Sex, drugs, and the proper measurement of economic activity

An article this morning in The New York Times reports on an interesting development in economic statistics. The European Union is redoubling efforts to make sure its 28 member countries accurately measure the contribution of black market industries such as prostitution and drug dealing to economic activity. Currently most E.U. countries don’t include the contributions of these sectors to gross domestic product, the statistic that measure the value of all final goods and services produced within a country over the course of a set amount of time. These activities are illegal yet they play a role in the overall economic activity of these countries.

But there are more significant issues than the black market in calculating GDP. As the newspaper article mentions, the new methodology will increase measured GDP by counting businesses’ spending on research and development as investment and not costs. A similar change in methodology last year increased measured U.S. GDP by 3 percent.

So what about the unmeasured contributions from unpaid care work, which dwarf those of R&D? Care work is what it sounds like: the work needed to care for children, the sick, the disabled, and the elderly. Some of these activities are provided by the market, but a large amount is done by family members who go unpaid. Some children are cared for during the day by a parent while others go to a professional child care provider. Either way, the activity is a socially and economically important activity. According to an analysis by the U.S. Census Bureau, including unpaid household production in U.S. GDP would have boosted it by 26 percent in 2010.

One of the persistent criticisms of GDP is that it fails to fully capture the level of well-being in a society or, in the case of the current reforms, include harmful activities. The New York Times article quotes one analyst saying that including black market industries in GDP would undermine the statistic’s value as a measure of well-being. But lodging that criticism misses the point of GDP. The intended purpose of the measure is to show how much output an economy can produce in a given amount of time. The traditional market economy produces goods that many people find objectionable, but they are included in National Income Product Accounts.

GDP shouldn’t be analyzed in a vacuum. Data on employment, household incomes, industry composition, and many other topics need to be considered. Economies are multifaceted and complex systems. We should expect our statistics to be just the same. This debate highlights why the well-being of a country or the vibrancy of an economy can’t be measured in one number.