Journal Entry
(posted by Jim Henley)
Lee at Thinking Reed takes a whack at everyone’s favorite macroeconomic pinata, the awfulness of GDP as a meaningful measure of national well-being, or wealth, or much of anything else. I would add another huge problem: macroeconomics lacks even a primitive form of national balance-sheet accounting. It’s a truism among investors that income statements (”the P&L”) are for suckers: cash flow and the balance sheet - the summary of assets and liabilities - give you a better picture of the real health of a company.
In standard public-company accounting, if your assets take a hit, it means a negative adjustment to your income statement. “Beat up the balance sheet, and your P&L must be right,” my accountant friends say. Now let’s imagine that a corporation’s physical plant was destroyed by a massive hurricane. The damage depreciates the physical asset, and the value of that depreciation flows to the P&L through an adjustment. But let a hurricane destroy the physical plant of an entire city or region, the way Katrina and Andrew before her did, and on the national level we lack any method for conveying the year’s blow to national wealth the disasters represent to Gross Domestic Product. That’s how the US and Baby Sadr and various Sunni revanchists and Shiite militias can spend years destroying everything in Iraq but the blast walls, reducing the so-called electrical system to sociopolitical Galvanism but journalists and politicos can speak with a straight face about Iraq’s economy “booming.” (Iraq has had many “booms” since 2003, as some quality time with A Google will show.)
This just the GAAP version of the Broken Window Fallacy, yes. But it demonstrates, I think, that you don’t even have to think of environmental damage and such as gauzy abstractions that macroeconomics fails to comprehend because they are too rarefied and spiritual for the field. Rather, national accounting is simply that primitive.
June 29th, 2008 at 9:43 pm
[...] found the Bastiat passage below while putting together an AOTP post on the crudeness and inadequacy of national accounting. I also found, as sure as summer, that Iraq is in the middle of yet another economic [...]
June 29th, 2008 at 10:53 pm
[...] AngelicaDaniel KofflereditorFreeDemjacksonJim HenleyKevin CarsonmarieMonaPaige « Journal Entry [...]
June 30th, 2008 at 2:04 pm
Wonderful–especially the GAAP version of the broken window fallacy.
In the corporate world, as you say, the accounting system at least deals with the outright destruction of assets.
But under the Sloan accounting system described by William Waddell and Norman Bodek in The Rebirth of American Industry, there is quite a bit of calculational chaos insofar as stuff produced to inventory, which meets no actual market need, counts against the balance sheet.
The problem with the GDP, as with Sloanist corporate accounting, is that all the inputs and intermediate production stages to produce a given output are counted as an asset. So the more wasteful inputs and unnecessary Rube Goldberg stages of production are required to produce a given unit of personal consumption, the higher the GDP–even when actual quality of life is constant.
The more wasteful and inefficient the system, the higher the GDP; but on the other hand, an order of magnitude increase in efficiency that enabled people to consume at present levels with only an 8-hour work week would result in a catastrophic implosion of GDP.
June 30th, 2008 at 10:55 pm
We have been going round and round this subject for months on another blog I frequent, jtaplinsblog. Your references will be invaluable to our discussion.
Meanwhile, I had already seen the link you supplied for “booming” and wonder why you didn’t cross reference it to one from an opposing perspective rather than just challenging us to goolge for ourselves? At the same time, today’s alternet.org featured a tomsdispatch post that certainly filled the bill.
July 1st, 2008 at 8:05 am
[...] post on the problems with using GDP as a measure of economic (let alone societal) well-being, and Jim Henley’s comments on the same, together with the very awesome RFK (no, really) quotation that AOTP’s [...]
July 1st, 2008 at 8:12 am
[...] post on the problems with using GDP as a measure of economic (let alone societal) well-being, and Jim Henley’s comments on the same, together with the very awesome RFK (no, really) quotation that AOTP’s Jackson [...]
July 1st, 2008 at 7:25 pm
[...] a must-read. And I’m not just saying that because my favorite libertarian blogger Jim Henley linked to one of my posts there. Maybe it’s also because of my own warring inner liberal and [...]
July 3rd, 2008 at 9:12 pm
Okay, devil’s advocate: If these points are addressed elsewhere, I don’t need a response…I’m just throwing out ideas.
1) The stock market (adjusted for interest rates) gives us some idea of national assets. Of course it is influenced by speculation, limited inclusion, and mass-delusion, but it should generally be based on our best guess of the future productivity of the assets involved, so it’s a reasonable estimate of the value of national assets.
2) Sure the “broken window” phenomenon might produce a temporary boost to GDP, but it can’t produced a sustained increase in GDP…so year over year increases in GDP can be taken a sign of real growth.
With that being said, I think the fatal weakness of GDP is its failure to account for non-monetarized factors in our life. Still, other measures (e.g. productivity per hour of work) may help to account for things like that.
August 28th, 2008 at 11:18 am
go inside now…
I Have To Agree, You Said it well…