Misunderstanding economics

Jon sent me a link to this Toronto Star story, which displays an astonishingly poor grasp of economics:

The storm stretched from Montreal to Kingston and caused $1.6 billion in damage. To this day, there are houses that still have not been repaired.

Yet, the Ice Storm of 1998 is the biggest single event in Canadian history to boost the Gross Domestic Product, a simple totalling of all goods and services in the economy that is the most-used measure of the economy.

It's this irony — that rebuilding in the wake of devastation is good for the economy — that is in large part fuelling an ambitious attempt to produce an alternative to the GDP, one that balances economic growth against a much larger and more comprehensive set of numbers to tell us if we are truly better off. It's called the Canadian Index of Well-being [. . .]

First off, this "irony" is rather un-ironic. The GDP is a measurement of the approximate value produced in a year (the big clue is the word "product", yes? Check Wikipedia's entry). If you somehow managed to destroy every item of value in the entire country, then anything produced to replace the missing items shows up as part of the "product". The fact that it's replacing lost goods isn't captured by the GDP . . . because the GDP pays no attention to existing value. That's not part of its mission.

The writer's grasp of basic economics makes me suspect that he'd think it was a good idea to pay people to go around breaking windows . . . because of all the new business it would create for glazing companies and window installers. (See the Parable of the Broken Window for the original story.)

One thing the GDP has going for it is that it is measuring similar things in a constant manner: goods and services produced as recorded by the dollars for which they are exchanged. This proposed new measurement would include "ER wait times, rates of cancer and other diseases, body mass index, smoking rates, life expectancy, infant mortality and low birth rates, even rates of depression and suicide." With disparate data sources like that, you can pull any interpretation out that you might like . . . it's not a measurement of anything; it's a numerical toxic waste dump.

This doesn't mean that the attempt to measure non-dollar-denominated benefits is doomed to failure, but that you need to select the data to use for your measurement in as transparent and meaningful a way as possible. I could construct an "index of lifestyle health" by charting the number of Tim Horton's outlets in a given area, divided by the number of cigarette packs sold, and then multiplying by the number of hot tubs were listed in housing ads, but it wouldn't tell you anything useful at all.