Bad things and the GDP fallacy

There are many who are (quite rightly) worried about whether or not economic growth is sustainable. This has led to a number of attacks on Gross Domestic Project (GDP) as a measure of economic progress. One of the arguments that is repeatedly made is that things that we, as a society, would consider to be bad, lead to an increase in measured GDP. Consider this video of Oxfam’s Katherine Trebeck (video starts at 3:50 – watch it for a minute):

Trebeck, who is arguing that disasters, both big and small, add to GDP, is quoting economist Mark Anielski:

The ideal economic or GDP hero is a chain-smoking terminal cancer patient going through an expensive divorce whose car is totalled in a 20-car pileup, while munching on fast-take-out-food and chatting on a cell phone. All add to GDP growth. The GDP villain is non-smoking, eats home-cooked wholesome meals and cycles to work.

I would write a long post on why this is a fundamentally misguided reading of GDP, but Alex Tabarrock has already done it more succinctly than I ever could:

Imagine that you are your friends are going to see a jazz concert but on your way to the concert you have a little disaster, a fender bender. Instead of seeing the show, you and your friends have a miserable time waiting for the tow truck to come to have your car fixed. Spending on the tow truck and the auto repair counts as GDP but it does not add to GDP because it is counter-balanced by a decrease in spending on jazz, wine and cheesecake. Nothing Tyler says (see above) about gross substitutability changes this fact.

Consider a bigger disaster, the 9/11 attack. First, the point already mentioned, the¬†resources used in the cleanup count as GDP but don‚Äôt add to GDP to the extent¬†that they would have been employed on other projects. Now it is true that some of the workers could¬†work overtime which they otherwise would not ‚Äď this would tend to increase¬†measured GDP more than real GDP since leisure is not measured in the national¬†income and product accounts. Even this¬†factor, however, must be balanced against the overwhelming fact that the¬†destruction of the twin towers meant that tens of thousands of the most¬†productive people in the¬†United States were forced into unemployment or death. Since GDP can also be measured as the sum of wages, rents, interest etc.¬†the immediate effect of all the unemployed and dead was to reduce GDP. Similarly, Hurricane Katrina has destroyed¬†more jobs in¬†New Orleans than it¬†has added (and not all the added jobs represent real additions) hence the¬†Hurricane reduced measured and real GDP.

There’s probably little else that people (including economists and including me) get wrong more than trying to figure out what gets counted as GDP. Tabarrock hasn’t completely diverted worries though – he’s assuming the balance sheets cancel out immediately, when borrowing and saving comes into play, there is a lot of spending which goes towards bad things which, on a year-to-year basis, will look like GDP growth, where the “displacement” effect he discusses is divided over subsequent years. Also, GDP won’t accurately take into account global externalities. Finally, GDP itself will still comprise a lot of bad things at the end of the day (if the car crash is perfectly offset by a drop in spending on jazz and wine, nothing has changed).

Still, the point is that the standard “bad things increase GDP” argument doesn’t always work, once we begin to think the problem through a little more carefully.

Update: a friend replies over Twitter with

@aidthoughts¬†and if the vegan cyclist consumes less expensive leisure and needs less income therefore works less hard and is just as happy?”

I give up, Aid Thoughts will endorse the Happy Planet Index from now on.