What’s the matter with GDP?

Budget & Tax , Culture & the Family

Wendy Warcholik, Ph.D. | March 7, 2016

What’s the matter with GDP?

Wendy Warcholik, Ph.D.

When it comes to measuring the true progress of our society, this particular metric leaves a lot to be desired.

There is a holy number in America today. People worship this number on a daily basis. It has the power to cause the stock market to roar or to come tumbling down. This number even has the power to determine the fate of presidents. And yet, it is also profoundly anti-family.

What is this number? We call it Gross Domestic Product, or GDP.

Early in my career, I worked within the bowels of the U.S. Department of Commerce, constructing a very small piece of GDP. Since that time, I have learned that GDP is misleading at best and downright wrong at worst.

While economists pride themselves on being the most objective researchers in the soft sciences, the fact is, there is no such thing as objective data.

Imagine that a drug company just created a miracle drug that cures one of the most insidious cancers in existence. Sales of this very expensive drug would of course soar, directly adding hundreds of billions of dollars to the economy.

However, there is one important caveat. For every 100 people who take the drug, half will die within 24 hours of taking it. Incredibly, the drug’s morbid dual personality makes no difference to GDP. GDP goes up from the sale of this drug whether it ends up curing a person of cancer or immediately killing that person.

Do the bean counters at the Department of Commerce discount the value of the drug sold based on its high mortality rate? Of course not. That would be a value judgment. Yet, GDP already makes de facto value judgments on a number of economic activities; their very inclusion in GDP amounts to giving them a thumbs-up.

Adam Smith’s most popular work is considered by most to be The Wealth of Nations. But he was also a moral philosopher and penned the less-well-known Theory of Moral Sentiments. In fact, he wrote five revisions to this book up until his death. The great father of economics was not obsessed with simply describing the intricacies of pin manufacturing. On the contrary, he was also committed to explaining how free markets only work when populated by moral people.

Good for GDP, But Bad for Society

Let’s consider a few economic activities whose importance to GDP has been increasing in recent years, yet which actually impose more costs than benefits to society.

Take divorce, for example. We know that there are significant economic benefits to marriage that are reversed by divorce. For instance, there are noteworthy differentials between single and married men’s incomes. Brad Wilcox, a visiting scholar at the American Enterprise Institute, finds that married men aged 28 to 30 earn almost $16,000 more than their single peers; likewise, middle-aged married men earn almost $19,000 more than do their single peers.

More broadly, the development of no-fault divorce has ultimately changed people’s time horizons. When people aren’t forced to prove why a divorce is in the best interest of the man, woman, and child, they no longer think of marriage as a lifetime commitment.

As a result, declining marriage also means having fewer children. This is great for GDP in the short run since disposable income goes up. Fewer children, however, means that we have a population where old people outnumber young people. In the United States, for example, one-third of counties suffer from the phenomenon known as demographic winter. In these counties—including 27 of Oklahoma’s 77—there are more deaths than births. Demographic winter will feel like a slow-moving economic depression in these areas of the country.

Another example is legalized gambling, which is prevalent in many states. Gambling may be most representative of what Pope Francis calls “human beings as consumer goods.” It’s an industry built on deception to remove money from your wallet as quickly as possible. Studies have shown that casinos and other gambling venues are an economic black hole for the communities in which they’re located. The revenue generated from customers, who mostly reside in neighboring communities, is whisked away never to return.

Consider also the growing movement toward drug legalization. Colorado and Washington were the first states to legalize marijuana. Moving illicit drug sales into the open will certainly be a boost to GDP, which doesn’t include the black market. GDP will also get a boost from all of the increased activity among those in the drug rehab industry, bankruptcy lawyers, and counselors.

Beneficial to Society, But Not Included in GDP

At the same time, GDP fails to include some activities whose benefits far exceed the costs to society.

Consider homeschooling, for example. An estimated 1.8 million children are homeschooled in America today and it is growing at a rapid pace. Yet, outside of buying books and pencils, GDP has missed this movement entirely. Consider that the average American school teacher earns more than $56,000 per year. A mother’s in-kind contributions to her children’s education don't make it into GDP. And that’s not including the fact that she doesn’t need to maintain an expensive school building or need expensive administrative staff to push paperwork. At the same time, the evidence suggests that homeschoolers get better results than students in traditional public schools. GDP certainly does not factor in this important qualitative difference in educational outcomes.

Or think about elder care. As America continues to age, elder care providers will be in high demand. A home care aide can cost more than $40,000 a year. A skilled home nurse can cost more than twice that amount. Not many people can afford to stay in their home with such large costs.

As a result, we are already seeing a boom in children caring for their older parents at home. Often, a child will drop out of the labor force entirely in order to do this. This means that GDP is hit twice—first the reduction in paid wages to the person providing elder care, and second through the replacement of hired help with the in-kind provision of elder care.

Finally, religion. Religion is the institution we often look to when we want to move someone from welfare to work, from drugs to sobriety, from prison to civil society. Faith is often the path that these people travel. Bob Woodson, founder and president of the Center for Neighborhood Enterprise, does a lot of work with felons and drug addicts. He says that although he can’t explain it, faith is always the transformative element for people in despair.

Yet there is no room for “spiritual transformation” in GDP accounting—even though people clearly are more economically productive after such transformations. GDP measures church donations and the salaries of preachers and priests. However, simply accounting for these two items is just the tip of the iceberg when it comes to the positive impact and enrichment that religion has on the lives of Americans.

Overall, GDP leaves much to be desired when measuring the true progress of our society. We need new metrics that are based on the core institution that is the glue of society—the family.

Wendy Warcholik, Ph.D.

OCPA Research Fellow

Wendy P. Warcholik (Ph.D., George Mason University) is an OCPA research fellow. She formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”

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