What Counts in the GDP?

Here are some of the things that count positively toward the GDP.

Pollution. If groundwater is polluted, and we have to buy bottled water at a thousand times the price of tap water, the GDP rises. Because of enormous cleanup and legal costs, the oil belched by the BP Deepwater Horizon well in the Gulf of Mexico will contribute far more to the GDP than had that same oil actually made it to the refinery and been sold as gasoline, diesel, and other products. (The Exxon Valdez oil spill had a similar effect on the GNP two decades ago.) Cleaning oil off the beaches and wildlife can cost tens of thousands of dollars for every $100 barrel of oil cleaned up.8

Crime. GDP increases as property loss claims arrive and people buy replacements for stolen goods. It increases as they install alarms and bars or hire guards. New prison construction, prison operating costs, and other crime costs all add to the GDP. We're actually better off with safe communities where such “defensive” expenditures are unnecessary. Crime requires defensive expenditures, which should be subtracted from the GDP. A recent Iowa State University analysis showed the social costs of a murder at $17.25 million.9

Health damage. Another “defensive” expenditure includes many health care costs. For example, over 350 billion cigarettes were sold in the United States in 2006, adding to the GDP.10 During the same year over $10 billion was spent treating lung cancer in the United States, which also added to the GDP.11 Instead of subtracting the cost of smoking-related cancer, the GDP treats it all as a positive benefit, the same as wheat production.

Family breakdown. Divorce may not be good for families, but it is good for the GDP. A divorce can cost from $7,000 to $100,000.12 That total usually includes the lawyers' fees, the establishment of separate households, and often the cost of therapy.

Debt, foreclosure, and bankruptcy. When people or the government borrow too much and personal or national debt rises unsustainably, the GDP climbs. Even bankruptcies and foreclosures count positively in the GDP, since they incur legal costs, moving expenses, and replacement of lost housing or possessions. The average bankruptcy cost in 2010 was between $700 and $4,000,13 and with an estimated 1.5 million Americans declaring bankruptcy that year, it adds up.14

Paper transfers and bursting bubbles. New “financial products,” such as derivatives and credit default swaps, were at the heart of the 2008 financial crisis, driving worldwide recession. These “products” count highly positively in the GDP because they increase the incomes of insurance companies and investment banks. Yet their value can just as suddenly vanish, as happened in 2008 when packages of subprime loans suddenly had no buyers. The financial services account was the fastest growing part of the GDP, as income from the sales of bundled mortgages and derivatives ballooned. Such bubbles are seen as great economic successes when they should more properly be measured as harbingers of disaster. American International Group's income from selling credit default swaps soared in 2006 to hundreds of millions of dollars, adding to the GDP. By 2009 the company lost over $61 billion due to the same credit default swaps.15 Even the Bureau of Economic Analysis is considering changes.16

Increasing scarcity. Depletion of natural resources is a cost to future generations. Yet scarcity is often reflected positively in the GDP. For example, as U.S. and global oil reserves have been depleted, gas prices have risen, increasing the GDP even while raiding the wallet of anyone with a gas tank to fill. The GDP gives no clue as to whether the rise in final market sales value is due to scarcity, productivity, or market manipulation. Paying four dollars for a gallon of gasoline at the pump adds twice as much to the GDP as paying two dollars per gallon. Sure feels good adding more to the GDP.

Risk. The GDP does not take into account the risk of catastrophic costs. Retail electricity sold from nuclear power plants counts positively in the GDP. Expenditures attempting to minimize or clean up the Fukushima nuclear disaster also count positively. Due to the tremendous longevity of deadly nuclear isotopes, such as plutonium, the Environmental Protection Agency ruled that nuclear waste must be safely contained for one million years.17 The associated unknown risks and costs count for nothing in the current GDP.

Now, consider a few important things that the GDP does not count.

Nature. Natural resources are the basis for many of our most productive economic assets. Seattle's drinking water, for example, is filtered by the forest of the upper Cedar River watershed. Its quality far exceeds drinkability standards. This saves the city $200 million in costs for a needless filtration plant. The valuable service of natural water filtration does not count in the GDP. But building a filtration plant and raising water prices to pay for it would count. Building a levee for New Orleans counts, but the greater value of hurricane protection provided by natural coastal wetlands does not. Buying a boat to catch fish counts. The habitat that produces the fish does not count. The obvious economic goods and services that nature provides every year to Americans do not count in the GDP.

Sustainability. The GDP says nothing about sustainability and does not discern whether activities contributing to the GDP are sustainable. The Atlantic cod fishery was the world's largest food fishery for over five hundred years. A few decades of overfishing caused the fishery to collapse. Overfishing counted more positively in the GDP in a single year than fishing at a lower sustainable rate. The GDP is incapable of distinguishing between the unsustainable demolition of a fishery and a sustainably managed fishery, such as the Alaskan salmon fishery.

Exercise. We all know it's good for our health, but it only counts if we pay to go to the gym or otherwise spend money. That daily walk we try to take may be good for our health, but it's a waste of time as far as the GDP is concerned.

Social connection. It's the most important thing we can do to be healthy and happy. But unless money is spent, friends and family are also a waste of time. The time Dave and John spend with their sons contributes nothing to GDP. Unless they are buying the kids something. That counts.

Volunteering. It's the glue that holds communities together, and it will be increasingly important as budgets for social services tighten. But if it's unpaid, it counts for nothing. It's just another GDP waste of time.

Housework. Domestic work isn't counted, at least not by the GDP. Hire a nanny; that counts. Hire a maid; that too. Hire a gardener or carpenter; you're contributing to GDP. Do it yourself, and you're slacking in your duties to our nation's preeminent measurement.

Price and quantity effects. The GDP does not separate between price effects and quantity effects. For example, if a company doubles the price of a car, it shows up in the GDP just as it would if the company built and sold two cars at the former price. This means the GDP is deeply flawed even as a measure of production, its original purpose.

Quality. One of the long-standing critiques of the GDP was the lack of a quality adjustment. Without adjusting for quality improvements, the GDP overvalues lower quality higher priced goods and undervalues goods of higher quality and better performance. The dumber, slower, more expensive computer added more to the GDP than a smarter, faster, cheaper computer. Recently, the BEA implemented corrections for quality improvements for some goods including computers, software, and in 2011, communications equipment. This is done using a quality-adjusted price index calculated by the Federal Reserve Board. Yet for the vast majority of goods and services, quality improvements, which benefit both producers and consumers, still reduce GDP.

Just imagine you're stuck in a traffic jam, burning gas and choking on exhaust, requiring you to pull off and fill up the tank. The traffic jam has added to the GDP. If you got into a wreck, totaling your car and increasing the cost of your insurance while the wreck caused an even bigger traffic jam for everyone else, the GDP would rise even more. And if you were injured in the wreck and sent to the hospital for weeks of recovery, the GDP would rise still higher. And if you'd had an expensive divorce that morning, and your house burned down that evening, requiring legal fees, insurance claims, and more new purchases, you would have had a completely stellar GDP day! Congratulations!

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