GDP is supposedly the value of the goods and services an economy \u201cproduces,\u201d but there is a big conceptual caveat: GDP only covers goods and services that are bought and sold.\u00a0 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.<\/p>\n
So there is a gap between \u201coutput\u201d and \u201cutility.\u201d Boston money manager Jeremy Grantham highlights another\u00a0example.\u00a0 A barrel of oil pumped out of the Saudi dessert and a barrel of oil pumped from a hugely expensive deepwater well\u00a0300 miles off the coast of Brazil have the same \u201cutility,\u201d but if the Brazilian oil costs ten times as much to produce it will add ten times as much to global GDP.\u00a0 Grantham considers this a systematic measurement problem that will persist as the world\u2019s easy-to-find oil, copper\u00a0 etc. is produced and incremental supply becomes more\u00a0expensive in the future.\u00a0 Accordingly, in forecasting future GDP growth, he cuts it by 40 bps (0.4%) to 0.9%, to correct for this systematic \u201coverstatement.\u201d<\/p>\n
Here\u2019s the problem with Mr. Grantham\u2019s\u00a0haircut to GDP growth: he only does it for this one part<\/strong> of the economy, which creates a downward bias.\u00a0 To be valid, he would have to adjust ALL<\/strong> traded goods and services for the gap between cost and\u00a0utility, which is simply impossible to do\u00a0 And if it were possible, I think we would find\u00a0 that GDP is growing faster<\/strong> than the official figures, because information technology is providing more and more utility for less and less cost.\u00a0 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,\u00a0access millions of rare books via Google Scholar, and shop for used books throughout the U.S. on Amazon.\u00a0 Most of this can be done for low or zero cost, implying a huge increase in utility but a fairly modest increase in GDP<\/strong>.<\/p>\n This measurement problem relates\u00a0to \u201cwage stagnation\u201d and income inequality. We keep hearing from liberal economists such as the \u201cMarx Brothers\u201d (Krugman, Reich & Stiglitz) that average hourly wages have not increased since the 1970s.\u00a0 Reich claims wages of the typical worker have increased just 1% over the past\u00a0three decades.\u00a0 But consider Maria, who cleans offices in one of the buildings on New York\u2019s Sixth Avenue, pictured above.\u00a0 Before she starts her shift on the 9th<\/sup> floor, she chats with family and friends on a mobile phone.\u00a0 As recently as the late 1980s, virtually none<\/strong> of the Wall Street big shots who worked in that building had a mobile phone.\u00a0 (I know because I was there.) Obviously there are many such examples, and not just in electronics.\u00a0 Average people used to \u201cgo Greyhound;\u201d now they fly.\u00a0 Gourmet coffee was only available in a few fancy restaurants in the 1980s.\u00a0 Airbags were not standard equipment in U.S. autos until the early 1990s.<\/p>\n I don\u2019t want to repeat Jeremy Grantham’s error.\u00a0 Robert Reich could still be correct that wages have stagnated IF<\/strong> these dramatic improvement in living standards were offset by big declines elsewhere in the family budget.\u00a0 But I can\u2019t think of too many, except for the rise in commodity prices since 2002, which will be substantially reversed by fracking.<\/p>\n All of which is relevant to the alleged problem of income inequality.\u00a0 Supposedly most of the increase in GDP in recent decades “went” to the top 1% or\u00a0even top 0.01%.\u00a0 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\u2019s living standards.\u00a0 The benefit to the Maria\u2019s of the world is not properly measured while the huge incomes of Bill Gates, Larry Ellison, Sergei Brin et al.<\/em> are.\u00a0 The misleading \u201czero sum\u201d framework of Gini coefficient discussions of inequality compounds the misperception that\u00a0tycoons are benefiting at the expense of everyone else.\u00a0 In the real world, we all benefit.<\/p>\n In reality inequality is not a problem that needs to be, or even could be, addressed by raising taxes. \u00a0That would only kill the golden goose, as it did for a while in the 1970s. As Drew Matus of UBS told Bloomberg\u2019s Tom Keene recently, nearly all of the great technological innovations of the last fifty years occurred in the U.S..\u00a0 Tax hikes that dry up venture capital and over-regulation that squelches innovation will enrich Washington bureaucrats but hurt the Maria\u2019s of the world.\u00a0 Washington bureaucrats are already doing very well\u2014far better than\u00a0average consumers.\u00a0 Federal spending has climbed $1 trillion since 2007, and half of the ten richest counties in the U.S. are located near Washington DC.<\/p>\n Copyright Thomas Doerflinger 2012.\u00a0 All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":" GDP is supposedly the value of the goods and services an economy \u201cproduces,\u201d but there is a big conceptual caveat: GDP only covers goods and services that are bought and sold.\u00a0 If I help my daughter with her algebra, it … Continue reading