The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

How Useful is GDP?


Will Wilkinson and David Henderson have been raising good questions about GDP. Will offers a provocative argument.

If all government spending on education became equivalent private spending overnight, GDP would stay the same (in the short term, before gains in education quality started to pay off in terms of higher productivity), though people would be better off. However, government spending on education, as inefficient as it may be, is giving people something they want and directly benefit from. Much (most?) military and security spending is not like that. My sense is that, despite the U.S.’s historically relatively modest level of government spending, the composition of U.S. spending is such that U.S. taxpayers get less of value in return for their tax dollars than do taxpayers in many places with higher taxes and higher levels of government spending. Which is to say that when using GDP per capita as a proxy for welfare, the U.S. comes off better than it should relative to, say, Canada or Sweden.

This will raise hackles, I’m sure, but it’s an argument worth thinking about. If we keenly felt that we had to pay for our own security, how much would we buy? One could argue that wouldn’t buy enough, in light of the public good that is a U.S.-led world order, and Will addresses that argument in turn.

Now, one could argue that U.S. military spending and hegemonic U.S. military power, makes it possible for the Canadian government to spend on health-care, from which the Canadian people derive some benefit (even if the service is not provided as efficiently as it could be), rather than on aircraft carriers, from which the Canadian people would derive basically no benefit (since the Americans have already taken care of it). I think this is almost certainly true, but it’s just another way of making the same point: Canadians are better off and Americans are worse off than their GDP stats suggest.

I’d put a slightly different spin on this. Many writers and thinkers express concern about how the United States does not do as well on various human indicators — life expectancy, educational attainment, etc. — as it does in terms of GDP per capita (PPP). Some see this as an indictment of the Anglo-Saxon market-driven economic model, as compared to the social market economies of northern Europe, etc. I’m struck, in contrast, by how well the U.S. performs in relative terms given that it is easier to converge than to lead, the extraordinary extent of family disruption (e.g., the number of 15-year-olds who live with both biological parents is much lower in the U.S. than in Sweden, France, or Germany), and a history of enslavement, segregation, and a massive influx of less-skilled workers from neighboring countries. We can also add the incredible number of people that we incarcerate to the list. One can argue that this artificially depresses our unemployment rate. But it also ravages the lives of millions, mostly men, overburdens a relative handful of communities, sharply reduces the number of marriageable men, and much else besides. My gut instinct is that the fact we do so well despite these handicaps — really, these crippling pathologies — is actually a reflection of the power of a mostly entrepreneurial economy with flexible labor markets.

On the question of mass incarceration, my sense is that Will is right to see it as a grave problem. Mark Kleiman’s excellent When Brute Force Fails describes the many pathologies of our criminal justice system, and how we can reduce crime while also reducing public expenditures. To understand what’s driving the extraordinary waste of money and human resources, check out this story from journalist Laura Sullivan.


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