Quality of GDP

March 21, 2011

When I worked in the electric power industry we used to talk about the “quality” of earnings. That is, earnings that were cash and stood a reasonable chance of reoccuring. This became a big deal during the era of nuclear power construction. Accounting rules allowed a utility to book “earnings” based on the construction work in progress (CWIP). Yes, a utility could report earnings on a half built portion of a nuclear power plant.

It’s complicated, but I can explain the rationale if anyone is interested. Short of that the detailed explantion, the basic idea was that when the plant went into service, the utility would “give back” some of those earnings. It works great as long as everything goes as planned, but if the plant costs a lot more than expected or doesn’t get completed, then as soon as that gets recognized, then the utility is in a world of hurt.

As it turned out many utilities had income streams that were well over half composed of fiction. Their condition could have been known by a savvy investor, but utilities are supposed to be widow and orphan stocks. So, anyway, a lot of people lost money.

Okay, not back to the present. I think we’ve discussed the notion of the quality of GDP. It seems self-evident that building a bridge is a lot more productive than paying a bunch of men to dig holes and fill them up again.

But why?

I’m beginning to formulate a hypothesis, attempting to describe GDP quality. Here are some ideas of what constitute “Good GDP.”

1) It helps gather foreign currency: Economics is a competitive game. Getting more of your opponents’ currency seems like a good idea.
2) It creates skills that have use for further economic activity (Bridge building skills have great future value than hole creation and destruction)
3) It creates means that increase a nation’s productivity

Does this make sense, and if so, can you improve on these criteria?

 

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