15 May 2018

What having a baby has taught me about GDP


Like many dads-to-be, I’ve been thinking about GDP a lot recently. The arrival of a new human means acquiring all sorts of stuff. I quietly grimaced on finding out we should expect to spend about £1,000 on new baby clobber, a figure presumably based on buying everything new.

Thankfully, the wonders of the digital economy mean that’s far from necessary. For instance, my wife and I got hold of a good-as-new sling from a woman down the road for a fiver, thanks to Facebook Marketplace. That for an item that you can spend as much as £150 (bear in mind that much of the infant accessory market is built on parents’ anxiety about not giving their little darling the very best in life).

This is where the GDP bit comes in. Having managed to get almost everything we needed for a small fraction of that £1,000 figure, my contribution to our gross domestic product is now several hundred pounds smaller than it would have been had I gone and bought everything shiny and new, even though we’ve got everything we wanted.  This is just one tiny example of the kind of free or low-cost transaction that technology is making much easier. And these transactions get lost in the leading measure of economic output.

It’s not a new problem. Speaking at the turn of the century, no less a figure than Alan Greenspan pointed out how GDP often offers a misleading picture of economic activity. For instance, people in hot places spend more on air conditioning – that spending comes up in the GDP figures, while people in cooler climes get the same effect without any economic transactions taking place.

By the same token, a huge range of domestic activities which clearly have huge economic value are not recorded. If I pay someone £200 to paint our front room, that’s added to GDP — were I to just buy the materials and do it myself the economy is not really any smaller, but GDP is lower.

Despite this, governments, economists and others fixate on the “growth numbers” as if they are a hard-and-fast diagnosis of the nation’s economic health, rather than a crude, incomplete estimate of most areas of economic activity.

One of the most widespread criticisms of this GDP fetishism is that it only measure economic output, and that is a poor proxy for human happiness.  As early as 1959 the economist Moses Abramowitz said we should be “highly sceptical” about treating GDP as a proxy for improved human welfare. That’s fine as far as it goes, but there is arguably a bigger problem with GDP: that it no longer does its intended job of measuring the size of the economy.

While it might have been a fairly handy approximate in the 1930s, when Nobel laureate Simon Kuznets was tasked with measuring the size of the US economy, GDP now looks like more of an anachronism with every passing year.

The problem with GDP is not just that commerce has gone online, but that so much of what is on offer – from news, to social networks, films, music – is either free to use or massively cheaper than before. As Tim Worstall recently observed on CapX, Facebook, Google or whatever email you use all contribute hugely to the economy without their true value showing up in GDP stats. Then there are the films one can watch for next to nothing on Netflix, or the fact most of us probably haven’t bought an album since about 2010.

And none of this is making the economy “bigger” in a GDP sense. In fact, streaming services like Spotify have led to a fall in GDP.

In his book The Zero Marginal Cost Society, Jeremy Rifkin posits a future where hyper-efficient machines have reduced the cost of producing a given good to zero, freeing up humanity to engage in more meaningful activities. We need not share his starry-eyed utopianism to see the enormous efficiency gains to be had in a more collaborative, sharing-based economy. For example, the idea of buying a car for oneself may very quickly be seen as a relic of the past, as people pop into a hired (probably driverless) vehicle for a few hours to run an errand.

Rifkin observes: “While producing and sharing virtual and physical goods at near zero marginal cost in the sharing economy on the Collaborative Commons vastly improves the economic quality life of millions of people, and decreases the amount of the earth’s resources needed to sustain a healthy society, it reduces the GDP at the same time.”

OECD economists Nadim Ahmad and Paul Schreyer note in a 2016 paper that calculating GDP is only going to get harder as consumption becomes ever more informal and digitally-enabled. Ahmad and Schreyer say that while problems with measuring output are not new, “what is new is the scale of the problem”.

“With new intermediaries and new modes of doing business increasing the size of more informal (sharing economy) transactions between households, conventional methods, which have hitherto provided rough estimates for these flows may no longer be appropriate,” they write.

One area where the measurement conundrum is particularly acute is in the recycling economy epitomised by Freecycle, a US group which has spawned a huge number of imitators. In the UK the spin-off site Freegle claims to have more than 2 million users, all giving and receiving stuff without money changing hands. And they aren’t just trading little knickknacks – take a look at any of these sites and you’ll find people giving away TVs, sofas, wardrobes and other valuable items.

How to measure this informal economy is, if not impossible, decidedly complicated. Membership numbers can give us a clue as to its scale, but there’s no simple way of gauging the value of the goods exchanged, or even how much the donor might have saved in time and effort from not having to take things to recycling or landfill. And that’s before we even get into the environmental benefits of using things a bit longer.

Where do we go next in terms of plotting all this growth? The answer is, partly, nowhere. Various projects have tried to get a better measure of output, consumption and plain happiness — from Bhutan’s well-known Gross National Happiness index, to the Genuine Progress Indicator used by several US states.

And we already have a veritable glut of other complementary statistics – employment, unemployment, wages, benefit claims, house sales, average rents, you name it. Hell, if you sign up to the right mailing list the Government will tell you how many chickens have been produced in a given quarter, if you like that kind of thing.

That doesn’t mean we should ditch GDP altogether, but economists will have to work hard to come up with a satisfactory way of incorporating the myriad new ways of consuming into a picture of the economy. After all, to paraphrase some advice I received recently re: the new arrival, throwing the baby out with the bathwater is not the thing to do.

John Ashmore is Deputy Editor of CapX.