Counting what really counts

A very wonky comment, but statistical agencies could take a significant step forward simply by headlining Net National Income rather than Gross Domestic Product when they publish the national accounts they currently compute. GDP is of interest only for short-run macroeconomic analysis, and of dubious value even there. Net National Income is at least relevant to welfare and a starting point for a more comprehensive analysis. As an illustration of the difference, I believe Ireland reports Gross National Product as well as/instead of GDP because it excludes income flowing to (and from) foreigners. More here
http://johnquiggin.com/2010/05/06/the-central-flaw-in-the-henry-review/

The interesting thing is that the policies that are the most socially equitable are now turning out to be the most economically effective too.

Happy coincidence!

“one of the implications of work in this field is that our standard ways of doing national accounts work against adopting the right priorities. Relevant expenditures are counted as transfer or consumption spending rather than investment spending. So it’s all too easy for governments to cut them back in recessionary times.”

I would love to know more about this, like, with examples and stuff.

Measured national income typically includes implicit rents for owner-occupied housing and the implicit value of food consumed by farming households, even though no money changes hands in either case. Money versus non-money is *not* what draws the production boundary. And the “invented for” question is much more complex — go back and read Kuznets some time.

More broadly, preparing additional measures does not mean one stops doing the measures that may be most directly relevant to macro policy — “leederick” is getting all upset about a false choice.

For folks more genuinely interested in these issues, there are several decades of work, now, on the ways activities move across the formal production boundary during macro crises — I’ll just mention one of the most famous, Beneria and Roldan’s 1987 _Crossroads of Class and Gender_, on the way working-class Mexican households coped with the 1982 crisis. This is relevant to how we understand how crises work and what policy does, as well as longer-term effects — part of what the recent DeLong and Summers paper refers to as hysteresis.

New books (1) by Nathalie Morel, Bruno Palier, and Joakim Palme and by Anton Hemerijck show that the countries that invest heavily in early childhood education, in continuous education opportunity, in high-quality training schemes, and in making it easier for women to take part in the workforce, have both higher growth and productivity rates and less inequality and poverty

Hi Niamh,
The book is $110. Could you give an indication as to what sort of analysis is included please? Is it qualitative, more ‘Spirit Level’/cross-country correlations stuff, or is there more rigorous identification as well?

As an illustration of the difference, I believe Ireland reports Gross National Product as well as/instead of GDP because it excludes income flowing to (and from) foreigners.

Correct. They report both, and the media is aware that GNP is more relevant.

@niamh Well said! We at CT have all had enough of this kind of thing. It would have been perfectly possible to defend the usefulness of the standard national accounts without being abusive.

Can I connect this to the previous thread? The kind of people under attack there (college teachers) are, inter alia, upholders of the notion that the world has many distinct, incommensurate standards of value, not one. That the worth of knowing Latin, or poetry, is not in what people will pay to be taught them, that the value of a library is not in the cost of the books. People, in short, who find this sort of thing absurd:

http://www.wri.org/publication/content/8381.

Who would observe that this is like noting that breathing is worth $10 a minute, with the implication that if you stop breathing you will be MUCH richer.

The trick is not in counting these things correctly, it’s in insisting that counting them is silly. The pressure to count them comes from people who, finding making things and owning things steadily less profitable, now make their money selling things (more and more, selling money). Eating their own civilisation from the feet up. They are abetted by the numerous teenagers who imagine that they will be ones to profit – just as previous generations of the young imagined that all their wars would be victorious. See Ron Paul and following.

I’m sure all this has already been taken into account by market actors – after all they have perfect information (with notably rare exceptions which can be dealt with piecemeal).

BTW talking of postwar national accounting conventions and money/non-money issues, there is of course the imputed value of financial intermediation (i.e. banking), now described as ‘indirectly measured’ to make it sound better. This is FISIM, and was introduced to resolve ‘the paradox of a prosperous industry showing a negligibly positive, or even negative, contribution to the national product’.

See https://crookedtimber.org/2010/05/12/two-points-in-lieu-of-an-argument/#comment-317479

(A live link to the passage in question, is http://onstest.landmarkgovernment.co.uk/ons/rel/elmr/economic-and-labour-market-review/no–5–may-2007/improving-the-measurement-of-banking-services-in-the-uk-national-accounts.pdf )

“In historical terms, we are still in a very early phase of response to the latest global crisis. We don’t yet know if it will prove to be a turning-point in the dominant economic paradigm. Lots of people are starting to do the necessary thinking. They need to get out into the wider political debate.”

One thing I’ve noticed from several places, that seems to be ignored in many places, is the importance of the current account balance (or to put the same thing another way – the importance of international financial flows). Could it be that the people who make their money from international financial flows, don’t want it to be noticed?

Perhaps I should refine that thought a bit.

“That the things we had concentrated on TARGETING, weren’t the only things of importance”.

Better regulation will save the plantation.

Because of course nothing can ever be done except by a profit-making corporation.

(Perhaps this bizarre assumption is supposed to be covered by the caveat Maybe this would work better elsewhere, but in the US…, the idea being that ‘in the US’ means ‘ in the US as it stands’ – which begs the question what exactly we hold constant and what changes are to be deemed politically possible.)

I don’t really see where the argument is in that post anyway – it seems to be a list of personal opinions with little clue as to why anyone should agree with them. Even the few sentences that do explain themselves, such as And especially when you are talking about public healthcare- the overwhelming majority of the expense will be for the elderly and this is actually a terrible investment from an economic perspective., it’s not clear why they are relevant. Report the investment bit as investment, the pure ‘consumption’ bit only as consumption. At what point in that process do the heavens fall, exactly?

There’s an issue that counting investment as an asset neglects: the quality of an asset is not equal to the spending on it. Chicago spends 4.86 billion dollars on education each year (in the operating budget), to educate 400,000 students (that’s four hundred thousand for you Europeans). Should we count this as a 12,150 dollar investment in each child, even though West Windsor spends the same amount of money and gets much better results? (Sources chicago, ridgewood)
(If anyone knows if I did the accounting wrong, please tell me)

Mpowell, I don’t think anyone is talking about stopping making and publishing the measures of GDP and so forth that gov’ts have been doing for the last 60 years. What you would see would be additional measures. (To be really geeky, it’s worth noting that the methodology of national accounting *has* changed over the years in numerous ways.(1) )

Richard Stone, the key figure in standardizing national accounting in the postwar period, envisioned linking them to a much larger set of social statistics(2), a project consistent with what Niamh is describing. What we have today, as the standard nation-level economic data, is a small part of what we could have.

You bring up an interesting argument that I’ve heard in various forms over the years, which is measuring activities and benefits that are currently not measured could, far from unleashing kinder and gentler policy, actually make it easier for authorities to tighten the screws. For example a finding that austerity gets borne is by shifting burdens onto women could just as well be used by a policymaker looking to impose fiercer austerity. It’s hard to dismiss this concern. But we need a way to talk about this without lapsing into extreme _a priori_ positions about the nature of gov’t.

1. Vanoli, André. 2005. _A History Of National Accounting._ IOS Press.
2. Stone, Richard. 1971. _Demographic Accounting and Model Building._ Organization for Economic Cooperation and Development.

leederick: I also don’t think anyone’s laid a finger on my basic point, … that although good chunks of economics have been damaged by the financial crisis (EMH, privatisation, trickle-down), national accounting hasn’t been

1. Maybe no-one’s particularly interested in that ‘point’, because lots of things haven’t been ‘damaged’ by the financial crisis which are nevertheless rotten to the core.

2. In fact your claim was rather bolder: The global crisis has totally validated the dominant economic paradigm in national accounting. ‘Counting what really counts’ is a great example of leftist zombie economics. It’s been completely disproved by recent events, no-one who has any understanding of the last five years should give it any credence. And we should all be very thankful that national accounting focused on the money economy. Which is just weird, and like mpowell’s contribution consists of a lot of windy assertion.

3. @16 I mentioned, as is my wont whenever a pretext arises, FISIM, which is, just to clarify, clearly a construct specifically reverse-engineered to make the rents flowing to the bankers look like returns to productive activity. (Albeit that if you begin with certain assumptions this can be seen as a technical problem of ‘balancing the books’. Cf. ‘technocrat’.)

4. Even the ‘Executive Director, Financial Stability’ of the Bank of England, not someone you’d expect to view the banks as bloated parasites feeding on the misery of the masses etc., in 2010 said:

Banking contributed to a Great Recession on a scale last seen at the time of the Great Depression. Yet the official statistics on the contribution of the financial sector paint a rather different picture. (pp. 2-3)

And his conclusions, which given they are written in officialese are positively lurid:

First, given its ability to both invigorate and incapacitate large parts of the non-financial economy, there is a strong case for seeking improved means of measuring the true valueadded by the financial sector. As it is rudimentary to its activities, finding a more sophisticated approach to measuring risk, as well as return, within the financial sector would seem to be a priority. The conflation of the two can lead to an overstatement of banks’ contribution to the economy and an understatement of the true risk facing banks and the economy at large. (pp. 22-3)

Second, because banks are in the risk business it should be no surprise that the run-up to crisis was hallmarked by imaginative ways of manufacturing this commodity, with a view to boosting returns to labour and capital. Risk illusion is no accident; it is there by design. It is in bank managers’ interest to make mirages seem like miracles. (p. 23)

Third, finance is anything but monolithic. But understanding of these different business lines is complicated by the absence of reliable data on many of these activities. There are several open questions about the some of these activities, not least those for which returns appear to be high. This includes questions about the risks they embody and about the competitive structure of the markets in which they are traded. (p. 23)

How’s that for a finger?

@Tim Wilkinson; most the response to the crisis has been intervention packages guided by figures produced by national accounting systems. I think that’s a pretty strong mark in their favour. I don’t really understand your point about how this is all windy assertion and the accounts are rotten – maybe you don’t think intervention hasn’t done any good, or that we’d be better off without those numbers regardless? Want to spell it out?

@ Colin Danby; maybe we’re reading different literatures. If you read deeply enough in the environmentalist, or feminist, or some leftist literature there certainly are people who want to stopping making and publishing measures of GDP and the like. The whole ‘counting what really counts’ movement (at least the rhetoric and, I feel, certainly some of the intent) is a fairly strong attack on the core concepts and practice of national accounting. It’s certainly not “how can we make marginal incremental improvements to a valuable system” it’s “we’re not counting stuff that is worth counting” and a rejection of the approach.

If it’d had been ‘National accounts have proved incredibly valuable and have helped forstall the financial crisis, here are some suggestions for improvement’ I wouldn’t have responded the way I did. But instead we get rhetoric along the lines of ‘we are still in a very early phase of response to the latest global crisis. We don’t yet know if it will prove to be a turning-point in the dominant economic paradigm.’ Really? In this case the dominant paradigm has a lot to be said for it.

@Tim Wilkinson; I’m not conducting a wholesale defence of every accounting policy and estimate. National accounts have been calculated without FISIM, and could be again. I don’t see FISIM as a weakness which undermines the system – in particular it’s largely an internal debate. The people interested in and critical of topics like that tend to be technical accountants, it’s not something the bunny counters or well-being gurus tend to focus on in their critiques.

Watson Ladd: Those sentences don’t appear to bear any salient relation to any of my comments.

leederick: ditto. To windy assertion I’ll add unconvincing bluster and blatant strawmanning. And I’ll throw in the two-step of terrific triviality too.

Leederick I invite you to follow up on the references that Niamh kindly provided us, and see if they make the arguments that you fear. I’ve read most of the gendered macro literature, for example, and I can think of nothing like that.

Sure, there are more radical critiques e.g. Marilyn Waring’s 1988 _If Women Counted_, a smart book by someone with policymaking experience. I don’t agree with all her arguments, but I think I can discuss those differences without shouting obscenities.

I’m in agreement about the usefulness of macro, but to argue that it could not be improved is not only weird but deeply unscientific. You might have inquired politely about what Niamh means by “the dominant economic paradigm,” but as every reader of Brad DeLong’s blog knows, much of the macro establishment has been pretty obtuse over the last few years. To argue for better paradigms is not to argue that existing knowledge is a complete swindle. Try not to fall into these false binaries.

R&D is a real investment but it gets accounted for strictly as a cost, and this is almost certainly for the best… I think we need to focus on shifting the terms of the debate without attempting to change the accounting standards.

Setting aside how politically practical this would be, it certainly sounds like the best approach. A lot of spending – at corporate and governmental level – will pay off down the line, but that shouldn’t necessarily mean it gets counted as ‘investment’. Maybe paying your junior employees more makes them more likely to stay, and this benefits the firm by preserving its experienced human capital. But that doesn’t mean that the accounts should show that as investment spending. We should be able to argue “this spending is good and should be preserved because it will have provable long-term benefits”, not just “this spending should not be cut because it falls into the accounting category of ‘INVESTMENT'”. After all, it’s not as though investment doesn’t get cut back as well…

I do think there are two separate issues involved in this debate though, and I wouldn’t like to see them entirely conflated.
One is how national accounts are compiled. This is indeed subject to change over time, but I’m not qualified to comment on the technicalities other than to note that, as in the quote above, ‘What we measure affects our view of the world and in the end what we do’.
The other issue concerns a more general point concerning what it is we need to know about in order to make good policy, so we can make sure we have good measures, whether or not they feature in national accounts or are compiled in some other way.
What I’ve been been flagging here is primarily a set of values about what matters for both growth and justice in the ‘knowledge economy’.
Cutting back on education spending as a means of balancing budgets, for example, seems like a good example of short-term thinking at the expense of longer-term policy-based social ‘investments’.

TW, I agree that there is always a problem when discussing this kind of thing in how you talk about what things are more likely achievable than others. I would make my point thusly: the distinction between investment and expense is frequently not clear cut at all. Trying to bury the distinction in an accounting procedure does not help to highlight what is motivating policy. You can always say as political scientist, “well if you account for these expenses as investments and these others as real expenses, you come up with this data set and it looks good to me”, but then you’re just participating in public debate. If you succeed in getting the CBO to treat certain expenses with long term investment like properties as ‘not expenses’ when reporting on bills you just create an enormous incentive to game this process behind the scenes where it is much harder for even highly knowledgeable observers to suss out what you are doing. So I guess it depends on what is being advocated for here. If it just, “well, we need to look at other quality of life indicators”, sure. But if it’s, “we need to change our basic reporting of economic statistics”, I’m much less inclined to agree.

Ah, memories, memories. Back in the early 1990s “Active Labour Market Policy” was the buzzword in Canberra labour policy circles. That approach was very much along the lines apparently adopted by Morel et. al. as summarised by Niamh at 37. I’m sure Prof. Quiggin will remember those exciting days. Here is a report of the time (actually, quite early in the process – 1990) where Active Labour Market Policy gets top billing (Note: .pdf):

http://www.dest.gov.au/sectors/training_skills/publications_resources/indexes/documents/90_10_pdf.htm

The Green Paper “Restoring Full Employment” lays out the new policy rationale in detail (in the Australian context). I don’t know of any download site for that lengthy report. Hard copy was copyright Australian Govt. Publishing Service 1993. Maybe other Australian readers could help.

So we’ve been here before in Australia too, as well as in the UK as Chris Bertram remarks at 15. The overlap isn’t surprising, I think there was a good deal of informal crosstalk between Australian and UK Labour policy people at the time. That history prompts me to wonder (a) whether Morel. et. al. get into discussion about why these ideas were so short-lived, and (b) whether, if they do, they agree with Chris Bertram.

In Australia, the whole thing collapsed with the 1996 change of Govt. The incoming Liberals had old-fashioned union-bashers (hardly to be distinguished from unreconstructed Cold Warriors) as a very significant part of their constituency, and the laying waste of labour market policy was an easy bone to throw them. The multinationals liked it too, for more practical reasons. Memories!

@gordon Actually, it only lasted about a year. Labor cut back the Working Nation programs in 1995, as soon as unemployment fell below (IIRC) 10 per cent. The Libs (=Tories) just finished the job

if everyone in the household is working full-time outside the home, then someone who is working full-time outside the home is ALSO doing a substantial amount of non-market production.

That’s called the Second Shift, chris @ #35, and it’s done almost exclusively by women. It’s been extensively documented by feminists amongst others, but is not counted.

ajay @41 – The link between the two is presumably if governments are running policy with the main aim of making the national accounts look better this year, rather than aiming for long-term prosperity.

But ‘look better’ here means ‘be better’; you aren’t talking about actually falsifying the figures. And the problem still arises if government is running policy with the main aim of getting ‘good’ results in the national accounts over the long term.

mpowell – but your entire post @42 is all about profit-making corporations, hence ‘gaming the system’. No doubt there is scope for perverse incentives in the public sector as well – but even if we assume that they whole thing is run from top to bottom by politicians with an eye on the next election (which we shouldn’t), that doesn’t come close to rapacious pursuit of profit as a debasing influence.