We are in an NGDP factory
Arnold Kling has a new post discussing the issue of wages and productivity. He argues that productivity is increasingly difficult to measure:
We are not in a GDP factory. As the share of GDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where real output and the quality of labor input are extremely difficult to measure.
This is also my view, if GDP means RGDP (which, in context, it clearly does.) Indeed Kling and I are probably out on the extreme, in terms of being especially skeptical (relative to other economists) of the usefulness of measures of RGDP, real productivity, the price level, etc.
Over at Econlog, I argue that while the problem of measuring real productivity is very real, it’s largely unrelated to the so-called “wage decoupling issue—which is mostly about the gap between nominal wages and nominal productivity. Fortunately, errors in measuring real productivity have no impact on measures of nominal productivity.
So while I entirely agree with the Kling quotation above, I also strongly believe the following to be true (please read carefully):
We are in an NGDP factory. As the share of NGDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where nominal output and the quantity of labor input are relatively easy to measure.
So why is this second claim so different from the Kling quotation? Because RGDP and NGDP are radically different concepts, almost unrelated. Thus we can say with some confidence that the nominal health care industry has expanded from (say) $36 billion to $3.6 trillion since the mid-1960s, but I have absolutely no idea how much real health care output has grown, as I don’t even know what the output of the health care industry is. What are they trying to produce? (Recall that Robin Hanson says that health care is not about health.)
And even if health care is about health, how much of the improvement in health is due to health care, and how much is due to less smoking, better nutrition, better sanitation, etc.
In many ways, NGDP is not a very interesting variable (think Zimbabwe), except when it shows short run volatility. In that case, it destabilizes labor and financial markets, because there are lots of nominal wage and debt contracts. In those situations the “NGDP factory” is a useful concept, even though NGDP is also measured imperfectly. But NGDP is at least an order of magnitude more clearly defined and more easily measured than RGDP.
I do occasionally refer to RGDP, as despite its flaws it tells us something about business cycles and international comparisons. A sudden drop in RGDP usually indicates a recession, as all those imponderables associated with measuring “real heath care” don’t change much from one year to the next. Think “law of large numbers in BEA errors”. The BEA bureaucrats are making similar errors, one year after another. Thus it’s a problem if measured RGDP suddenly falls by 5%, despite the many flaws in RGDP data.
As far as international comparisons, a country with a $50,000 per capita GDP is not necessarily richer than one with a $45,000 per capita GDP, but it is almost certainly richer than a country with a $5000 per capita GDP. So RGDP has some value, if used with care.
Most importantly, don’t ask any statistic to do more than it can.
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4. March 2019 at 12:24
“I don’t even know what the output of the health care industry is. What are they trying to produce? (Recall that Robin Hanson says that health care is not about health.)”
Hanson makes a good point but only up to a point. Part of health care is clearly about health and this will be even a larger part as medical technology greatly improves in the 2020s and 2030s.
4. March 2019 at 15:58
It may be that Americans spend vastly more on housing, healthcare, education and national security, but measurable results are limited.
Maybe this is why so many Americans believe that living standards are falling, even though certain numbers, such as per capita income, would seem to show a better life.
4. March 2019 at 17:01
So why is it so hard to determine the price of money? Shouldn’t it be a share of NGDP? For example: 1/NGDP is the share of a nation’s output that can be bought with a single dollar.
This reminds me of an article on a professional pilot I recently read. The man has been flying large passenger aircraft for 30-40 years. He has never had any accidents and was good at his job. By coincidence, bureaucrats now found out that he does not have a specific flight license for large machines. Now he is in really big trouble. Professional flying is not about professional flying, it’s about having a stupid license. I was always waiting for a critical voice in the article (or someone saying “just kidding, now we get real again”), but the voice of reason never came.
4. March 2019 at 17:12
@Todd
I don’t know the details in the US, but about half of the “patients” in an average family practice in Germany are there for one simple reason: They aren’t allowed to stay at home without getting a sick leave for their employer first. It’s really absurd.
The others are hypochondriacs and neurotics. Yes, maybe there are some really sick people. But most come for the mentioned bureaucratic reasons – or because it’s “free” since “someone else” pays the bill for them.
4. March 2019 at 19:46
I don’t know the details in the US, but about half of the “patients” in an average family practice in Germany are there for one simple reason: They aren’t allowed to stay at home without getting a sick leave for their employer first. It’s really absurd.–Christian List
Oh, in the US we make up for any efficiencies by prescribing lots of drugs for every possible malady, and by keeping people alive past their expiration date.
A discussion about sensible euthanasia is not possible.
5. March 2019 at 02:00
I would be careful not to conflate health, healthcare, and medical care. The US has poor health outcomes, but very good medical care and medical care outcomes (albeit expensive.)
You will never have good health outcomes in a country populated by fat people who carry guns and drive a lot.
5. March 2019 at 09:05
dtoh, I agree, but even taking that into account it’s very hard to measure medical care outcomes. Let’s say you “prove” that cancer treatment X adds 4 months to a lifespan. Is that good? How do we determine if it’s good? Do we use revealed preference? Utilitarian measures? And if it is good, how do we determine “how good” What is the value of four extra months when suffering from cancer. I’m willing to believe the benefit might be huge or tiny. I just don’t know. There are lots of imponderables here.
5. March 2019 at 12:48
Scott,
Good point, but I’m not sure I agree. Medical outcomes and preferences are in fact relatively easy to measure. Simply ask the average consumer whether they would prefer to live a long disease free live or die early and suffer from disease. Similarly ask a consumer whether they would rather live an extra two months in agonizing pain and bankrupt their family or die with dignity two month earlier. Sure there are some cases where it’s not so clear cut, but in general I think it’s pretty straightforward.
That said, I think that from a cost benefit perspective, a good argument can be made that the US allocates too many resources to medical care.
5. March 2019 at 13:59
dtoh, I suppose that’s as good a method as any, but again it’s tough to put a number on those choices, especially as health care consumers are not used to thinking that way. Say someone says “I’d prefer the extra 4 months in pain”. OK, but how much do you prefer that? An extra $43,000? And extra $221,000? Are people actually good at answering those sorts of questions, in a non-market setting?
5. March 2019 at 14:49
Scott,
Perhaps the extra four months (or so) would be worthwhile, if the patient has some unfinished business they have good reason to believe can be tended to during that time. Otherwise, the wish to just live as long as possible, may be complicated by the fact one may not even feel good enough during this period to smile or laugh. Many who have lived among others who bought that extra time, yet the patient had no pressing reason to do so other than fear of death, witness how those extra months aren’t always personally worth the additional costs and pain of a prolonged goodbye. Meanwhile, the rest of us sometimes end up determined to take care of life’s unfinished business as soon as possible, before such a diagnoses occurs!
5. March 2019 at 15:19
Scott, Becky,
I think part of the problem is that people aren’t really given the opportunity to answer these questions. I’m a huge believer that people make really good decisions so I may be biased.
Scott, why don’t you do a post on health/medical care sometime.
5. March 2019 at 15:40
Scott,
One more thing. Klinger says, “I think that for economists to say anything useful about productivity and wages, they should try to study individual units of individual firms.”
I’ve strongly believed this for a long time. Publicly listed companies produce a little under half of all output in the U.S. They also all provide very detailed public quarterly information on how growth in their sales (output) breaks down between volume and price.
Looking at these data, at a minimum you would have very detailed information on productivity and inflation for about half the economy. A little research on the correlation between public and private firms would also allow you to extrapolate for the other half of the economy.
IME, most companies look very carefully at whether productivity (efficiency) gains are covering the increases in their compensation costs, and if not whether they are making up the diffference through better margins.
If economists looked at these data, I think they would be amazed at how carefully firms analyze this stuff and how their behavior so precisely follows standard economic models.
5. March 2019 at 18:33
Scott,
I still don’t get why you think the price of money is not “objective”. Which price is objective anyway? What do you even mean by that? Is it not accurate enough? I assume you mean that if X people tried to determine the price they might get X slightly different results each time. But isn’t that true for any price? Can we not say that NGDP (and therefore for the price of money) is accurate enough?
dtho,
True in theory but which health care system works like that? I assume close to none. In my college days, my ethics professor explained that patients (or better: the general public) usually spend their biggest health care expenditures at the very end of their lives, usually in the last months, weeks, or even days. They spent it on diseases that will kill them for sure in a short time anyway. Does this make a lot of sense? He was very much in doubt.
Benjamin,
You’re right, the US seems to be extreme in this area, but most other (large) western countries don’t seem to be much better.
5. March 2019 at 18:55
dtoh,
Perhaps there will come a time soon when more patients become convinced the extra expense isn’t worth it. Right now the learning curve still seems pretty steep. And I don’t think many families begrudge the first person in their family who takes the expensive route, indeed they are often encouraged to do so. But the process does seems to become a lesson to others in the family to do it differently when their time comes, sometimes avoiding doctors and hospitals altogether. Even though that initial family cost may mean the old family home doesn’t get a complete renovation, or an old family car doesn’t get replaced when auto mechanics aren’t keen on repairing it anymore, I don’t think many families really begrudge their family member who took the leap of faith when everyone was called into the room to make the decision as to the crucial surgery or therapy.
5. March 2019 at 21:27
dtoh, I’ve done many recent posts on health care. A few months ago I did a post arguing the European health care system is less bad than the US system, although of course the Singapore system blows both of them away.
6. March 2019 at 11:47
Why do t you do a primer on what’s wrong with the US system. It will flush out a lot of misconceptions.
6. March 2019 at 23:50
Singaporeans seem plenty healthy, but I am not sure how easy it is to separate health care impact from life style factors?
Eg Singaporeans mostly walk and take public transport. Not much driving.
7. March 2019 at 10:31
Dtoh, Again, I’ve done that sort of post. The problems are numerous regulations that vastly push up costs, and subsidies that vastly boost demand. Combine them and you get way too much money spent on health care.
Matthias, I don’t care about the health of Singaporeans, I just want to get spending down to 5% of GDP, like they have. We spend 17% of GDP.
Health care has little impact on health.