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Ed Lotterman: Know GDP’s limitations in measuring well-being

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When my doctor said, “We need to get you a fine-needle aspiration as soon as possible,” I immediately knew that I was entering a different chapter in my life. Nine years later, it is clear that my neck carcinoma brought me unexpected gifts, a minor one of which was yet another example of the limitations of Gross Domestic Product as an economic indicator.

One of the frustrations of teaching economics is that after spending decades trying to help people understand basics, including common indicators of how an economy performs, you see that toil blown away by ignorant people with large audiences. Sometimes they are politicians. Often they are journalists.

A few weeks ago, when the U.S. Commerce Department released a tabulation of the nation’s GDP for the fourth quarter 2020, I encountered the following sweeping assertion: “Economists agree that GDP is by far the best indicator of how the economy is doing.” No, economists don’t agree on that. GDP is simply a measure of the value of goods and services produced. Yes, it is very useful and important. But, like any other indicator, it has limitations and these must be understood for the information tabulated to be useful.

In fact, over 40 years, I have never read nor heard any trained economist saying GDP was “by far the best” indicator of anything. I have taught undergrad macroeconomics from a dozen different texts and never encountered that. Moreover, every text devotes several pages to detailed exposition of the limitations of GDP as an indicator, warning students to not read more into an announced GDP figure than is warranted. Yet sweeping assertions in the media about the overwhelming primacy of GDP continue to show up with regularity approaching that of tides.

One also regularly encounters articles, often written with an air of someone uncovering a plot to assassinate 100 world leaders, denouncing GDP as some dire link in an iniquitous chain to enslave humankind. What then follows is a recitation of limitations of GDP that could have been taken from any of the hundreds of thousands of intro econ texts sold each year over the past several decades. Every macro student I have ever had needed to master that list before taking their final exam. I think that is true for most other profs.

The limitations of GDP could take a whole column in themselves. Briefly, the indicator does not consider resources used up in production. It does not include nonmarket goods or services such as growing your own food, taking care of your own kids or finishing off your own basement. Pay someone else for these and it does count.

GDP does not consider the actual human benefit or output, only dollars at which it is sold. Whiskey and school lunches both go in at the money they cost. Orthopedic surgery and undertaker’s fees resulting from drunken driving count as much as equal dollars spent on playground equipment or repairing bad heart valves.

GDP does not take into account pollution or other external costs of whatever was produced and is used. One goes on and on.

However, GDP also misses benefits -- like treatments for diseases that would have been fatal a few decades ago and improvements in the durability or performance of consumer goods -- making comparisons to earlier times problematic.

My neck cancer was treated with surgery, chemo and radiation. These basic measures all were known decades ago, yet all have been improved in ways that increase effectiveness. Side effects of chemo are better-controlled. Radiation is more precise.

The same is true for most cancers. It is still a terrible diagnosis, but the proportions of patients who survive and enjoy many years of additional life add up steadily. Ditto for stents and other heart interventions that have prolonged life for millions. Ditto for cataract operations and vitrectomies that allow myriads, including me, to see, read, live and work, compared with a time when we might have been severely impaired as people were since time began.

Ditto for neonatal care that keeps very premature babies alive and well. Ditto for joint replacements that let seniors stay active and productive rather than hobbling in agony as they did when I was a kid.

Medical breakthroughs are not the only sort of improvements that don’t get picked up in GDP. I have an 18-year-old pickup that is approaching 150,000 miles with original water pump, alternator, starter, air conditioning and so on. The oil pan and valve covers have never been off. It is far more reliable at this age and mileage than my mother’s 1949 Chrysler was right off the assembly line and far better than my first brand-new car in 1980.

When the original tires on the 1963 Volkswagen that my sister and I drove lasted 22,000 miles before replacement, it was the talk of the local cafe where our mechanic had coffee. Now 70,000 miles is not unusual on any car, nor is seven years of service from a battery rather than two or three.

When is the last time you had to get a TV repairperson to your house, or brought your stereo to a shop to get a tube replaced? The improvement in image and sound quality has been enormous. Prices have dropped. In 1983, an Apple IIe with two floppy drives cost $1,600 with a special faculty discount. An Epson dot-matrix printer was another $400. Now we buy iPhones and tablets that blow those technologies away in performance at a fraction of those costs. Printers, meanwhile, are going the way of the fax machine.

Does this all mean we are in some sort of consumer’s paradise? No, drivel televised in HD is still drivel. Dollars run short. Loved ones die. Life still involves much of Thoreau’s “quiet desperation.” Life is still life.

Yet I feel blessed to have lived in an era with anesthesia, antibiotics, reliable contraception, repairs for torn retinas, meds to ameliorate hypertension plus decades-old vehicles that still pop right off at 25 below. I like being able to send a friend in Brazil a quick email, track down a comrade from Vietnam in 1970, and read the obituary of my favorite teacher. And I am glad to be cancer-free nine years after being told I had about a 50% chance of making five years. There are concrete ways in which our lives really are better, and much of all this fails to show up in any economic indicator.

St. Paul economist and writer Edward Lotterman can be reached at bismarck@edlotterman.com

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