those into some single metric would not only be challenging (how do you measure quality of healthcare numerically to get a meaningful number?, for example), it would be worthless. I'm also deeply skeptical we could measure externalities accurately and still have GDP reflect anything meaningful. I think what criticisms aimed at the GDP metric should tell us is that citizens and pundits need to look at other metrics for the state of an economy and the respective population. Look at the Human Development Index, look at the Gini coefficients, look at the Index of Sustainable Economic Welfare, the Genuine Progress Indicator, look at quality of life and happiness surveys, look at surveys on the quality of education and health care, look at the Human Poverty Index, the Digital Opportunity index, Net Domestic Product etc etc. We don't need to rework the GDP as a metric for overall output (well, some tweaks might be needed, but the overall structure is what it should be). We just need to learn to look at other metrics of an economy other than GDP and take a view of it on the whole. While I suppose one large figure that incorporated all of those would be somewhat useful (though, I think, not possible to form), I think the figures separately are actually superior. For example, China has a good GDP; but how's pollution their for you guys? A single figure would distort that so individual metrics are better in my view.

Jim

The GDP is a relative data point and is inclusive of multiple unidentified components. As such it is mostly apolitical. If it were changed to, let us say, categories of positive and negative components (prisons, weapons, welfare, etc) it would immediately be politicized and thereby become meaningless and irrelevant to the economic life of the nation. Leave it alone or as one wag said, "perfect is the enemy of good."

Mark Nielson

I think it would be good to replace GDP with some other measure, but with what? Possibly it should be replaced with GDP minus government expenditure, for the inclusion of Fed, State, Local spending in the GDP figure gives the impression that government expenditure actually increases welfare, rather than channeling resources into inefficient opeartions and thus making the populice poorer.

Sincerely, Mark Nielson PhD

Charles

My concern with using GDP growth as an indicator of economic health is that, as we have seen, growth in demand (and hence production) of goods and services that is fueled by unsustainable debt isn't actually healthy. But despite having read numerous discussions of GDP shortcomings such as this over the past few years, I don't recall that concern having been emphasized, if raised at all. So as a non-economist, I have to assume I'm missing something that makes this an invalid - or at least insignificant - concern. What is it?

Thanks.

kevinearick

GDP measures economic activity, instead of economic profit.

Basically, it ignores organic growth, and it allows borrowing from the future to generate "earnings" as the basis for additional borrowing, the demographic Ponzi scheme.

Good luck getting the economists to give up their bag of tricks voluntarily.

I - C / G is much more instructive, but there is no real data on I because nearly all current operations are pulling forward revenue to get retained earnings.

As you know, the Supreme Court short-circuited organic growth with Family Law decades ago, turning savings and investment into debt and consumption, resulting in government, finance, and consumption economic activity, at the expense of production.

We no longer have willing markets for our products as a result.

Marc

I may be missing something here, but surely it is untrue to claim that GDP does not reflect improvements in the quality of goods. If we are talking about real (as opposed to nominal) GDP, then the hedonic adjustments made to reflect quality improvements will have the effect of reducing the deflator, thereby boosting real GDP.

Also, it seems to me that a far more pertinent criticism of GDP as a measure of economic output is that it fails to take into account the imported components of domestically produced goods. If a series of vehicle parts are imported from, say, China and assembled in Detroit, the entire value of the finished vehicle will be added to US GDP, despite the fact that only the assembly work is attributable to the US.

Marc

Just to correct my above post: I apparently was missing something. A quick Google search reveals that there is no hedonic adjustment implicit in real GDP vs nominal GDP, so I rescind my initial claim.

Mario Rizzo

We should call something a "depression" because of its political consequences?! Why not call it a recession with significant political consequences? This would distinguish it from a "depression" with significant political consequences.

Thorstein Veblen

I have a suggestion for a topic for next week. Is the Fed's Monetary Policy too tight? Should the Fed adopt an inflation target of say, 2.5%? The likes of Ryan Avent, Scott Sumner, Matt Yglesias, Brad DeLong, Paul Krugman, and Tim Duy are all pushing for the Fed to do more. Should it? The Fed's unemployment prediction for next fall is 9.3-9.7%, while it expects inflation to be 1.4-1.7%. Is this acceptable? And if so, why/why not? Are the risks of doing too much and too little really symmetric?

I look forward to hearing both of you weigh in on this key economic policy question.

Very Respectfully Submitted,

Thorstein Veblen

Jim

Worthwhile reading "If the GDP is Up, Why is America So Down?" by Cobb in The Atlantic October,1995. "The GDP; An Outdated Measure." In The Atlantic November, 2009. And the cover story in the current Economist on the perils of progress.

The GDP notwithstanding, the standard of living in The USA has come down and it will continue to come down as profligiate use of personal, corporate and government debt is paid down or monetized. We will never learn.

By the way, what more could The Fed possibly do that wouldn't make the situation worse. The present and predicted unemployment rate was partially caused by loose monetary policy and now the list of economists above want more of the hair of the dog. Brilliant!!!

Jack

Hark! Am I hearing the first sounds of our wise but somewhat staid professors awakening to a greatly changed world in which old metrics are becoming far less relevant?

The wide range of comments would also seem to indicate a loss of faith in a GDP that is enhanced by those benefiting by 100's of billions for "producing" nothing but soaring housing prices while those of median incomes pay more out of incomes that have not increased in decades often have their savings wiped out as the bubble collapses and energy and insurance costs continue to soar.

http://mysite.verizon.net/vzeqrguz/housingbubble/

What would "GDP" measure in the home price bubble? Only the costs of some 20 million new homes built since 2000? Over 8 years, statistically every home in America would have been sold at least once. Is every increased sale or "remodeled and flipped" home to be counted?

Mark Nielson favors taking out state and local expenditures. How so?

Is the man on the costly articulated Volvo road grader plowing a foot of snow off my street producing a lesser product than is an auto insurance firm that returns less than 25% of each premium dollar? or our WS thieves selling companies back and forth only to leave their empty husks for one last feeding of the bankruptcy lawyers and taxpayer financed court system?

"There are three types of objection to the GDP as a measure of welfare." Indeed! Let me add one more!

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

As the two graphs show, despite a doubling of GDP (in constant dollars) welfare of more than 60% of our working folk as measured by wages has not improved enough to mention. And surely the soaring costs of H/C, energy and housing has more than gobbled up any savings from "category killer" box stores.

Real GDP graphs:
http://www.data360.org/graph_group.aspx?Graph_Group_Id=149

GDP will always have its place, but as a measure of welfare, surely the median wag is more far more relevant. Better yet an estimated discretionary income figure taken after the costs of a basic living std including H/C are deducted.

(Yeah......... I know, we'd have the hassle of dealing with the embarrassment of negative numbers for some 40% of our people being right out there on the front pages where a huge number in the trillions of "increasing GDP" that few understand is so much more comforting.)

Lastly, a can't help but laugh at our neo-inflation fighters who are "worried" about an inflation over half of which is energy costs derived from what clearly has all the signs of a manipulated "market", while we've 10% unemployment with a similar number either no longer being registered as unemployed or trying to hold it together with part time no bennies Walmart jobs. With stores well stocked with everything but customers where would we get a classic "too many dollars chasing too few goods" inflation to fight?

Worries about low interest rates causing businesses to make foolish investments with the "free" money? With all the normal risks of business and a substantial down payment with the need to make the principle payments anyway, now that the juicy "biz" of kiting mortgages with no more than a desk and a computer is largely over, there seems little risk that low interest rates will create too much business investment. From medicine to energy conservation/alternatives to caring for our elderly we've many problems to solve; let the investment begin! And hey! Wake up the Fed in a couple of years after unemployment approaches 5% and someone is complaining about having to work too much overtime and then consider tightening.

God forbid! an "overheated" economy in which wage increases for median and lower income groups might get started for the first time in 30 years!

Martin Bento

Mr. Posner, basically you're saying we should stick with GDP because it is apolitical and uncontroversial. But the topic of the post is the recent amplification of longstanding controversy surrounding it. So how can it be uncontroversial?

As for apolitical, let's look at some of the systematic distortions that you yourself have identified:

1) It does not include depreciation. This means it does not account properly for destructive effects of habitat degradation - including global warming, but also including the recently-proved responsibility of Mr. Go for Katrina. This oversight has political ramifications, because, among other reasons, environmentalism is a political dispute.

2) It does not include the value of domestic work. The undervaluing of domestic work is a longstanding grievance of feminism, which is a political movement.

3) It has no way to truly measure the value of military and other security-related spending. The proper level of such spending is a constant political dispute.

So GDP as currently measured is thoroughly political, partly in respects that the alternative measures could at least somewhat address. It seems to be another case of the covertly political being worse than the overtly political, because the political biases of the overtly political can be directly addressed and disputed. That said, I do think some of Becker's criticisms of the UN approach appear at first glance to have merit. The UN approach sounds like a first cut, but much in need of refinement.

Charles

"GDP notwithstanding, the standard of living in The USA has come down and it will continue to come down as profligiate use of personal, corporate and government debt is paid down or monetized."

Though I expressed it poorly, this is the point of my question above re GDP and unsustainable debt. There are only to allusions to this disconnect in this thread - this quote from "jim"'s comment, in "kevinearick"'s comment, but not at all in the post.

So to rephrase my question, how can any knowledgeable person consider rising GDP necessarily an indicator of economic health if the rise is well-known to be fueled by unsustainable debt - as was well-known to be the case prior to the current crisis and is obviously the case in the last quarter?

David

I can recall liberals regularly criticizing GDP (and before that, GNP) as an incomplete and inaccurate measure of economic well-being. Their criticisms were consistently ridiculed by free market economists as the rants of economic know-nothings.

Now, with GDP growing under a Democratic Administration, after a GOP-induced recession (Depression, to adopt Judge Posner's position), it is more than a little curious to read on this conservative blog that, well, just maybe, GDP is not much of a measure upon which to rely after all.

As Dana Carvey's "Church Lady" character was fond of saying back on Saturday Night Live years ago: "How conveeeeenient!!"

I hope that this self-serving right-wing excuse for economic revisionism does not serve as a faux intellectual underpinning for a right-wing political attack on the present Administration. However, I can already imagine John Boehner or Mitch McConnell decrying GDP growth as meaningless, and relying on this sort of analysis for justification.

Does the phrase "sour grapes" seem at all apt?

Jack

Charles: Good question and one I've puzzled about since at least the "jobless recovery". ie........ Is the lack of jobs and flat wages for most working Americans structural due to a combo of productivity increases and outsourcing (once called "trade" until it became such a one way street?) that all of our commercial demand can be filled with 80% of our available workforce?

Wage distribution graphs illustrate flat wages for most Americans so it's no surprise that demand for goods and services will also be stagnant as the few and fewer in the top ranks can not consume the excess. As we see; many fewer new cars sold while the strapped majority patches up worn out cars.

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

JFK's memorable one-liner of "a rising tide lifting all of the boats" is apt. But for decades now the tide lifts only the yachts.

If, as I'm sure is the case, today's joblessness and the related jobs that don't pay the bills is structural we'll go broke trying to employ a Keynesian approach that perhaps worked when the increased tide tended to lift most of the boats.

The cure, or at least the best bang for the Keynesian buck, would be that of increasing the incomes of those ankle deep in their sinking skiffs who've a long list of unmet and immediate needs that would spur the business cycle and begin to create jobs.

But despite the long term trend of ALL of the productivity gains going to the topmost income tiers and that trend having been amplified by tax cuts targeted at those top ranks, legislative gutting of collective bargaining, and neglecting to even index the min wage to inflation, much less to the doubling of productivity, we'll be treated to anguished howls of "commie redistributionism" if anything is done to actually cause the long-awaited "trickle down" to begin to trickle.

The alternative is surely that of some form of jobless "stagflation" as we fall behind even in terms of GDP growth and the weakened dollar increases our import costs and adds to the costs of our joblessness.

Eventually, if those many of lower and middle incomes don't have a buck to spend how do those at the top make a buck? Simple in the short run, with paid for Congressional help they continue to sell off what's left of America, and garner their returns from abroad.


Charles

Jack -

In the unlikely event you find your way back to this thread, FWIW I agree on all points.

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