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Techdirt Reading List: GDP: A Brief But Affectionate History

from the i-wouldn't-be-quite-so-affectionate dept

We’re back again with another in our weekly reading list posts of books we think our community will find interesting and thought provoking. Once again, buying the book via the Amazon links in this story also helps support Techdirt.

I’m a GDP skeptic. I think it’s a ridiculous concept that is poorly measured and much more meaningless than most people realize. And, I think it can be quite damaging at times too, because we optimize for what we can measure, even if it’s not what we should be optimizing. We see this in so many areas. If there’s a number, our brains seem to turn to mush, even when people say that the numbers aren’t necessarily the most important thing (e.g., look at the way people use “patents” as a measure of how innovative society is — it’s a disease). I’m certainly not alone in being a GDP skeptic either — debates have raged on for years about it in economics and policy circles. A few years back, economists Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, at the request of then French President Nicolas Sarkozy, published a report which led to a book entitled Mismeasuring Our Lives; Why GDP Doesn’t Add Up, which also digs into the somewhat nutty (and in my mind, equally problematic) concept of “Gross National Happiness” as something of an alternative to GDP.

More recently, economist Diane Coyle published GDP: A Brief but Affectionate History, and the title is pretty accurate. The book is pretty short, and highly readable, and quite interesting. Coyle is somewhat less of a GDP skeptic than I am, and as you can probably guess from the “affectionate” part of the title, more willing to cut GDP some slack as a useful tool — though she seems to be coming around towards the view that it’s potentially outdated, especially as the nature of our economy has moved towards the digital world. Either way, I quite enjoyed it and learned a lot about the history of GDP and some of its more ridiculous and entertaining quirks.

For people who don’t spend much time in macroeconomic circles, or thinking about things like “just how do we measure economic output, productivity or prosperity,” many seem to think that GDP is a much more… credible and meaningful number than it is. And I highly recommend reading both books mentioned here to begin to understand why it’s a lot more problematic than it seems.

Filed Under: gdp, gross domestic product, gross national happiness, reading list, techdirt reading list

'More Realistic' Modelling Of TPP's Effects Predicts 450,000 US Jobs Lost, Contraction Of Economy

from the accelerating-the-global-race-to-the-bottom dept

Last week we wrote about a World Bank report that predicted that TPP would produce negligible boosts to the economies of the US, Australia and Canada. Of course, that’s just one study, and it could be argued that it might be unrepresentative, or unduly pessimistic. That makes the publication of yet more econometric modelling of what could happen particularly welcome. It comes from Jerome Capaldo and Alex Izurieta at Tufts University, and starts off by making an important point that is too often overlooked when considering other TPP predictions:

> The standard model assumes full employment and invariant income distribution, ruling out the main risks of trade and financial liberalization. Subject to these assumptions, it finds positive effects on growth. An important question, therefore, is how this conclusion changes if those assumptions are dropped.

Assuming that TPP won’t change employment levels in any of the participating nations seems a stretch, not least because previous trade liberalization has caused sizable job losses, as the new study notes. At the very least, it means that those using these models to argue in favor of TPP shouldn’t be making any claims about its effects on employment, since these don’t exist by definition. Capaldo and Izurieta are able to look at how jobs are affected because they use a different model, which they claim is superior to the one found in most other studies:

> In this paper, we review existing projections of the TPP and propose alternative ones based on more realistic assumptions about economic adjustment and income distribution. We start from the trade projections put forward in the main existing study and explore their macroeconomic consequences using the United Nations Global Policy Model.

Most of the paper is spent taking a rather critical look at previous results, and will probably be mostly of interest to economists, especially academic ones. But the final results of the new calculation are certainly worth noting:

> Given the small changes in net exports, the resulting changes in GDP growth are mostly projected to be negligible. We present two sets of growth figures: ten-year totals, which measure the overall effect of the TPP on growth rates compared to the baseline, and annual averages, which measure the average changes in growth rates due to the TPP.

That underlines another point often missed: that the GDP growth figures quoted by politicians and TPP supporters reflect the overall effect after ten years. Here’s what Capaldo and Izurieta found:

> Total ten-year changes in growth rates are projected to be below one percent, by 2025, in all regions but two. In East Asia and Latin America, GDP growth is projected to increase by 2.18 percent and 2.84 percent respectively under the TPP. By comparison, during 2005-2015, GDP in the two regions is estimated to have grown by 50 percent and 47 percent respectively. > > The US and Japan are projected to suffer net losses of GDP of 0.54 percent and 0.12 percent respectively compared to the baseline

Although those growth figures are worse than previous predictions, they confirm that TPP’s impact on GDPs will be small. What’s new in this paper is an estimation of the agreement’s effect on jobs:

> While projected employment losses are small compared to the labor force, they clearly signal an adverse effect of liberalization not taken into account in full-employment models. In TPP countries, the largest effect will occur in the US, with approximately 450,000 jobs lost by 2025. Japan and Canada follow, with approximately 75,000 and 58,000 jobs lost respectively. The smallest loss — approximately 5,000 jobs — is projected to occur in New Zealand, where the increase in net exports is projected to be the largest. Overall, projected job losses in TPP countries amount to 771,000 jobs.

Also novel is the report’s comments about the global effects of TPP:

> when analyzed with a model that recognizes the risks of trade liberalization, the TPP appears to only marginally change competitiveness among participating countries. Most gains are therefore obtained at the expense of non-TPP countries. > > Globally, the TPP favors competition on labor costs and remuneration of capital. Depending on the policy choices in non-TPP countries, this may accelerate the global race to the bottom, increasing downward pressure on labor incomes in a quest for ever more elusive trade gains.

Although this is just one (more) study, it does seem to confirm the more gloomy predictions for TPP. It inevitably poses a key question with yet more force: why exactly are politicians in TPP nations pushing so hard to ratify a controversial agreement that seems have few quantifiable benefits, and very considerable costs?

Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+

Filed Under: economic losses, gdp, job loss, predictions, tpp, trade

US Government Study Predicts TPP Trade Agreement Will Produce Practically No Extra Growth For Anyone

from the just-like-TAFTA/TTIP dept

As their name suggests, free trade agreements are designed to help trade flourish between the countries involved. The hope is that when trade increases, society as a whole benefits. One of the key metrics for assessing that outcome is to look at changes in Gross Domestic Product (GDP), which provides one index of economic activity in a country. It does not, of course, measure other things that may be important to people, such as public services or quality of life, but it’s widely used.

GDP growth is one of the main benefits that will flow from US-EU TAFTA/TTIP, according to its supporters. They point to a study from the CEPR group in London, which was conducted on behalf of the European Commission as part of the preparations for negotiating a trade agreement with the US. Here are the headline figures from the study, as reported on Commission’s TTIP Web pages:

> Independent research shows that TTIP could boost: > > the EU’s economy by €120 billion; > > the US economy by €90 billion; > > the rest of the world by €100 billion

CEPR’s detailed report (pdf) explains that those figures would be the uplift in 2027 if an “ambitious” agreement were reached, as compared to the economies in 2027 without TTIP. So the predicted extra 0.5% GDP growth for both the EU and US is actually cumulative growth after ten years, and represents around 0.05% extra GDP per year, in the best possible case — hardly impressive.

Another way of looking at TAFTA/TTIP is in terms of its effects on the trade flows between the EU and US. According to the CEPR study, in the most ambitious (that is, most optimistic) case, imports to the US from the EU would increase by about €187 billion in 2027, while exports from the US to the EU would increase by €159 billion in the same year. But again, looking more closely at CEPR’s figures shows that 47% of those increased imports would be cars, which would also represents 41% of the increased exports. In other words, nearly a half of the increased trade that TTIP might bring according to this forecast would consist of swapping cars across the Atlantic.

What about the economic impact of the Trans-Pacific Partnership (TPP)? Figures for this have been harder to come by, which makes a new publication from the US Department of Agriculture particularly valuable, since it gives official estimates of what benefits might flow from TPP. Here’s the basic result:

> Agricultural output in the United States will increase in most sectors due to increased market access within the TPP region, especially in cereals (1 percent), dairy products (0.5 percent), and meat (0.4 percent). Among TPP members, the largest percentage gains in agricultural output will be in meats in Australia, dairy in New Zealand, and “other agriculture” in Singapore. Agricultural output quantities will decline in most sectors in Japan and Vietnam in 2025 relative to the baseline.

As you can see, this details increases in agricultural production in 2025. But what about the increases in overall economic activity — GDP?

> The largest macroeconomic impact of the TPP, in percentage terms, takes place in Vietnam, where real GDP would be 0.10 percent higher in 2025 with the implementation of the TPP than it would be under the baseline. Small gains in real GDP will also accrue to Japan (0.02 percent), and to New Zealand, Malaysia, and Mexico (all 0.01 percent). The TPP is projected to have no measurable impacts on real GDP in any other TPP member countries.

So according to the US Department of Agriculture’s model, the country whose GDP receives the biggest boost from TPP would be Vietnam, which would see a gain of 0.1% in 2025. Most countries would see considerably less than that, with both the US and Australia experiencing “no measurable impacts on real GDP” as a result of TPP. Now, it’s important to note that this study concentrated on the agricultural products. As it points out:

> The scope of the TPP negotiations goes well beyond cutting tariffs; they also cover other areas that could impact agricultural trade, including investment, trade in services, technical barriers to trade, sanitary and phytosanitary barriers, etc. This analysis does not account for the gains that might be achieved in these other areas of the negotiations.

In other words, there could be more significant gains for the US and other nations in these areas. But many countries are banking on TPP giving a considerable boost to their agricultural sectors, whereas the new US study predicts no extra growth as a result, anywhere. That’s important, because the governments of both Australia and New Zealand have indicated that it will be necessary to make concessions in other areas in order to obtain those hoped-for positive results for their key farming sectors. But if the prediction is that these concessions will only result in increased agricultural trade, but not increased GDP overall, the question has be asked: is it really worth accepting things like longer copyright terms and stronger pharma patents if the payback in terms of real growth is small or non-existent?

Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+

Filed Under: agriculture department, economic growth, gdp, growth, tafta, tpp, trade agreements, ttip

Economists Don't Understand The Information Age, So Their Claims About Today's Economy Are A Joke

from the if-you're-using-gdp,-you're-missing-the-point dept

For years we’ve pointed out how GDP (Gross Domestic Product) isn’t a great way to measure the economy, especially in the digital age. Even if we assume that GDP can be calculated accurately (and, really, it can’t), it’s an aggregate piece of information, hiding lots of important things underneath. In the extreme, you could have one massively wealthy person who collects all the money, while everyone else has no money, and you could still see a “healthy” economy in GDP terms. Even worse, when it comes to the information age, GDP calculations get… both terrible and terribly misleading. Part of the problem is assuming that value only comes from things that are paid for. There’s always been some element of this problem in traditional GDP calculations when dealing with more informal economies (how do you calculate the GDP of a stay-at-home parent who cares for a kid and cooks the meals?). But, when it comes to the information age, this issue has grown exponentially — especially since so much online is “free to the user.”

On top of that, the ongoing march of technology continues to make things cheaper and better (yay, Moore’s Law), but getting a computer that’s twice as powerful for half the price shows up in GDP calculations as half the economic output, rather than 4x the value. That’s why it’s great to see economic historian Joel Mokyr take this issue on in a great Wall Street Journal piece pointing out that too many economists focus on GDP and don’t understand the information age.

Many new goods and services are expensive to design, but once they work, they can be copied at very low or zero cost. That means they tend to contribute little to measured output even if their impact on consumer welfare is very large. Economic assessment based on aggregates such as gross domestic product will become increasingly misleading, as innovation accelerates. Dealing with altogether new goods and services was not what these numbers were designed for, despite heroic efforts by Bureau of Labor Statistics statisticians.

The aggregate statistics miss most of what is interesting. Here is one example: If telecommuting or driverless cars were to cut the average time Americans spend commuting in half, it would not show up in the national income accounts?but it would make millions of Americans substantially better off. Technology is not our enemy. It is our best hope.

Mokyr is one of the best of the best, and I’ve often found myself recommending his books (The Lever of Riches: Technological Creativity and Economic Progress is a personal favorite), and this is another great example of his work.

And, yes, economists will argue that they understand the problems of GDP, and yet they still rely on it, because there isn’t something better. As we’ve noted, however, when you have a bad metric, even if you know it’s a bad metric, you still tend to optimize for that metric. Because that’s what you have. Yet optimizing for GDP could actually limit and hinder innovation, creating results that are actually negative for the well being of the public, just because of the impact on GDP.

And that leads to bad policies, misdirected concerns and dangerous views on innovation itself.

Filed Under: economics, efficiency, gdp, innovation, joel mokyr, marginal cost, technology

DailyDirt: Women's Work

from the urls-we-dig-up dept

The social challenges of reducing the employment gender gap isn’t exactly new, but there could be a growing number of good reasons to reduce inequalities in the workplace. The economic benefits of more female employment might boost GDP statistics (though GDP is far from a perfect measure of an economy). It’s a complex issue, but here are just a few interesting data points on this subject.

If you’d like to read more awesome and interesting stuff, check out this unrelated (but not entirely random!) Techdirt post via StumbleUpon.

Filed Under: employment, gdp, gender gap, happiness index, sahm, womenomics

Should We Be Measuring Happiness As An Economic Measure?

from the this-makes-me-sad dept

A lot of people have finally realized that traditional economic measures have all sorts of problems. Things like GDP mismeasure a ton of things, and by presenting an aggregate set of data, often obscure lots of issues. Also, things like GDP don’t handle disruption very well. I’ve discussed in the past how you could argue that, purely on a GDP basis, something like Craigslist has been horrible. It effectively undercut newspaper classifieds, which was a multi-billion dollar business, and turned it into a much smaller business. If you measured such things purely by GDP, you’d say that it was bad. But, of course, Craigslist also created tons of value, enabling people to make transactions that couldn’t have been made before, while also allowing other transactions to be made more efficiently and with less friction. Much of that will never show up in GDP, even if, intrinsically, most people recognize that something like Craigslist provided a lot more value to the world than it took away.

In trying to deal with that, we’ve started to see new forms of economic measurements pop up. One popular one is “happiness.” There’s even been some talk about using “Gross National Happiness” as a key economic measure. There’s a great book from a couple of years ago by Nobel-prize winning economist Joseph Stiglitz, with Amartya Sen and Jean-Paul Fitoussi, called Mismeasuring Our Lives: Why GDP Doesn’t Add Up. It was actually the result of a request from then French President Nicolas Sarkozy to explore how useful (or not) GDP was, including looking into alternate measurements, such as this idea of Gross National Happiness. If you haven’t read the book, I highly recommend it.

Recently, the folks at Planet Money also did a report on the growing interest in measuring happiness, particularly as an official stat for American economic health. There appears to be growing interest in establishing a happiness index for the US, not unlike the unemployment index. Of course, you can think of the immediate problem. Just how do you measure happiness:

But once you get into the details, there’s a lot of debate over the happiness data. One big divide: Should you ask people how they’re feeling right now, or how they feel about their life in general?

You get different answers depending on what you ask. Which one is more important is a squishy, philosophical question.

The difference between asking about “right now” or “their life in general” can be massive. It shows up clearly in the data about how happy parents are vs. non-parents. There are tons of studies that suggest parents are miserable compared to non-parents. But nearly all of those studies are based on questions about “how happy are you now” type questions. Not surprisingly, the parent changing a diaper is probably going to report slightly less current happiness compared to the non-parent who’s out at the bar with some friends, for example. But… it’s not that simple. When other studies are done that ask parents and non-parents about how happy their overall lives are or how fulfilled their lives are, parents frequently report much higher feelings of fulfillment/happiness on a grand scale, while non-parents often report more regret. In other words: time frame makes a huge difference.

Of course, as the Planet Money report points out, just because something is difficult to measure, or involves highly subjective concepts, doesn’t mean it can’t be done. For example, unemployment data. You might think that this involves a nice, simple objective question, but when you look at the details, it’s actually pretty subjective as well.

In the U.S, in order to be counted as unemployed, you have to be out of a job and looking for work. But what counts as looking for work? Checking Craigslist? Sending out three resumes a week? Five?

“It’s actually kind of a hard question,” says Justin Wolfers, an economist at the University of Michigan. “It’s very subjective.”

Yet every month, a single unemployment number is released.

So, you could see why a “Happiness Index” might be a compelling bit of economic data — especially if you believe (as I do) that GDP is misleading. After all, if people are happier, isn’t that a pretty important thing? Well, yes and no. Even as I find the topic interesting, I also worry a lot about the embrace of “Happiness” as an economic measure beyond the reasons laid out in the Planet Money report. Yes, it’s difficult to calculate, but perhaps you can get past that so long as the calculation is done the same way over time. The real problem, for me, is that when you choose to make something a key economic number like that, you are guaranteed to start optimizing for it. That’s what happens when you create metrics. Whether they’re important or not, whether they’re accurate or not, once you have a number, you naturally try to optimize for it.

It shouldn’t be difficult, then, to quickly come up with scenarios for why a National Happiness Index could create significant problems as people optimize for it. First off, you encourage the kinds of short-term rewards that lead people to say they’re happier, even if that creates massive costs down the road. Want to see governments leverage the present and put the costs on the future? Start using a happiness index. Second, if the focus is on maximizing present-day happiness, then you just focus on drugging the population. Yes, that’s an extreme example, but hopefully it gets the point across. In economics, you need to measure the costs and benefits to things. You can “maximize happiness” in all sorts of ways if you ignore the costs to it. Put happy drugs in the water, and let everyone be thrilled. The Happiness index fails to take into account all of the consequences of doing something like that.

So while it’s encouraging to see more of an exploration into alternative metrics, and getting beyond some of the older metrics that clearly “mismeasure” important aspects of our lives, we need to be careful to not just leap to the “next great thing” without realizing that it, too, likely has downsides.

Filed Under: economics, gdp, gross national happiness, happiness, happiness index, measurements, metrics

Freakonomics Obsession With Patents Strikes Again: Says If More Women Got Patents The Economy Would Grow

from the logical-leap dept

While the Freakonomics guys have shown a willingness in the past to be skeptical about the traditional claims concerning copyright, they often seem to have a blindness to similar criticisms of patents. In fact, in the Freakonomics book sequel Superfreakonomics, there’s what’s basically a puff piece about massive patent troll Intellectual Ventures. Thus it’s disappointing, but not surprising, to hear that one of the Freakonomics duo, Stephen Dubner, is talking up some claims about how “closing the patent gap” between the number of patents that men get and women get (by basically convincing more women to patent stuff) could increase our GDP by a staggering 2.7%.

That’s a huge leap, and a rather astounding claim. And you would think that these guys, who are so focused on trying to sniff out interesting points from data, wouldn’t leap so blindly past a whole variety of questionable assumptions, including the big one: the assumption that there’s a causal relationship between more patents and economic growth. Similarly, Dubner, in his radio piece, goes so far as to claim that patents are a reasonable proxy for innovation — directly asserting that the fact that fewer women get patents means that women have “the most room for improvement in the innovation field.”

To put it simply, that’s ridiculous. Just because people aren’t getting patents, it doesn’t mean that they’re not being innovative. In fact, multiple studies have shown absolutely no link between patents and innovation. It’s a shame that Dubner would take the easy way out and leap to the false conclusion that patents are a reasonable proxy for innovation — and, even worse, that he would then encourage an increasing rate of patenting, when one of the biggest problems facing the innovation sector today is over-patenting.

To be fair, Dubner is basing his report on some new research into the “patent gap” between men and women, which makes these particular claims (including the GDP growth claim). There is some interesting data in the paper showing just how few patents are given to women, but there are a bunch of questionable assumptions and logic leaps as well. Others have been pointing out some of the problems with the report, including new data showing that, based on the trendline, women are already increasing the rate at which they get patents very quickly. The bigger problem, though, is just the facile (and simply unsupportable) claim that more patents automatically leads to greater GDP. As economist Alex Tabarrok notes sarcastically in response:

Right; and since only 10% of construction workers are women, closing the gender gap would result in many more houses

This is a first year stats student type error, assuming this kind of causal relationship where none exists. The authors of the paper should have known better, but Dubner and the Freakonomics crew, who give this kind of work a stamp of approval, should be even more careful. Disappointing.

Filed Under: freakonomics, gdp, stephen dubner, women

Is McCain Really Saying eBay Will Save The Economy?

from the not-quite... dept

First off, before we get into the details here, I’ll state upfront that I have not yet decided who to support in this year’s Presidential election. I’m neither a Democrat nor a Republican. I’ve seen plans from both sides that I find problematic. Still, it bugs me when I see plans from either side mischaracterized, and I believe that’s the case with this somewhat mocking criticism of McCain’s “jobs plan” as being “the eBay model” (sent in by reader Rose M. Welch). At issue, is the fact that McCain has repeatedly referred to the 1.3 million people around the globe who “make a living off EBay.”

As the article notes, the figure is clearly exaggerated. However, many of the other criticisms of what McCain says seems misguided. It seems like a stretch for anyone to think that McCain is suggesting that people will find jobs selling on eBay. Rather, he’s using the example of eBay to note that innovation leads to new ways for people to make money — using the rise of the ecosystem around eBay as an example — not as the definitive method for creating jobs. And, on that, he’s correct. Continued innovation does tend to lead to job growth.

The second part of the criticism that seems incredibly unfounded, is the assertion by a few economists that eBay is just a business model for moving junk around, and that it doesn’t add anything to the GDP. This is simply incorrect, and it’s really strange that prominent economists would make such an assertion. eBay is about making an efficient market. Plenty of people use it to sell new products, rather than just “junk.” And, many of the people who use eBay to “make a living” do so by adding value to products which they then resell. That does add to GDP. eBay is about a lot more than just moving around junk. In fact, a rather large percentage of our GDP is based on taking already built goods, adding value to them and reselling them. To pretend this doesn’t happen on eBay is simply incorrect.

Now, before anyone thinks that this means I support McCain’s economic positions, I don’t. I think his continued disdain for basic economics, and his seeming assumption that economics can be handled by someone else is problematic. And, of course, his proposed gas tax holiday is just downright nutty.

Filed Under: economics, economy, gdp, growth, innovation, jobs, john mccain
Companies: ebay