David R. Henderson has an interesting post on the problems with using GDP as a criterion of economic goodness. Now let me be clear (as Obama would say): I fully agree with the general theme of his post, especially the examples of cheap or even free things offered on the Internet and hence not showing up in conventional GDP measures.
However, I think there is a slight problem in the specific example David uses to motivate the discussion:
Picture this: The U.S. government finally sells the Postal Service. As with other functions moved from the government to the private sector, the privatized post office does what the government did for about half the cost. So, with prices correspondingly lower, people spend roughly half as much as before on mail–which frees them to spend the difference on other desirable things. Because the Postal Service costs over $40 billion a year, the saving is $20 billion. By any reasonable measure, the average person in the U.S. is better off. In fact, the per capita increase in well-being is approximately $20 billion divided by 260 million citizens, or about $80 apiece.
But how does this change show up in gross domestic product? It doesn’t. The government’s contribution to GDP is measured not by how much value it creates but by how much it costs. So the $40 billion spent by the Postal Service counted as a $40 billion contribution to GDP. Cutting that in half through privatization may shift $20 billion from public to private hands but still adds up–under the conventions of national income accounting–to the same $40 billion. So the net effect on GDP of a $20 billion increase in economic well-being is precisely $0.00.
I don’t think that’s the whole story. Someone who wanted to defend the orthodox approach would say:
This critique conflates nominal with real GDP. When the BEA announces growth estimates, it refers to real GDP; that’s what we’re trying to promote.
Suppose an economy initially has total expenditures on final goods and services of $1 trillion, and the CPI is 100. Then a bunch of the firms have eureka moments and figure out how to massively cut their prices, without reducing their output. Their customers then (we suppose) take the savings and increase their spending elsewhere, so that total expenditures is still exactly $1 trillion. But the CPI has fallen by 50%, meaning real GDP has doubled.
Again, I’m not saying that GDP is a great way to gauge economic output, especially since government expenditures are counted as “output” on equal footing with private investment. All I’m saying is that one of David’s particular examples might overstate how bad a criterion it is.