Obviously, GDP calculation shouldn't be changed in order to keep comparability.
That said, something like the Measure of Economic Welfare by Nordhaus and Tobin, suitably modernised, should become the main focus of political discussion. It is true that GDP is an extremely strong correlate of the things we actually care about, but we should do what we can to make even more accurate measures, the difference between real and measured welfare might be quite significant at the margin of policy optimization.
With respect to government spending, this goes in the opposite direction to what we'd like to see. Because GDP values government services only at input cost, it systematically underweights the value of government services to consumers.
Irritation with the statisticians is understandable as they manipulated (at least) the labour/employment numbers throughout the Biden period for partisan political reasons. While measures clearly have to stay relevant and comparable, if the statisticians are now subject to a high degree of scepticism and scrutiny they’ve only got themselves to blame.
This is what the Democrats are up against. Republicans mostly consume misinformation and the best example of in 2021 we had a safe and effective vaccine against Covid…and yet many Americans refused to get vaccinated and we had an entirely avoidable Delta death surge among the lower educated Republicans.
I guess the confusion for someone like me is that although government spending does reflect economic activity, it’s not really what would happen absent coercion. I think of the 2 trillion gone up in smoke in Afghanistan, or the 1 trillion in interest on the debt etc and wonder how these really negative things interact with GDP. I don’t doubt that mistakes happen in the private sector as well. It just seems that the real economy only happens where people are truly subjected to the consequences of their decisions.
Focus on GDP has masked the visibility of other important macro trends. For example the growing income spread and the economic misery that gave rise to MAGA(the root of which can be found in the Perot candidacy).
This change will accelerate this spread. It will create incentives for further tax cuts to goose private investment, and incentives to lower social benefits.
How does it "mask" No total of anything gives information about the distribution makes it up. Does the population mask the distribution by national origin??
I don’t fully understand your comment. What I was trying to say was while we have has steady gdp growth since the 80s; the lowest quintiles of the population have seen loss of real wages, erosion of benefits, need for 2 earner families.
One macro indicator is the spread between mean and median incomes which has grown steadily.
Ross Perot tapped into this in his presidential run and I believe that MAGA has emerged from the stresses of this economic stress on the lower quintiles of income
The big problem was Ross Perot ended up doing more harm than good as the economy boomed and wages rose in the aftermath of NAFTA. So Perot ended up looking like a “boy that cried wolf” when a very real dragon was emerging from the sea in the 1990s. And then 9/11 distracted Americans during the most important negotiations taking place between America and China concerning China into the WTO that concluded in December 2001. And then as we emerged from the 2001 recession instead of adding manufacturing jobs we hemorrhaged manufacturing jobs to China.
That was my original point. Measuring and targeting GDP to make economy boom. One way to do that is with tax cuts so that there can be more economic output. But tax cuts make the after tax ROI of projects to move manufacturing very attractive. Tax cuts also make the after tax cost of pay increases go up.
Real household income has gone up because there are more two income families making that income.
The 2003 Bush Tax Cuts firehosed dollars into the economy. So in 2004-2005 GDP almost hit 4% while revenue as a percentage of GDP fell to 15.4% in 2004. Defense spending as a percentage of GDP hit almost 4% after going below 3% in 2000.
Fingers crossed the worst that happens is the govt decides to emphasize reporting on private output rather than outright replace GDP or make some radical changes. Though I’ve said “fingers crossed” so many times now that I don’t have any left to cross.
“The strangest part of this proposal is that it would make Biden's economic performance look better, not worse.”
It occurs to me, though, that it would also serve as a story that the administration and their apologists could tell in order to explain why Biden's economic performance looked better. When the economy tanks, rather than admitting that they got it wrong, they can simply say, "Oh, no, the economy is still chugging along just fine. It's just a change in the way the numbers are calculated."
Agreed—GDP is a crucial economic indicator, but complementing it with quality-of-life metrics like life expectancy provides a more complete picture of societal well-being
The gist of this is true— GDP isn’t some one size fits all measure of economic health— it’s a measure of output. We have other measures to measure other stuff.
I do think that some of those critiques are more accurate, and I think the household work example is a telling one. For instance, if I work in retail for $30K per year, and hire a nanny for $30K to take care of my child, that counts as $60K in GDP. But if I decide that I’d rather care for my child and the nanny takes my retail job, GDP reflects 50% less output. Intuitively, that’s not right— the same amount of work is being done. I don’t know that we can or should try to account for that, but it’s certainly something to think about.
But that’s a real critique, as opposed to this incoherent idea that your doctor’s visit counts as GDP if you go to a private clinic, but not if you go to the VA doctor.
GDP sometimes fails like from 2003-2009 in which the Fed failed and obviously the Bush/Cheney administration failed. So the headline GDP numbers were solid but looking underneath the numbers were obviously suboptimal. The Fed failed by ignoring CPI after switching to core PCE in 2000. Core PCE and GDP looked good but job growth disappointed and wage growth disappointed while we hemorrhaged manufacturing jobs to China and energy prices kept rising. Greenspan and Bernanke were the two wrong people at the wrong time to lead the Fed as Greenspan believed his keeping rates high had factored in to 1992 election and he didn’t want to repeat the “mistake” in 2004. Bernanke like many Americans became invested in Bush after 9/11 and believed all of the Crusade nonsense and GWOT absurdities. So Bernanke believed it was his patriotic duty to enable Bush when the Fed is supposed to be apolitical and just focus on the data.
The Bush/Cheney administration failed in a myriad of ways with the administration choosing to view any number of developments in a positive light. Under 35 year olds buying houses was viewed as a positive development even though everyone knew education was becoming more important and young people would need to be mobile in order to take advantage of the new jobs being created. So the notion of graduating high school and getting a job at Bethlehem Steel was long gone which means marriage and child bearing and home ownership would be delayed. Invading Iraq played a huge role in the dysfunctional global oil market as Big Oil failed to properly invest in production for fear of Iraq stabilizing and flooding the market with cheap oil. I could go on and on but the suboptimal nature of the Bush economy is apparent when one looks beyond the headline GDP number.
I believe the FBI wanted to investigate mortgage fraud as early as 2003, but got shut down by the Bush administration. And Bernanke apparently didn’t know what a derivative was until too late in the game.
The mortgage stuff was a symptom of a dysfunctional economy. And the economy was dysfunctional because of an energy crisis with even the hemorrhaging of manufacturing jobs to China a symptom of the energy crisis. CPI peaked at 5.6% in July 2008…and Bernanke is such an idiot he just dismissed it as something that was wrong.
Btw, the director that just won best picture made a movie about the aftermath of the mortgage crisis in which houses in Orlando sat empty as families lived in run down motels in Kissimmee. The house the families got kicked out of were bought up by wealthy Americans for a fraction of what they were worth. So little kids got picked up by the school bus at a run down motel instead of a nice suburban house…only in America.
How useful is GDP as a metric anyways? I'm assuming an economist would look at a wide range of different metrics when evaluating the economic state of a country. Even if we did separate it, as long as it's a visible change, you can modify your calculation, or use a separate metric to counteract that difference.
I'm also very interested in the metric that accounts for unpaid labour-does a metric like that exist already? Why wouldn't something like that have greater visibility/utility than GDP?
One last question-Is the calculation of GDP a sacred measure because we have government organizations dedicated to measuring it accurately (compared to other metrics which don't have the same scale of accuracy)? Is that why GDP is more useful than other metrics, because the others are less "precise"?
Economists do look at a whole host of measures. For example, to determine whether the US is in a recession, they look at GDP, personal income, industrial production, retail sales and nonfarm employment.
That's kind of my point then. If we already look at a bunch of different metrics, if we change how we calculate GDP, I feel like economists would just adapt, so it wouldn't be as harmful?
I don’t take the idea of changing GDP seriously. I think it was just more of the “government is a complete waste” bullshit that is the ongoing narrative of a portion of the political spectrum.
Context is important. I would argue the sub 2% growth of 2016 was stronger than the almost 4% growth of 2004-05. So we kept adding jobs in 2016 as energy prices fell…while in 2004-2005 job growth was relatively weak coming out of the jobless recovery and energy prices kept rising into the Katrina supply shock.
The headline GDP number is generally useful…but sometimes it’s obvious that it isn’t telling the whole story like in 2016 when the economy was strong but the headline GDP number looked low because America had become the biggest energy producer in a very short time and OPEC+ was engaging in a price war to undermine fracking. 2004-2005 had strong numbers but that was while we were hemorrhaging manufacturing jobs to China and energy production had plateaued as energy prices increased.
Bottom line—don’t just look at GDP! Look at wage growth and job growth and energy prices and deficits etc. I think it’s pretty obvious that Bush and Republicans and Greenspan juiced the economy in 2004 just so he could win reelection and continue the GWOT.
Oh, and in 2004 deficit as a percentage of GDP was 3.4%. In 2016 deficit as a percentage of GDP was 3.1%! And in 2019 with deficit as a percentage of GDP was 4.6% with GDP growth of 2.5%. So 2016 was the strongest economy of those 3 years even though it had the lowest GDP growth.
I would suggest one change at BLS. Do a real wage or remuneration index, % cchnge in wage of a sample of defined jobs. BLS does a unit value index of defined groups doing a "job", but that is vulnerable to changing composition of the group.
Obviously, GDP calculation shouldn't be changed in order to keep comparability.
That said, something like the Measure of Economic Welfare by Nordhaus and Tobin, suitably modernised, should become the main focus of political discussion. It is true that GDP is an extremely strong correlate of the things we actually care about, but we should do what we can to make even more accurate measures, the difference between real and measured welfare might be quite significant at the margin of policy optimization.
With respect to government spending, this goes in the opposite direction to what we'd like to see. Because GDP values government services only at input cost, it systematically underweights the value of government services to consumers.
GDP isn't a measure of the value of goods and services to consumers though.
What's "the BEA"?
Bureau of Economic Analysis. The full name is mentioned in the article way down below the first use of the acronym.
Irritation with the statisticians is understandable as they manipulated (at least) the labour/employment numbers throughout the Biden period for partisan political reasons. While measures clearly have to stay relevant and comparable, if the statisticians are now subject to a high degree of scepticism and scrutiny they’ve only got themselves to blame.
And your evidence is..?
Evidence? Looking at the actual data I saw nothing of the sort… where did you hear this?
This is what the Democrats are up against. Republicans mostly consume misinformation and the best example of in 2021 we had a safe and effective vaccine against Covid…and yet many Americans refused to get vaccinated and we had an entirely avoidable Delta death surge among the lower educated Republicans.
Could you give an example?
I guess the confusion for someone like me is that although government spending does reflect economic activity, it’s not really what would happen absent coercion. I think of the 2 trillion gone up in smoke in Afghanistan, or the 1 trillion in interest on the debt etc and wonder how these really negative things interact with GDP. I don’t doubt that mistakes happen in the private sector as well. It just seems that the real economy only happens where people are truly subjected to the consequences of their decisions.
That’s not unique to government. Think of the waste in generating and transferring crypto. GDP is a measure of production. That’s it.
Interest on the debt is income to some, and expenditures by the government, on the National income side of the ledger it cancels out pretty much
Focus on GDP has masked the visibility of other important macro trends. For example the growing income spread and the economic misery that gave rise to MAGA(the root of which can be found in the Perot candidacy).
This change will accelerate this spread. It will create incentives for further tax cuts to goose private investment, and incentives to lower social benefits.
How does it "mask" No total of anything gives information about the distribution makes it up. Does the population mask the distribution by national origin??
I don’t fully understand your comment. What I was trying to say was while we have has steady gdp growth since the 80s; the lowest quintiles of the population have seen loss of real wages, erosion of benefits, need for 2 earner families.
One macro indicator is the spread between mean and median incomes which has grown steadily.
Ross Perot tapped into this in his presidential run and I believe that MAGA has emerged from the stresses of this economic stress on the lower quintiles of income
The big problem was Ross Perot ended up doing more harm than good as the economy boomed and wages rose in the aftermath of NAFTA. So Perot ended up looking like a “boy that cried wolf” when a very real dragon was emerging from the sea in the 1990s. And then 9/11 distracted Americans during the most important negotiations taking place between America and China concerning China into the WTO that concluded in December 2001. And then as we emerged from the 2001 recession instead of adding manufacturing jobs we hemorrhaged manufacturing jobs to China.
That was my original point. Measuring and targeting GDP to make economy boom. One way to do that is with tax cuts so that there can be more economic output. But tax cuts make the after tax ROI of projects to move manufacturing very attractive. Tax cuts also make the after tax cost of pay increases go up.
Real household income has gone up because there are more two income families making that income.
The 2003 Bush Tax Cuts firehosed dollars into the economy. So in 2004-2005 GDP almost hit 4% while revenue as a percentage of GDP fell to 15.4% in 2004. Defense spending as a percentage of GDP hit almost 4% after going below 3% in 2000.
Ok. Thats all true but…where have the gains gone?
Fingers crossed the worst that happens is the govt decides to emphasize reporting on private output rather than outright replace GDP or make some radical changes. Though I’ve said “fingers crossed” so many times now that I don’t have any left to cross.
“The strangest part of this proposal is that it would make Biden's economic performance look better, not worse.”
It occurs to me, though, that it would also serve as a story that the administration and their apologists could tell in order to explain why Biden's economic performance looked better. When the economy tanks, rather than admitting that they got it wrong, they can simply say, "Oh, no, the economy is still chugging along just fine. It's just a change in the way the numbers are calculated."
Agreed—GDP is a crucial economic indicator, but complementing it with quality-of-life metrics like life expectancy provides a more complete picture of societal well-being
Thanks for a well-written rejoinder. I worry about budget cuts at and politicization of BLS and BEA.
The gist of this is true— GDP isn’t some one size fits all measure of economic health— it’s a measure of output. We have other measures to measure other stuff.
I do think that some of those critiques are more accurate, and I think the household work example is a telling one. For instance, if I work in retail for $30K per year, and hire a nanny for $30K to take care of my child, that counts as $60K in GDP. But if I decide that I’d rather care for my child and the nanny takes my retail job, GDP reflects 50% less output. Intuitively, that’s not right— the same amount of work is being done. I don’t know that we can or should try to account for that, but it’s certainly something to think about.
But that’s a real critique, as opposed to this incoherent idea that your doctor’s visit counts as GDP if you go to a private clinic, but not if you go to the VA doctor.
Thanks for this essay. "God is in the details."
GDP sometimes fails like from 2003-2009 in which the Fed failed and obviously the Bush/Cheney administration failed. So the headline GDP numbers were solid but looking underneath the numbers were obviously suboptimal. The Fed failed by ignoring CPI after switching to core PCE in 2000. Core PCE and GDP looked good but job growth disappointed and wage growth disappointed while we hemorrhaged manufacturing jobs to China and energy prices kept rising. Greenspan and Bernanke were the two wrong people at the wrong time to lead the Fed as Greenspan believed his keeping rates high had factored in to 1992 election and he didn’t want to repeat the “mistake” in 2004. Bernanke like many Americans became invested in Bush after 9/11 and believed all of the Crusade nonsense and GWOT absurdities. So Bernanke believed it was his patriotic duty to enable Bush when the Fed is supposed to be apolitical and just focus on the data.
The Bush/Cheney administration failed in a myriad of ways with the administration choosing to view any number of developments in a positive light. Under 35 year olds buying houses was viewed as a positive development even though everyone knew education was becoming more important and young people would need to be mobile in order to take advantage of the new jobs being created. So the notion of graduating high school and getting a job at Bethlehem Steel was long gone which means marriage and child bearing and home ownership would be delayed. Invading Iraq played a huge role in the dysfunctional global oil market as Big Oil failed to properly invest in production for fear of Iraq stabilizing and flooding the market with cheap oil. I could go on and on but the suboptimal nature of the Bush economy is apparent when one looks beyond the headline GDP number.
I believe the FBI wanted to investigate mortgage fraud as early as 2003, but got shut down by the Bush administration. And Bernanke apparently didn’t know what a derivative was until too late in the game.
The mortgage stuff was a symptom of a dysfunctional economy. And the economy was dysfunctional because of an energy crisis with even the hemorrhaging of manufacturing jobs to China a symptom of the energy crisis. CPI peaked at 5.6% in July 2008…and Bernanke is such an idiot he just dismissed it as something that was wrong.
Btw, the director that just won best picture made a movie about the aftermath of the mortgage crisis in which houses in Orlando sat empty as families lived in run down motels in Kissimmee. The house the families got kicked out of were bought up by wealthy Americans for a fraction of what they were worth. So little kids got picked up by the school bus at a run down motel instead of a nice suburban house…only in America.
How useful is GDP as a metric anyways? I'm assuming an economist would look at a wide range of different metrics when evaluating the economic state of a country. Even if we did separate it, as long as it's a visible change, you can modify your calculation, or use a separate metric to counteract that difference.
I'm also very interested in the metric that accounts for unpaid labour-does a metric like that exist already? Why wouldn't something like that have greater visibility/utility than GDP?
One last question-Is the calculation of GDP a sacred measure because we have government organizations dedicated to measuring it accurately (compared to other metrics which don't have the same scale of accuracy)? Is that why GDP is more useful than other metrics, because the others are less "precise"?
Economists do look at a whole host of measures. For example, to determine whether the US is in a recession, they look at GDP, personal income, industrial production, retail sales and nonfarm employment.
That's kind of my point then. If we already look at a bunch of different metrics, if we change how we calculate GDP, I feel like economists would just adapt, so it wouldn't be as harmful?
I don’t take the idea of changing GDP seriously. I think it was just more of the “government is a complete waste” bullshit that is the ongoing narrative of a portion of the political spectrum.
Context is important. I would argue the sub 2% growth of 2016 was stronger than the almost 4% growth of 2004-05. So we kept adding jobs in 2016 as energy prices fell…while in 2004-2005 job growth was relatively weak coming out of the jobless recovery and energy prices kept rising into the Katrina supply shock.
I'm not sure I understand the relevance.
The headline GDP number is generally useful…but sometimes it’s obvious that it isn’t telling the whole story like in 2016 when the economy was strong but the headline GDP number looked low because America had become the biggest energy producer in a very short time and OPEC+ was engaging in a price war to undermine fracking. 2004-2005 had strong numbers but that was while we were hemorrhaging manufacturing jobs to China and energy production had plateaued as energy prices increased.
Bottom line—don’t just look at GDP! Look at wage growth and job growth and energy prices and deficits etc. I think it’s pretty obvious that Bush and Republicans and Greenspan juiced the economy in 2004 just so he could win reelection and continue the GWOT.
Oh, and in 2004 deficit as a percentage of GDP was 3.4%. In 2016 deficit as a percentage of GDP was 3.1%! And in 2019 with deficit as a percentage of GDP was 4.6% with GDP growth of 2.5%. So 2016 was the strongest economy of those 3 years even though it had the lowest GDP growth.
I would suggest one change at BLS. Do a real wage or remuneration index, % cchnge in wage of a sample of defined jobs. BLS does a unit value index of defined groups doing a "job", but that is vulnerable to changing composition of the group.
Is what you’re looking for different from the Atlanta Fed Wage Growth Tracker?
I’ll keep my shadowstats schizo gdp thanks