3:42pm

Fri October 28, 2011
Planet Money

Why GDP Is Like GPA

Originally published on Thu May 31, 2012 9:53 am

GDP contains multitudes. Everything we manufacture. Every plumber who fixed a sink, every accountant who carried the one and divided by five — all the goods and services we produced.

It was invented by a guy named Simon Kuznets during the the Great Depression, when everybody wanted to know just how bad things were.

Now the number is put out by Steve Landefeld at the government's Bureau of Economic Analysis.

"It was designed to do exactly what it does today, which is to pull together all the diverse pieces of economic data," he says. "Some of which are going up, some of which are going down, some of which double count one another — into one comprehensive and consistent picture of what is happening to the economy."

The latest number: $15.2 trillion per year, give or take. A new record high, even after adjusting for inflation.

But just giving out GDP is like talking about your GPA in high school.
Sure, it's useful to apply to college. But your GPA paints a limited picture of what kind of student you really are.

Likewise, there are limits to the usefulness of GDP.

For instance, it's skewed by how well people are the top are doing. So when GDP per person goes up, a lot of us might not feel it.

"The share going to the top 1 percent as we talk about it today has grown," Landefeld says. "That has made the simple average of GDP per capita less meaningful to the average person. It's a real number, but it perhaps doesn't refelct what people are seeing in their personal economic situation."

Also there's that list of what goes into GDP, and what doesn't.

If you buy a tomato, that increases GDP. But if you grow a tomato — if you spend hours watering and weeding — that doesn't get included.

If you pay a nanny to take care of your kids, that's GDP. If you stay home to take care of your kids, that's not GDP.

Environmentalists like to point out that industries can boost GDP by doing damage to the environment. Herman Daly, an economist at the University of Maryland, points to the Gulf oil spill. BP spent billions on clean-up.

"All of the expenditures on cleaning up the oil spill were then added to GDP," Daly says. "Now that's asymmetric accounting. You're not counting the negative, and you're adding in the positive."

So even though the loss of oil revenue and shrimp sales were factored into GDP, nothing was subtracted for the oiled pelicans. Nothing was removed for the environmental damage.

Could you factor environmental effects into GDP if you wanted to?

Robert Mendelsohn, an economist at Yale, just put a real dollar figure on air pollution. It wasn't easy. He included not only things like premature death caused by pollution, but also what value people put on the loss of visibility.

Researchers showed people pictures of the Grand Canyon, with and without smog, and asked how much is it worth to have that pristine view.

Then they add up all the costs. Mendelsohn estimates that if you subtract pollution and global warming costs, GDP could be 2 percent lower than it is now.

I tried out all these criticisms of the GDP on Steve Landefeld. He was polite. He said they do occasionally tweak the way the GDP is calculated. But he said right now, it's hard enough to measure all the stuff that actually has price tags.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

MICHELE NORRIS, HOST:

By one measure, the U.S. economy has completely recovered from the last recession. GDP, the nation's gross domestic product, is the sum total of everything the U.S. produces, and it's now back to where it was before the financial crisis. Of course, the country has more people now and millions of them are unemployed.

And as NPR's Robert Smith reports, GDP is not a perfect number.

ROBERT SMITH, BYLINE: Oh, GDP. One number that contains multitudes. Everything we manufacture. Every plumber that fixed a sink or accountant that carried the one and divide it by five, all goods and services are included. It was invented by Simon Kuznets during the Depression, when everyone really wanted to know how bad it was.

Now the number is put out by Steve Landefeld of the government's Bureau of Economic Analysis.

STEVE LANDEFELD: It was designed to do exactly what it does today, which is to pull together all the diverse pieces of economic data. Some of which are going up, some of which are going down, some of which double count one another, into one comprehensive and consistent picture of what was happening to the economy.

SMITH: And what does that comprehensive picture look like this week? A new record high. But just giving out the GDP is like talking about your grade point average in high school. It's useful, especially if you're applying to college. But like your grade point average, it paints a limited picture of who you really are.

Likewise, there are omissions in the GDP. For instance, it's skewed by how well people are the top are doing. So, the government can report that the GDP per person is going up. And it is going up, but a lot of us might not feel it.

LANDEFELD: The share going to the top 1 percent, as we talk about it today, has grown. That has made the simple average of something like GDP per capita, personal income per capita, less meaningful to the average person. It's a real number, but it perhaps doesn't reflect what they're seeing in their personal economic situation.

SMITH: Also, there's that list of what goes into the gross domestic product. So, if you buy a New Jersey tomato that increases the GDP. But if you grow a tomato, spend hours watering and weeding, that does not get included. If you pay a nanny to take care of your kids, GDP. If you stay home with the kids, no GDP.

LANDEFELD: Yeah, that is hard to calculate.

SMITH: And not to pile on poor number, but some people think that it includes too much. Environmentalists like to point out that a lot of industries are boosting GDP by doing damage to the environment. These are hidden costs.

Herman Daly is an economist at the University of Maryland. He points to the Gulf oil spill, for example. BP spent billions of dollars on clean-up, containment booms, people to pick up tar balls.

HERMAN DALY: All of the expenditures on cleaning up the oil spill were then added to GDP. Now, see, that's asymmetric accounting. You're not counting the negative and you're adding in the positive.

SMITH: So, even though the loss of oil revenues and shrimp sales were factored into GDP, nothing was subtracted for the oiled pelicans, nothing was removed for the environmental damage itself.

So even if you wanted to do this to GDP, is it possible? It's easy to measure when someone sells a tuna fish sandwich. How do you do the accounting for a dead fish in the wild? There's actually been some progress on this. Robert Mendelsohn, an economist at Yale, just put a real dollar figure on air pollution. And it wasn't easy. You have to include everything.

ROBERT MENDELSOHN: The worst thing that happens is we kill people prematurely. So illnesses, all the way down to an asthma attack. And then we also looked at ecosystem damages, loss of visibility.

SMITH: So, you mean the view over the Grand Canyon, if it's hazy, that has a cost associated with it?

MENDELSOHN: Yes, it does. That's actually part of this study.

(SOUNDBITE OF LAUGHTER)

SMITH: Researchers showed people pictures of the Grand Canyon, with and without smog, and asked how much is it worth to have that pristine view. And then they add up all the costs - the deaths, the asthma, the view. You can, in theory, deduct that total from GDP. Mendelsohn estimates if you subtract pollution and global warming costs, GDP could be 2 percent lower than it is now.

So, I tried out all these criticisms of the GDP on Steve Landefeld, the man in charge of the number. And he was polite. He said that they do occasionally tweak the way the GDP is calculated. But he said, right now, it's hard enough to measure all the stuff that actually has price tags.

Robert Smith, NPR News, New York. Transcript provided by NPR, Copyright NPR.

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