More GNP Defects

January 12, 1958

Last week we discussed two of five major defects in the national income or GNP estimates. One was the arbitrary inclusions and exclusions. The other was the difficulty of avoiding duplicate counting or of separating gross from net. Here we will consider the three remaining major defects.

3—National income, to be estimated at all, must be reduced to a common measure—in our case, the dollar. But the value of the dollar is itself constantly changing. In a period of inflation all values are falsified. For 1939 our GNP was estimated at $91.1 billion; for 1957 it was estimated at $440.3 billion. Here is an apparent quadrupling, or better, of “gross national product.” But when the government statisticians restate the figures in “constant dollars” (specifically in “1954 dollars”) they find that the GNP in 1939 has to be raised to $189.3 billion and that the 1957 GNP has to be lowered to $407 billion. In other words, “real” GNP did not quadruple but only about doubled in the eighteen- year period.

The government statisticians get this result by dividing actual dollar totals by an index number of prices each year. They print, in fact, a separate table of “implicit price deflators” for the gross national product figures for each year based on an index number of 100 for 1954. The price deflator for 1939, on this basis, is 48.1, and for 1957 is 108.2. If we take the GNP in 1939 at the prices that prevailed in that year it comes, as we have seen, to $91.1 billion. But if we translate 1957 GNP into 1939 prices, we get, instead of $440.3 billion, only $195.7 billion for 1957. This is not nearly as impressive.

WHAT DO WE MEASURE?

Moreover, it is possible to correct the comparison only approximately, never accurately, by applying “implicit price deflators.” Goods never remain the same for two years in succession, either in relative quantities or qualities. No index number can be completely “scientific.”

4—In Newsweek of Aug. 25, I called incidental attention to a defect in the national-income estimates that throws into doubt the whole question whether these estimates measure comparative “real” income or economic welfare. Larger crops often have a smaller total dollar value than smaller crops. (Hence crop-restriction schemes.) But this merely illustrates a wider principle. Economists have pointed out since the time of Adam Smith that it is not “value-in-use,” but scarcity, that determines “value-in-exchange,” or money price. Water is an indispensable commodity that ordinarily commands no price at all. If more and more things become plentiful (except dollars), the national income, as measured in dollars, might actually begin to fall. If we could imagine a situation in which everything we could wish for was in as adequate supply as air and water, we might have no (monetary) national income at all. Our dollar “national income” figure does not measure total economic welfare, but merely an internal relationship of marginal values (multiplied by quantities).

5—The fetish made of national-income figures leads to false ideas concerning cause and effect. The national income is treated as the “purchasing power” that causes and buys the production. Yet the national income is merely the total assumed dollar value of the production itself.

SHRINKING YARDSTICK

The fetish made of GNP also leads to false policies. Part of the official GNP total of $440.3 billion for 1957 was arrived at by including $87.1 billion for “government purchases of goods and services.” Planners easily jump to the conclusion that if it had not been for these $87 billion of government purchases the GNP would have been just that much less. Yet whatever government spends it takes away from somebody in taxes.

If the national income falls short of some “goal” by x billion dollars, economic planners are tempted to assume that the x billion dollars could easily be supplied by that much deficit financing, or even by printing that much money. We can raise national income to any figure we want, in fact, not by increasing output and consumer satisfactions, but simply by shrinking the measuring rod—by inflation, by depreciating the dollar enough to raise prices to reach that income.