GDP is supposedly the value of the goods and services an economy “produces,” but there is a big conceptual caveat: GDP only covers goods and services that are bought and sold. If I help my daughter with her algebra, it does not boost GDP; if I hire a tutor, it does. More perversely, if Jill and Joe go to a marriage counselor and have an amicable low-cost divorce, GDP rises only a little, but if they battle in court for a couple of years GDP rises by the millions of dollars spent on legal fees.
So there is a gap between “output” and “utility.” Boston money manager Jeremy Grantham highlights another example. A barrel of oil pumped out of the Saudi dessert and a barrel of oil pumped from a hugely expensive deepwater well 300 miles off the coast of Brazil have the same “utility,” but if the Brazilian oil costs ten times as much to produce it will add ten times as much to global GDP. Grantham considers this a systematic measurement problem that will persist as the world’s easy-to-find oil, copper etc. is produced and incremental supply becomes more expensive in the future. Accordingly, in forecasting future GDP growth, he cuts it by 40 bps (0.4%) to 0.9%, to correct for this systematic “overstatement.”
Here’s the problem with Mr. Grantham’s haircut to GDP growth: he only does it for this one part of the economy, which creates a downward bias. To be valid, he would have to adjust ALL traded goods and services for the gap between cost and utility, which is simply impossible to do And if it were possible, I think we would find that GDP is growing faster than the official figures, because information technology is providing more and more utility for less and less cost. With a $900 computer I can stay in minute-to-minute touch with friends on FaceBook, watch Gangan Style on You Tube, access a Google map that is infinitely better than anything available in 1990, access millions of rare books via Google Scholar, and shop for used books throughout the U.S. on Amazon. Most of this can be done for low or zero cost, implying a huge increase in utility but a fairly modest increase in GDP.
This measurement problem relates to “wage stagnation” and income inequality. We keep hearing from liberal economists such as the “Marx Brothers” (Krugman, Reich & Stiglitz) that average hourly wages have not increased since the 1970s. Reich claims wages of the typical worker have increased just 1% over the past three decades. But consider Maria, who cleans offices in one of the buildings on New York’s Sixth Avenue, pictured above. Before she starts her shift on the 9th floor, she chats with family and friends on a mobile phone. As recently as the late 1980s, virtually none of the Wall Street big shots who worked in that building had a mobile phone. (I know because I was there.) Obviously there are many such examples, and not just in electronics. Average people used to “go Greyhound;” now they fly. Gourmet coffee was only available in a few fancy restaurants in the 1980s. Airbags were not standard equipment in U.S. autos until the early 1990s.
I don’t want to repeat Jeremy Grantham’s error. Robert Reich could still be correct that wages have stagnated IF these dramatic improvement in living standards were offset by big declines elsewhere in the family budget. But I can’t think of too many, except for the rise in commodity prices since 2002, which will be substantially reversed by fracking.
All of which is relevant to the alleged problem of income inequality. Supposedly most of the increase in GDP in recent decades “went” to the top 1% or even top 0.01%. As I will detail in a later post, the top of the Forbes 400 is dominated by tech tycoons who commercialized all this wondrous technology that raises everyone’s living standards. The benefit to the Maria’s of the world is not properly measured while the huge incomes of Bill Gates, Larry Ellison, Sergei Brin et al. are. The misleading “zero sum” framework of Gini coefficient discussions of inequality compounds the misperception that tycoons are benefiting at the expense of everyone else. In the real world, we all benefit.
In reality inequality is not a problem that needs to be, or even could be, addressed by raising taxes. That would only kill the golden goose, as it did for a while in the 1970s. As Drew Matus of UBS told Bloomberg’s Tom Keene recently, nearly all of the great technological innovations of the last fifty years occurred in the U.S.. Tax hikes that dry up venture capital and over-regulation that squelches innovation will enrich Washington bureaucrats but hurt the Maria’s of the world. Washington bureaucrats are already doing very well—far better than average consumers. Federal spending has climbed $1 trillion since 2007, and half of the ten richest counties in the U.S. are located near Washington DC.
Copyright Thomas Doerflinger 2012. All Rights Reserved.
