Gaming the System
January 16, 2009
GDP is a statistic, and non-economists derive little utility from consuming this statistic.
-Jason, from the comments at Econlog
This is something I’ve been meaning to post on for a while now, but the only analogy I could think of by which to do so was gratuitously sexual. But, sex is like the economics of growth: once you start thinking about it, it’s hard to think about anything else.
If you want to determine the happiness of a couple’s relationship, you might collect data on their sex life in order to have some objective, measurable proxy for that happiness. Of course it wouldn’t be a perfect measure. There would be a lot of variation among couples, but it would still be useful, especially, one could imagine, for comparing relative happiness of a given couple over time. It would not be unreasonable to argue that a couple that experiences a period of low sex followed by a period of more frequent sex have experienced an improvement in the happiness of their relationship.
Alright, you see where I’m going with this. You don’t get a happy relationship by having the sex first, and then figuring the happiness will follow. A relationship cannot be restored to full happiness by raising sex frequency to its previously higher level. In the words of everybody, correlation is not causation, especially if the causation runs the other way.
I’d be the last person to argue that measured GDP doesn’t mean anything. In fact, I often argue that the increase in measured GDP that China has experienced over the last thirty years represents a huge improvement in the lives of average Chinese people. It’s not that I care about GDP. I don’t care about GDP at all. But I do want to measure, in as objective a way as possible, the subjective “quality of life” in poor countries, and in particular whether quality of life is improving or declining.
This is a big deal, because few people, when they ask “Does government spending increase GDP?” consider that because government spending is not voluntary, it is fundamentally different from other components of measured GDP. Thirty seconds of google research indicates to me that the US Government spent $600 billion on defense in 2008. Was it worth $2,000 to you, personally? If that question seems too nebulous, here’s a partial breakdown: was the Iraq War worth $500 to you? (As an aside, this line of reasoning also suggests why I find the claim that WWII brought us out of the Depression insane on its face.) At the same time that government spending increases GDP, it changes what measured GDP means.
Money spent on police raids against marijuana dealers is to GDP as rape is to sex. Simple accounting identities obscure important differences. In the end, my advice for macroeconomics would be to take Hayek’s advice and focus on qualitative distinctions, which economics as a social science is well-equipped to evaluate, rather than aiming for an impossible level of quantitative precision.
William's Continued Adventures 
January 16, 2009 at 6:06 pm
Yes, you can increase GDP without increasing quality of life. It’s silly to think a higher GDP automatically equals happiness. But that’s why politicians talk about jobs and infrastructure and other things people want.
That defense spending fed and clothed a lot of people, which is worth something to them, personally. Factory workers don’t care whether the US government or WalMart (or the Chinese government) signs their checks. Plus, it’s probably worth $2,000 to me personally not to get attacked by China or Al Qaeda. I see your point, we shouldn’t automatically equate GDP and public well-being. But the actual debate is how to spend the stimulus effectively to enhance the overall welfare, not whether to add zeros on the end of our GDP.
Also, I know libertarians enjoy that rape analogy, but it has got to go. Both involve your choice being taken away, yes. But it’s like invoking the Holocaust or Hitler. They’re bad, I get it, no need to equate to the worst thing ever or it pales in comparison.
January 16, 2009 at 9:07 pm
I recognize that you don’t like the rape analogy, but my point was about measurement, not morality. Rape is a type of sex. Government spending is a component of GDP. The point is that if you are trying to measure sex or GDP, you are changing what those things mean by your decision to include non-voluntary components. Government spending could be perfectly morally just, and my point would be the same.
Since you seem to believe that the marginal effect of our military action abroad is to create more terrorism than it eliminates (you liberals and your hydra analogy. enough already!), I find it very difficult to believe that you think our current spending level is precisely what is required to prevent China or Al Qaeda from attacking us.
I really don’t think I’m backpedaling on this one; my claim was always this narrow. Government spending isn’t worthless, but its effect is exaggerated when you look at measured GDP as evidence for its effectiveness. Yes, some of the debate is about jobs and infrastructure, but some of it is about estimating the multiplier due to tax cuts vs. spending. I’m wary that the latter kind of debate is an attempt to “game the system” of measured GDP.
As to the claim that defense spending fed and clothed people, what do you mean? The soldiers? Couldn’t we have just fed and clothed them here in the US, and we’d be better off?
Or are you talking about workers in munitions factories? Because then we might be getting into macro theory, which is not my four-tay, but I still think you are wrong to ignore the waste of real resources involved in that case.