Jonathan Rowe’s essay (“Our Phony Economy“) in the June edition of Harper’s Magazine criticizes the blind use of GDP as the only measure of the economy. GDP by definition looks at the total quantity of good produced in a given year. Rowe wisely notes that solely relying on GDP can omit some important aspects which effect the economy. For instance, using more gas and oil increases economic activity, but polluting the air does not count as reduced economic activity. If we our society becomes more unsafe and businesses must hire security guards and electronic security systems, this shows up as an increase in GDP whereas most people would believe that have a more unsafe society constitutes a reduction in welfare.
Activities such as parental child care are not counted in the economy while private day care does count as economic activity. When measuring gasoline production, GDP should take into account that gasoline production increases economic activity on the one hand, but also reduces fossil fuel levels as well. Rowe notes that some economic activity may include economic ‘bads’ such as drug abuse or fraud.
Finally, a disease outbreak where a city would have to hire more doctors, nurses, and medical staff would be considered an increases in economic activity. However, no economist would advocate that a “disease-led recovery” would be the best way to improve welfare. What matters to individuals is their health level, not how much they spend on medical care.
What Rowe does not do is offer better alternatives. The reason that pollution, safety, and fossil fuel extraction are not counted in GDP now is that they are very difficult to measure. What is the cost of releasing x amount of pollution into the air? How much do people value safety? In order to figure out how much the extraction of fossil fuels costs, we need to have some idea of how much fossil fuels are currently in the ground (which we don’t really know).
Doctors have a very difficult time determining health levels so how would statisticians be able to come up with some health-related economic indicator. With respect to economic “bads” like drug abuse, who should be the one determining what is an economic “good” and what is an economic “bad.” Drunk driving is certainly not a productive activity, but having a glass of beer or wine with your dinner certainly adds to the welfare of many people.
Thus, Rowe’s wisely notes that GDP does not provide an exact measure of social welfare. Nevertheless, until someone comes up with a better statistical tool, GDP will be the rough instrument with which most analysts, media, researchers and the public will use to measure economic activity.