God forbid undergraduates start trying to revolutionize the way economists compile data in the pages of The Herald. But sadly, Ethan Dennison '07 sought to do precisely this on Wednesday. For the sake of the integrity of a Brown education, allow me to set things straight.
Dennison begins by asserting that the process of rebuilding New Orleans will actually add around two percentage points to the U.S. Gross Domestic Product over the next year, and then spends the rest of his column railing about how stupid that is. To say that natural disasters actually help the economy amounts to accounting chicanery, he claims, "like something from Enron." Dennison argues that economists should discard GDP in favor of more holistic measures of economic wellbeing.
Let's establish the obvious: Hurricane Katrina was an economic disaster, one that severely damaged the nation's capital stock, disrupted the jobs and lives of thousands of Americans and will add significantly to our external debt.
What Dennison doesn't understand is that everybody grasps this. The effects of the hurricane are reflected in all of the major economic indicators: total market capitalization, the unemployment rate, the budget deficit. Point your browser to the Bureau of Economic Analysis, the Bureau of Labor Statistics, the National Bureau of Economic Research - you get the idea - and you'll find a wealth of information detailing precisely how the hurricane pain will show up on the books.
Dennison's complaint that "GDP literally reads like a cash flow statement of our economy, not an actual accounting of transactions," is obvious and irrelevant. GDP is a measure of gross revenue, just like the top line of any company's balance sheet. But it's not the top line that investors are interested in, it's the bottom one. You'd have to be the dumbest investor on the planet to think airline stocks were a good investment just because their gross revenues have risen since 1980, and you'd have to be a mentally disabled orangutan to believe that a bounce in U.S. GDP growth means Katrina was a good thing.
So where no problem existed, Dennison proposes - in a "cry for financial integrity" - sidelining GDP in favor of "the classification of happiness, sustainability and progress," which he says should measure growth in such all-important financial statistics as "volunteering."
Actually, the hermit kingdom of Bhutan - not exactly an exemplar of financial sophistication - has recently moved in Dennison's proposed direction by adopting a measure of "gross national happiness." This will likely be a fabulous propaganda tool for the country's monarch while telling economists very little about the actual health of the economy. Not only will cooking the happy books be child's play, but issuing debt to buy Red Stripe and seasons of "South Park" will become the new Keynesianism.
The more serious problem with rolling a variety of measures of economic wellbeing into one index is that there is no theoretical basis for assigning weights to various indicators. Which is worse, suicide or divorce? Taxes or inflation? War or poverty? Obesity or crime? The Yankees or the Red Sox?
One of Dennison's least compelling proposals is that we deduct things like firefighters' wages from GDP because fires are bad. Well, not only would this make GDP meaningless (gross domestic product minus firefighters?), but it is also nonsensical. If spending on emergency services rises, this could indicate a natural disaster, in which case you'd be counting the negative impact twice. But it could also just indicate a stronger government commitment to public services, which means that we've subtracted from GDP for no reason at all.
Prudent accounting doesn't involve simply aggregating the results of the World Cup with the inflation rate. It involves collecting all of these important statistics separately, and then keeping them separate.
For example, consumer spending will rise this year, but so will the trade deficit and the household debt burden. Look at all three numbers, and you get a pretty good sense of U.S. consumption.
The moral of the story is that economic accounting chicanery is rarely in the statistics themselves. It's in focusing on one while excluding others, like obsessing over GDP numbers at the expense of the unemployment rate - which nobody seems to be doing except Dennison.
Nate Goralnik '06 is an angry Arizonan.
