Sep

18

Measuring the GDP, from anonymous

September 18, 2014 |

I have been spending a lot of time researching GDP construction and it's history and this will be a part of my book that will be out in about 6-9 months. The basic issue is that "how" to measure an economy is a difficult thing. Very difficult. There were many competing theories on it in the first 1/3d of the 20th century. Modern GDP was constructed to serve the purpose of measuring the potential output of the economy for the purposes of conducting WW2. It has since become standard around the world as the only way to measure the economy.

The issue is that it does a very good job of measuring things in the short run. However, it can't take into account the "quality" of economic activity in the long run.

For example, under GDP 100 guys digging ditches and filling them in again are seen as better for the economy then 75 guys doing productive work and 25 guys staying home and taking care of their kids.

Likewise, 100 guys getting paid to destroy productive capital and kill people are seen as better for the economy then 50 guys working in 7-11 and 50 guys taking care of kids, painting, and playing the guitar.

GDP assumes in essence that people are rational actors and that if someone is being paid to do a job that it is by definition productive activity. However, with government that is not always the case, and with zero interest loans for wall street that is not always the case either.

There is a lot of chatter in public about why wages are stagnant and the average person isn't better off than they were 20 years ago despite the rise in GDP. The answer lies in GDP's accounting for War and other government expenditures, as well as the much more complex issue of how the banking/finance industries are reflected in GDP (you would be shocked at the answer to this most likely, but it is so complex I still don't fully understand it myself).

Stefan Jovanovich writes:

I remain amazed at how easily our political economy dismisses the pure waste of warfare and its effects.

Ed Stewart writes: 

Interesting points anonymous and Stephan. Anonymous, I look forward to reading your book.

Your ditch digging example is an easy one to see but when you start using that logic - what about the tax preparation industry that exists do to an ultra-complex tax code? There are many other examples. Many aspects of the regulatory state might be best considered a jobs program for the reasonably intelligent in the way that ditch-digging is a jobs program for physical laborers.

I had a realization a while back. We might be better off if we could shut down all of the fake work and specific social programs that actively harm productivity, that provide bad incentives (more kids = more $$$), and then just pay a basic annuity to all adults (privatized as a property right) to set a floor on living standards. Make it tradeable and you have an easy mechanism to transfer citizenship, etc. Citizenship is worth something why can't be buy and sell it, and why don't we earn anything directly from it like a dividend stock or bond.

Stefan Jovanovich writes:

Ed (and anonymous also) may be going down the path that my grandfather first set me on back in 1950s. He said that the Wobbly idea about "one big union" was hopelessly naive (he had been in his early 20s when he and grandma joined the IWW), but there was at the heart of it one very good idea - markets work brilliantly for consumers aka people who have the ready but they don't work nearly as well for "jobs". He had started mining when hand drills and sledgehammers were used to create the holes for the dynamite. (He told me that he even worked on one old and stupid mine in Southern Illinois where the owner still used black powder; he said he was young and stupid about politics but not about mining. He worked that job until he got his wages and then took the train to Chicago where he found a job working on what became the Navy Pier.)

He thought the Marxists had it backwards; the last thing you wanted was for the government to own anything and have permanent workers. They would inevitably become worse than even the most naked capitalists because they would never, ever have to stand the test of the market. You wanted competition and prices in everything; BUT you had to have everyone who accepted those rules be able to share in the prosperity they created. In his day miners did that sharing by literally passing the hat for sick and disabled workers and for burial expenses (for the children as much as for the miners and their wives). The idea of a "one big union" was that the hate would be passed for every person who was in the United States legally (which was everyone back in the day when people were freely allowed to come here if they passed the entry test for communicable diseases).

When he asked him about Bismarck's "social" programs, which were the model the American Progressives used for their "reforms" (sic), he just laughed. "You mean the laws that guarantee that every gymnasium graduate has a job telling everyone else how to behave?"

He would have agreed with Ed that even citizenship was a property right that people should be free to buy and sell. What he wanted attached to that right was the annuity claim to have the hat passed. And, he thought everyone - Rockefeller included - should have an account. "It is the only way to prevent people from thinking they need to make distinctions between the people who "deserve" to have the hat passed and those who don't." Sooner or later, he told me, the preachers will want to get their hands on the money and say it came from God. "But what about the communists and the socialists?" "Same thing, only they will say it came from Darwin."

The man has been dead for more than half a century, and I still miss him nearly every day.

Ed Stewart writes:

Very interesting, Stefan. It makes a heck of a lot of sense to me. I would love to read more if your grandfather or anyone else ever mapped out the idea further.

Stefan Jovanovich responds:

Ed asked if anyone had ever mapped out the Wobbly idea of one big union. The answer is "yes" - every time someone sits down and calculates what is spent on "poverty" and the parts of public health that do not deal directly with quarantines, innoculations and other direct measures against communicable diseases (in other words, almost all of the "wellness" spending). The most recent effort was this one:

"This week, the U.S. Census Bureau is scheduled to release its annual poverty report. The report will be notable because this year marks the 50th anniversary of the launch of President Lyndon Johnson's War on Poverty. In his January 1964 State of the Union address, Johnson proclaimed, "This administration today, here and now, declares unconditional war on poverty in America." Since that time, U.S. taxpayers have spent over $22 trillion on anti-poverty programs (in constant 2012 dollars). Adjusted for inflation, this spending (which does not include Social Security or Medicare) is three times the cost of all military wars in U.S. history since the American Revolution."

"Federal and state governments spent $943 billion in 2013 on these programs at an average cost of $9,000 per recipient. (Again, Social Security and Medicare are not included in the totals.) Today, government spends 16 times more, adjusting for inflation, on means-tested welfare or anti-poverty programs than it did when the War on Poverty started. But as welfare spending soared, the decline in poverty came to a grinding halt. How can this paradox be explained? How can government spend $9,000 per recipient and have no apparent impact on poverty? The answer is that it can't. The conundrum of massive anti-poverty spending and unchanging poverty rates has a simple explanation. The Census Bureau counts a family as "poor" if its income falls below specific thresholds, but in counting "income," the Census omits nearly all of government means-tested spending on the poor. In effect, it ignores almost the entire welfare state when it calculates poverty. This neat bureaucratic ploy ensured that welfare programs could grow infinitely while "poverty" remained unchanged."

Grandfather, being clear-sighted, knew that you could take all the money spent on the officially poor and divide it up among everyone - Rockefeller included - and eliminate poverty tomorrow; but, that would offend everyone who wants vices to be illegal and everyone (usually the same person) who wants official helping to be a sinecure that can be passed down from generation to generation just as parsonage livings once were. These are my words but his thoughts: "The snobbery of the caring classes will always win."


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