Economy 4.0

One Economic Boost We Could Live Without

David Brancaccio Oct 18, 2010

Here are seven English words that may never have been used in this order before: Thank goodness for the Gulf oil spill. No sane person would ever articulate such an idea, given the loss of life and the injuries on the oil rig after the blowout six months ago this week. From a human or moral point of view the notion is, clearly, indefensible. From an economic point of view, however, there may be a case. It turns out, there is evidence that the spill may have given the economy a little boost, much needed during these recessionary times.

This unsettling calculation by a JP Morgan Chase economist suggested the 4,000 people who were initially put onto the oil mop-up operation may have “offset the drags” in the near to medium term. Even if you factor in declines in fishing, tourism, and offshore oil production, the analysis argued the government’s key calculation of economic growth, the Gross Domestic Product, would get a push upward by the worst oil spill ever. Here is the apparent takeaway: if we want to steer the economy away from a double-dip, one strategy would be to set off a series of environmental disasters. Maybe chop a hole in the Alaska pipeline. Turn a few spigots on willy-nilly at some chemical plants. Hire a platoon of locusts to decimate the wheat crop.

Let’s agree this is not the way to grow.


The problem really is the way government calculates GDP. The statistic is effective at measuring economic activity when money changes hands. However, as a measure of economic progress, many critics say GDP is defective because so much useful economic activity doesn’t account for squat. Say you volunteered as a classroom aide – nope, GDP does not care. Say you took time off to nurse a relative back to health: This would drag GDP down because you could be working for less at your paid day job. Conversely, a way to boost GDP is to crash your car on the way home, because in that case you buy another car or you pay a body shop to fix the old one. Money changes hands and congrats, you have done your part to boost economic output.

Why not race toward more noble outcomes? If it’s not an overabundance of hot dog ingestion or spilled oil that we want, let’s try measuring life, liberty, and the pursuit of happiness.

America’s quarterly GDP figure is calculated by the federal government’s Bureau of Economic Analysis. I reached out to BEA director J. Steven Landefeld for his impressions of the forecast that the spill could goose the economy as currently measured by GDP. Landefeld emailed me that such an economic fillip is “simply an economic reality. Good or bad doesn’t enter into it.” Hiring workers to clean up the spill, which as you now know helps GDP, is considered worthwhile by society, says Landefeld.

The Best Defensive Expenditure: A Good Offensive Expenditure


His point is society may not want to bear the environmental consequences of not cleaning up. That I get. Activities like this are called “defensive expenditures,” and the category includes activities like rebuilding after Hurricane Alex and handing out vaccine for the bird flu. Landefeld told me it would be tough to discriminate between the good, the bad, and the ugly in GDP. The problem, he writes, is where to draw the line.

“Indeed, isn’t spending for shelter from the rain, or spending on heat for protection against the cold, defensive expenditures?” He has a point. It is, however, also true that GDP calculation already draws lines around what counts and what doesn’t, and some of these choices have surprised me. As the fishing business dropped off to almost nil in the oil spill zone, that collapse in sales suffered by fishermen is reflected in GDP. But what about the harm to shrimp, blue fin tuna, sea plankton, dolphins and their habitat? It turns out GDP does not count the hurt and destruction being inflicted on our undersea friends. It does not count destruction to ecosystems.

Robert Repetto, environmental and resource economics professor at Yale, explains how buildings and other equipment count in GDP, and fish do not. “Despite years of economic work and recommendations by the National Academy and other bodies, natural resources such as fisheries still don’t enter the accounts as similar economic assets…When the spill destroys fisheries or spawning grounds or swimming beaches, GDP does not go down, though the resulting loss of income may continue for years.” Depletion of natural resources is not the GDP’s only drawback. It doesn’t count the value of leisure time, or unpaid work such as mentoring troubled teens.

Life, Liberty and the Pursuit of a Happiness Index


For the thoughtful among us, this GDP derby is a kind of hotdog eating contest: even if you win, you end up feeling bloated and confused as to why you entered in the first place. I ask: why not race toward more noble outcomes? If it’s not an overabundance of hot dog ingestion or spilled oil that we want, let’s try measuring life, liberty, and the pursuit of happiness.

I recently saw a list of 79 different indexes that propose to do a fine job measuring the outcomes we care about, including family and personal well-being, shelter, employment, education, and human rights are among the categories that could be measured. Asking which measures we ought to use to grade our country’s performance is like asking,
“What kind of economy do we want to have?” Having a national conversation to answer that question would identify our shared values.

The technology to measure some of our shared values is improving. There has been progress coming up with more rigorous ways to measure happiness or to how our well-being has come at a cost to the environment. One attempt to measure our happy quotient puts the United States at number 114 in the world, right around ecologically-challenged Madagascar. For the record, Costa Rica is a happy number one.

Accounting for Everything


There are also serious efforts in economics to come up with a national accounting for non-market activities where money hasn’t changed hands. On a visit to a state park in Montana a few summers ago I saw some visitors picking huckleberries from the vines despite the sign that warned: “Take nothing but pictures; leave nothing but footprints.” A national resource was being pillaged before my eyes as sure as if these folks were pulling gold nuggets out of a stream, and you know there was no accounting for it.

A noted academic economist has proposed a way to put these so-called “non-market activities” like this into America’s system of national economic stats. William Nordhaus, co-chair of the National Academy of Sciences panel on such a solution said, simply, set the value of the berries at their market price, as if sold outside the national park. Get this calculation right and the destruction of natural resources could be reflected in an actual GDP figure. See, accounting for economic activity where no money changes hands may not be so tough after all.

Does GDP “measure what it measures?”


In fairness to the hardworking folks who produce GDP over at the BEA, they are open to finding new ways to value economic activity where no money changes hands. They have been working on options such as new indicators that might sit alongside old-style GDP methodology and more completely measure something like the Gulf spill. They may be up for a change, but the same cannot be said of many elected officials allied with powerful special interests. For instance, companies extracting natural resources for production are wary of the government carefully accounting for the environmental costs of their activities.

A national resource was being pillaged before my eyes as sure as if these folks were pulling gold nuggets out of a stream, and you know there was no accounting for it.

Finally, there is the argument that our GDP was never supposed to be indicator of all that matters in the first place. “It measures what it measures,” Landefeld writes near the end of his email. Even the grandfather of our national accounting system, Simon Kuznets, fretted about this when the granddaddy to GDP, Gross National Product, was put in place to measure production in the 1930s as a run-up to war. Kuznets said famously that the apparent simplicity of economic statistics can be misleading – and thus misused.

But like it or not, GDP stands for more than what it measures. When the government released its revised GDP figure covering the first months of the oil spill, it reported “growth” at a 1.6 percent annual rate. Markets and the media treated the release of the data as if the lab results were in on our national testosterone level. If we really want to know if our society is getting healthier – or sicker – we’ll need a wider battery of economic blood tests.


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