Wednesday, 4 September 2019

GDP isn't just adding up all the nice things

People keep wanting GDP to be something it isn't.

The only thing that GDP is is a measure of the final value of goods and services that trade in markets. That's it.

There are all kinds of good things that are not in GDP.

High among those good things is the value of household production that does not trade in markets.

This is standard fodder in principles and intermediate-level coursework. If you have a two-parent household, with one working outside the home for wages and the other working inside the home, then the value of in-home production does not count toward GDP. If the one parent starts paying the other one, then GDP goes up - even though absolutely nothing has changed.

If I make a sandwich at home, the value that I add to the ingredients by my labour is not counted toward GDP. If I sell the sandwich to myself, like if I were owner-operator of sandwich shop, it would be - again, despite there still being no change in the real economy.

If I babysit the neighbour's kids at our place for free in exchange for their babysitting ours, it doesn't contribute to GDP. If I paid them, and they paid me, it would be.

This is all standard stuff.

And there are some real problems caused by this, but they have nothing to do with GDP. They have to do with tax. But we'll come back to that.

ANU's Julie Smith was on RNZ today arguing the case for including the value of breastmilk in GDP. She argues that the value of unpaid household services should be in GDP. She's right that there is a problem if we're setting GDP growth rates as a target and we're ignoring that increases in female labour force participation has been at a cost to unmeasured but valued household production. Patricia Apps made similar points in her keynote at the NZAE meetings this year.

But there's good reason for keeping GDP as it is, and just being careful about how it's used.

Let's start thinking about all of the unpriced non-market activities that go on and that could, alternatively, be provided within markets.

Parents provide a lot of services for their kids, from chauffeuring to tutoring, and from homecare to mentoring. People can hire Ubers, and tutors, and home-care workers, and life coaches. Valuing all of those services would be tricky. And it would be pointless if GDP numbers were being used in ways that they should be used.

Except, that is, when it comes to tax.

I'd raised this as question during Patricia Apps' keynote at the NZAEs. People thought I was joking as reductio, but it's a serious point - and I expect a very real distortion. Just one that's probably not worth worrying about because trying to fix it would be even worse.

The distortion is as follows.

If you have a two-income household, both earners pay income tax on their earnings. And they pay GST for the services that they have to buy-in to help around the house, if they're buying in services to help with the lost time for home production. And the workers providing those in-home services pay tax on that income.

In-home services are paid for out of after-tax income, are subject to GST, and the worker takes home an after-tax income.

That builds a substantial tax wedge encouraging the in-sourcing of a lot of services, and distorting activity and formal labour force participation. There is a substantial tax advantage to having one partner stay home and provide untaxed services rather than be out in the formal paid workforce.

I recall stories about, when top marginal tax rates here were a lot higher, econ faculty doing a lot more of their own home renovation work. The tax wedge mattered. It's the same kind of problem.

Effectively, single-earner families are tax dodgers. No GST is paid on the in-home services provided by the stay-at-home parent. No income tax is paid on the monetary transfers to the stay-at-home parent from the in-work parent.

So I'd asked Apps whether, if we wanted to be really serious about addressing the value of household production, we shouldn't be taxing single-earner families based on the value of the household services implicitly provided. I don't think she'd thought about the problem that way before.

Of course, down this path lies madness. There are plenty of services provided between couples that do also trade, one way or another, in markets - legally in New Zealand, illegally in other places. But we'd all recognise it as insane to wish to impose GST on the imputed value of those activities - or to start having Stats NZ ask couples how often they had sex, put a dollar value on it, and start adding it into the GDP statistics. It sounds nuts and all, but as sex work is now legal, every visit to a brothel counts toward GDP (and attracts GST and income tax), while tax-dodging black market activities in the bedrooms of the nation do not.

Better I think to just keep GDP as it is, and recognise its limitations for policy purposes.

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