Friday, October 14, 2011

What if we are measuring economic output incorrectly?

Imagine that your compass was 20 degrees out of alignment.

Imagine you didn't know that.

Good luck finding the North pole.

Now imagine life if our economic compass were 20 degrees off.

That's what Ezra Klein and Uwe Reinhardt are suggesting in two coincidentally synchronous articles ...

Ezra is responding to a NEJM report on the economic impact of RomneyCare (Massachusetts' health care reform, the template for ObamaCare):

Health care and jobs: Mixed news from Massachusetts - Ezra Klein - The Washington Post

... On the surface, the NEJM study looks to be great news for Massachusetts: health care jobs in the state have grown much faster than in the rest of the country since its reform law passed...

... But the study actually isn’t good news when you look into what type of health jobs propelled this strong growth. Most of it, the study authors conclude, came from an increase in administrative positions, jobs like billing specialists and office support staff. It’s quite likely that more people with health insurance mean more resources necessary to bill insurance companies and administer the business of health care.

An increase in those kind of jobs is great for employment. But it’s not so great for health care costs. It’s part of the reason that American doctors have administrative costs four times higher than their Canadian counterparts. It likely contributes to growing health care costs that have eaten up nearly a decade worth of increased earnings....

Ezra doesn't make the connection directly, but in the traditional model of measuring GDP this increase in administrative activity is economic growth.

Let that sink in a bit.

Now read Reinhardt (emphases mine)...

Uwe E. Reinhardt: Make-Work and the G.D.P. -

... Suppose some evening a group of bored and mischievous teenagers slash tires on a number of cars in the parking lot of a shopping center. Distraught car owners call sundry nearby garages to send someone to fix the damage on the spot or tow the cars in for repairs. That work is speedily done, and the cars are ready for use again. The car owners pay the garage owners sizable repair bills.

This fictitious event leads to a number of questions:

1. Did the garages deliver value to the car owners?
2. Was gross domestic product increased or decreased?
3. Were the car owners better off, after paying the repair bill?

My answer to the first question is yes and to the second yes, as well, unless the garages had to give up other jobs with revenue equal to or greater than what they earn coming to the car owners’ rescue. To the third question, my answer is, it depends....

... In many instances, Person (or Enterprise) A delivers great value to Person (or Enterprise) B to extract the latter from a situation into which B should not have been put in the first place. We count in G.D.P. the value added by the extrication but do not detract the value destroyed by being driven into a precarious situation.

... Now think about the almost incomprehensible tax code that Congress has imposed. Think of it as a disaster of human making. To cope with it, individuals and businesses hire legions of lawyers and accountants who have deployed their human capital to understanding this bewildering code. These tax experts work hard and often brilliantly to shield their clients from taxes, usually achieving tax savings that are multiples of what they charge for their services...

... In many ways, our health care system mirrors our tax code — especially in its financing and health insurance facets. These can be made so complex and have been made so complex in the health care system in the United States that many decision makers in health care — patients, physicians, hospitals, employers and so on — need in-house or external consultants to find their way through the maze.

.. An academic health center may have a dozen or two dozen employees devoted to compliance. Such a center may employ several hundred billing clerks to cope with the myriad of private health insurance plans and policies, each with its own coverage, nomenclature and payment rules and requirements for prior authorizations...

... At Yale University I had the privilege of sitting in the classroom of the lateJames Tobin, an early Nobel laureate in economics and one of our profession’s greats. He distinguished between “enjoyable” and “nonenjoyable” G.D.P., with the latter including military spending or other “value added” from coping with either externally inflicted or self-inflicted damage done to our society. I often think of our revered professor when I contemplate the composition of this country’s G.D.P.

More than twenty years ago it occurred to me that different economic activities had different secondary multipliers. My focus was on the multiplier effect of military vs non-military activity. I was so impressed by my cleverness I wrote a letter on it to, I think, Time magazine. Of course it vanished, and subsequently I thought my "insight" was trivially obvious.

Maybe I shouldn't have given up so easily.

What Reindhardt describes is an aspect of the increasingly AI mediated "complexity wars". This is vast economic activity that is both destructive and creative.

We build castles and we tear them down.

We count this as economic activity.

What would our GDP per person growth look like over the past thirty years of innovation stagnation if we stripped out this "nonenjoyable" GDP activity?

Might explain a few things.

This is important.

1 comment:

Anonymous said...

There is a lot to unpack here, especially with regard to the distinction between overhead GDP in supply-constrained vs. demand-constrained times.

One important point here is that it is really only an important distinction in the long run if (a) the proportion of overhead is increasing over time, and either (b) we haven't reached diminishing returns as far as other wealth-creating activities or (c) there is a reasonable way to distribute the increased leisure in such a way as to allow full employment.

Not sure how coherent I am atm. But trying to figure out if we are drowning in overhead or not is something which is very fruitful to think about.