French President Nicholas Sarkozy has leaped with glee on the proposal by a commission headed by Joseph Stiglitz to redefine Gross Domestic Product. After all, if feminine attractiveness, length of vacations and quantity of garlic in the food can be included, France will rank much higher than in more old-fashioned measures. Plus, the existence of a new measure will enable politicians to fiddle the figures some more, something they always enjoy doing. In reality, Stiglitz and Sarkozy are right that GDP is an inadequate measure of output and wealth, but they look in all the wrong places for its replacement.
Stiglitz and his team believe that the gap between reported output and what people experience has caused the public to distrust official statistics. Apart from genuine statistical problems he puts part of this problem down to changes in income distribution, part down to changes in relative weights within GDP (for example, an increase in the share of GDP going to profits, as in the US since the 1980s) and part to such factors as traffic jams and pollution (and, inevitably global warming, though you’d think that would improve the quality of life in say Scotland or Labrador) that do not affect GDP but damage the quality of life.
The Stiglitz team then recommends that in the area of measuring production itself, quality improvement in services be taken into account (a recommendation incorporated into the US price data by the 1996 Boskin Commission) and government productivity increases should be accounted for. They then believe additional adjustments should be made to measure well-being, although this would probably require a range of indicators rather than one number. In particular well-being measurements should reflect consumption rather than production, should emphasize the household perspective, including tax and loan payments, should consider wealth as well as income and consumption, should take income distribution into account, and should include non-market activities such as housework and leisure. Analysts should also take account of both objective and subjective aspects of well-being, including health, education, personal interactions and environmental conditions. Finally the report should consider sustainability, both environmental and in terms of resources.
One can understand why Sarkozy liked this. A society with lots of leisure, more equal income distribution, massive recycling programs and fussy food service would benefit immensely against a market-driven fast food culture. Furthermore, the immensely skilled graduates of the Ecole Nationale d’Administration could adjust the subjective factors according to their own political goals, thus ensuring that GDP statistics always showed France in a leading position, and the gradual aggrandizement of government as a wealth-enhancing measure.
The fallacy of this approach becomes apparent when you realize that the tastes and preferences of the Enarques at the top of French administration may not fully reflect the wishes of the French people. France is after all a country famous for its cuisine, and extremely proud of it, yet it is also McDonald’s most successful market outside the United States. Given the legendary snobbery of the Enarques, it would be perfectly possible for them to produce statistics showing an ever increasing wealth and sophistication of French society, while the 99% of French people less elegantly educated found their living standards in steady and irreversible decline.
The central fallacy of GDP statistics however, one wholly ignored by Stiglitz, is that they include the output of government, measured by the cost of its bureaucrats. Naturally, the traditional functions of government – defense and the administration of justice – are not conveniently carried out by the private sector (though privatized prisons work pretty well) and so some factor should ideally be included for the cost of these necessary outputs. As far as defense is concerned, this factor has tended to decline since the 1950s in the US, and to be considerably lower in Europe.
However, the rest of government more or less by definition consists of regulators holding back the private economy or services that are not worth the cost of producing them (otherwise the private sector would be producing them already.) Stiglitz, a notorious supporter of government expansion, sees nothing wrong in including these items at full cost, but if we are correcting the figures, they should be included at their actual value, always less than their cost and quite often negative.
Under the current system, becoming less efficient in education, for example, so that more administrators are hired per teacher, produces an increase in reported GDP. That makes no sense at all. Overall, the inexorable growth in government over the last century is counted as having added to national output and welfare, thus deluding voters/taxpayers into thinking their wealth is increasing when in fact only their burdens have done so.
If therefore we are to follow Stiglitz and calculate GDP by numerous definitions, let’s take the definition that actually represents the genuinely valuable output of a real economy and switch to Gross Private Product, defined in Keynesian terms not as Consumption plus Investment plus Government Spending plus Net Exports but simply as Consumption plus Investment plus Net Exports.
Real Gross Domestic Product peaked in the second quarter of 2008 and has dropped 3.9%. Gross Private Product peaked in the fourth quarter of 2007 (a closer match with the December 2007 estimate for the recession’s start by the National Bureau of Economic Research) and has dropped 5.5%. In other words, the recession for the American people as individuals was 40% deeper and 50% longer (assuming the second quarter of 2009 marked the bottom) than the government has been claiming.
Since the third quarter of 2000, GDP has increased by 14.4%, or 1.55% per annum. GPP has increased by 12.6% or 1.36% per annum. It is thus not surprising that we’re not feeling a lot richer, since US population is increasing by 1% per annum, so our private income per capita has only increased by 0.36% per annum.
GPP doesn’t always increase more sluggishly than GDP. Between 1982 and 2000 GPP increased by 4.07% per annum while GDP increased by only 3.69% per annum. Yes, that’s a bottom-to-top comparison in terms of the business cycle, but that differential is the sign of a healthy economy – as is the overall rate of growth. The economy was growing rapidly, while government was growing more slowly (by 2.3% per annum in those years, still double the rate of population growth, but more slowly than the economy as a whole.)
There is of course a causality here. If GPP increases significantly more rapidly than GDP, the economy is healthy and therefore grows more rapidly. If on the other hand GDP dominates GPP, then not only is the economy itself less healthy, with a tendency to sluggishness, but the populace feels even more impoverished than appears from the GDP figure, because the burden of government on them is growing greater as a percentage of the whole. GDP may be increasing, but the additional output is being consumed by extra bureaucrats.
Anecdotal evidence confirms the impression of economic deterioration and extra government burden since 2000. The number of lobbyists in Washington has more than doubled since then (their own output, incidentally, is counted as part of the private sector – such are the deficiencies of economic statistics!) The average public sector remuneration has increased since 2000 from 66% above the average private sector remuneration to more than double today. Washington DC is the one real estate market that has already bottomed out, and is beginning to enter substantial recovery.
This is not a partisan point; for most of the period since 2000 we have been governed by a nominally Republican administration, while for nearly half the 1982-2000 period we had a Democrat one. More detailed examination of government spending statistics will show that control of Congress has a substantial effect on the figures, with the change from Newt Gingrich to Dennis Hastert as Speaker – both nominally Republicans – in 1998 producing a truly lamentable decline in the ability to control government spending.
Nevertheless, the figures are significant and informative. It’s not an illusion; the rate of growth in private sector income since 2000 has been more or less negligible, whole government has absorbed an inexorably increasing share of national output, depressing economic growth by doing so.
There is also a lesson for President Obama in this. If he continues the trend since 2000 of ever-expanding government, then he will get both sluggish growth in GDP and an even more sluggish growth in GPP. However much he may trumpet the modest increases in GDP as a sign that his policies are working, the public gets to spend only GPP, and so will rapidly become aware that they are being impoverished by his rule. His chances of re-election will be correspondingly diminished.
President Sarkozy is right; GDP is indeed inadequate as a description of national output. But it is GPP, and not some politically convenient fudging to suit the French Enarques or the Washington bureaucrats, that truly represents what the public actually sees happen to its living standards. Secretly, he should keep GPP statistics as well as all the others; they will give him a much better guide as to his chances of future electoral success.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)