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 quotingÂ economist Mark Anielski:
The ideal economic or GDP hero is a chain-smoking terminal cancer patient goingÂ through an expensive divorce whose car is totalled in a 20-car pileup, whileÂ munching on fast-take-out-food and chatting on a cell phone. All add to GDPÂ growth. The GDP villain is non-smoking, eats home-cooked wholesome meals andÂ 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 jazzÂ concert but on your way to the concert you have a little disaster, a fenderÂ bender. Instead of seeing the show, youÂ and your friends have a miserable time waiting for the tow truck to come toÂ have your car fixed. Spending on the towÂ truck and the auto repairÂ countsÂ asÂ GDP but it does notÂ addÂ to GDPÂ because it is counter-balanced by a decrease in spending on jazz, wine and cheesecake. NothingÂ Tyler says (see above) aboutÂ gross substitutabilityÂ changes this fact.
Consider a bigger disaster, the 9/11 attack. First, the point already mentioned, theÂ resources used in the cleanup count as GDP but donâ€™t add to GDP to the extentÂ that they would have been employed on other projects. Now it is true that some of the workers couldÂ work overtime which they otherwise would not â€“ this would tend to increaseÂ measured GDP more than real GDP since leisure is not measured in the nationalÂ income and product accounts. Even thisÂ factor, however, must be balanced against the overwhelming fact that theÂ destruction of the twin towers meant that tens of thousands of the mostÂ productive people in theÂ United States were forced into unemployment or death. Since GDP can also be measured as the sum of wages, rents, interest etc.Â the immediate effect of all the unemployed and dead was to reduce GDP. Similarly, Hurricane Katrina has destroyedÂ more jobs inÂ New Orleans than itÂ has added (and not all the added jobs represent real additions) hence theÂ 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:Â a friend replies over Twitter with
“@aidthoughtsÂ 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.