June 13, 2013

Newscom

Americans have been frustrated with the country’s economic performance for quite a while now. But how can we improve economic policy when we don’t even know what we’re trying to improve?

Many decision makers and reporters use Gross Domestic Product as a measure for the economy. But Heritage Foundation expert Derek Scissors argues that GDP, which counts one year’s production, is a bad measure of economic health. Instead, he says, we should measure our national wealth.

The GDP accounts for all sorts transactions that are not necessarily valuable to our economy. For example, Scissors points out, “if the government spends more than it takes in, this adds to GDP, no matter what the spending is used for and no matter how it is financed. GDP says government borrowing is always good.”

Or consider this:

Using GDP also leads to some fairly silly practices. If a house is built, it adds to GDP. If it is then torn down a year later, that also adds to GDP (because people were paid to rip it down). Unbelievably, you can just keep building and tearing down forever, and it will always add to GDP.

Scissors argues that because combined household wealth accounts for debt and other decisions, “it’s a much better reflection of what our economy really is.”

Do you think we should continue using the GDP to measure our economy?

Comments (7)

edward - June 13, 2013

It’s true that GDP is not a great measure of total activiy because of what is left out and what is put in that skew the measure in one direction or another. However, there is a tie between wealth and income. An increase in income (GDP) leads to an increase in wealth.

Thus, I would say that while the GROWTH in income is an imperfect measure, WEALTH may be even worse. How would you value land, for example. Its value in ones portfolio might go up, but there is no more land before the increase than before. How are we wealthier? How do you treat depreciation of physical assets?

Point is, all measure of economic activity are flawed and thus imperfect. Measures of national income are pretty readily available and their defects are known and can be accounted for.

Madman - June 13, 2013

There isn’t anything wrong with the GDP being used as
a measure I just subtract the deficet spending from it and that leaves it under water for the last 5 years not to hard to figure that out.

De Ette Moon - June 13, 2013

Before I decide, how would one measure national wealth?

Joan Cummins - June 13, 2013

NO! We need a truly accurate measure of the U. S. economy.

Steven Johns - June 13, 2013

The ratio of US debt to GDP may be more indicative of economic health than just GDP. Debt can be good if credit is issued wisely in a way that will increase real tangible fungible assets down the road, but to much over leveraged money instruments could make the GDP look robust, just to collapse later when securities loose value. Wealth is real assets that have an inherent value to the population because of they are actually needed by us. We actually need oil refineries and hydroelectric dams that have been built by the US Treasury issuing T bonds through New York Banks, so that is good debt that will create a net gain of wealth later. Value based on real physical assets that the population will continue to need carry pretty stable demand over time, but as we found out in 2007, too many unneeded MBSs don’t hold value so good when the bubble pops. International money systems like the Federal Reserve are systems designed to create money, but you also have to build real physical assets of wealth by the US Treasury issuing T bills to create real physical assets so that there is some real value for all that money to represent or your big bang for the buck leveraged GDP could be dubious in actual value. You need to have a healthy balance of money and physical assets for the money to represent without resorting to too much dumb cumbersome regulation, but just a little very smart regulation is not necessarily a bad thing for healthy balance.

Holly Chapo - June 16, 2013

As defined by Derek Scissors, GDP is not a good measure of our economy. It seems that too much is left out of this number. Should we not include the actual rate of unemployment? What about the housing situation? What about incomes – are they rising, falling or remaining stagnant? How about looking at the number of employed persons in the market currently compared with previous years keyed to population growth? What about the debt that is so monstrous? Does that not effect the status of our wealth? What about student loan debt? That can hardly be regarded as wealth. And what about trade deficits? Do they count for something? I suppose there are other areas that may matter. These are what are most familiar.

Stephen Patterson - June 20, 2013

We need a more reasonable method other than just the GDP index.

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