by Jurgen Brauer, July 2003
Copyright: J. Brauer. No reproduction without permission.

Anyone who riffles through the business pages knows that economics has to do with numbers. Financial market performance, consumer confidence assessments, production numbers, housing starts, oil prices, wage indices, health care costs, booms and recessions, interest rates, inflation rates, foreign currency exchanges rates, and on and on until the eyes and brain shut down. Economics, we dimly realize, is important – after all, it has to do with whether you have a job and how much you earn – but most people quickly become bored to death with the numbers, the sheer volume of numbers. They drown in a sea of numbers, not knowing why these numbers are important, and what they tell us. People grow frustrated and give up trying to understand what economics is and how economies function.

I have the same feeling about baseball. A never-ending stream of numbers and statistics about players and teams and playoffs and world series. Not being a baseball fan at all, I also grow frustrated. The point is that people are not in fact incapable of assimilating even massive quantities of numbers, so long as they understand the theory behind them. I have athletes among my students who are quite versed with every improbable statistic their sport has to offer and yet they struggle with even elementary economic numbers. Attitude matters.

But this is not what I want to write this column about. I want to write about how numbers are constructed and how misleading they can be. The most prominent economic statistic is the Gross Domestic Product, GDP for short. Depending on the textbook you are reading, the definition runs something like this: GDP is the legal market value of all final goods and services produced in a country within a certain time period, usually one year.

Looking at "one year" is a mere convention. In the United States, GDP is recalculated every quarter (and then multiplied by four to see what the yearly equivalent might be). In fact, GDP numbers are reported every month of the year, because the quarterly estimates are revised, and then revised again.

We count the market value of "final" goods and services. By that we mean that if a mill grinds out wheat flour to sell to a bakery to produce bread, we cannot count the value of the wheat flour and the value of the bread because then we would be counting the wheat flour twice, first by itself and over again as part of the bread. So, we only count the value of the bread.

We count the value of "production," not the value of sales. Thus, at year's end when car manufacturers have thousands of unsold cars left in inventory, we count their value because they have been produced. The number we want is called gross domestic product, not gross domestic sales.

We count "legal" market values only. If you sell cocaine at 2am on a dark street corner, you are engaged in economic activity – there are sellers and buyers – but you are unlikely to report your income from drug selling to the Internal Revenue Service so that it can be recorded and taxes paid.

Finally, we count "market" values only. If you take care of your elderly parents at home, no money changes hands, no income gets reported, and GDP does not change. Clearly, you do produce something of economic value – care for the elderly – that would be counted if you shunted off your old folks to the nursing home. But the doing-it-yourself approach means the value does not get counted. Same thing for taking care of children at home, instead of by means of babysitters, nannies, and kindergartens. Same thing for moving your lawn yourself instead of hiring a lawn care firm. Same thing for cooking meals at home, fixing your car at home, cutting each other's hair at home, and growing your own vegetables.

You get the point. There is an awful lot of valuable economic activity taking place in the country that does not get counted. The GDP number that is so widely reported each month is a highly suspect number. When the egg heads on nightly TV fret about a tenth of a percentage point of GDP growth or decline, one must wonder what all the fretting is about when so much economic activity, legal and illegal, is not counted to begin with.

It gets worse. The economy is actually very easy to grow. Just employ all the unemployed people to cut down every tree in the country. That's obscene, Dr. Econ, you say. Why do that? Answer: when you employ people to cut down trees, they are counted as "producing" something. GDP increases, the economy grows, and every politician happily eyes the next election campaign on a platform of job creation, income growth, and a strong economy.

In reality, things are not quite so bad, but I am sure you can come up with your own list of undesirable economic activity that nonetheless gets counted to make GDP grow.

It also works the other way around. Undertaking some really desirable activities will shrink the economy. Suppose that all of us stopped overeating. The food industry would be hurt. So would food marketing and advertising, groceries chains, fast food outlets, and the restaurant industry. The medical industry would be badly affected because doctors, nurses, health care administrators, and insurance companies would need to deal with drastically smaller numbers of heart attacks, diabetes, high blood pressure, and other eating-related diseases. The pharmaceutical industry would lose billions of dollars of production. In a word, healthy people are bad for the economy – at least when the economy is measured in terms of GDP.
 
Numbers can be extremely useful. They can also be extremely misleading. A policy focus that is excessively guided by attention to GDP and GDP growth is misguided. We need to supplement the GDP measure by asking whether our people are healthy, are educated, are secure, and enjoy their lives.