Here’s my postmortem on the Coyle episode. Includes my early nominee for worst economics story of the year.My biggest takeaway from the conversation was realizing the challenge of measuring services, an increasingly important part of the economy over the last century. Not sure what the full implications are–I wish we’d talked about it more.

I meant to ask Diane about the financial sector, particularly challenging part of the service sector to measure. She talks explicitly about the financial sector at some length. Think about the value of what Goldman Sachs does. Or Bank of America. What’s the product? I’m not sure how you think about that. The financial sector’s “contribution” to GDP has grown dramatically over the last 30 years. What does that really mean? Again, I don’t know where to start for thinking about that.

The other topic I enjoyed and learned from was the production boundary. We don’t count washing the dishes and we also don’t count most of Wikipedia. That part of the conversation really highlighted for me the two different uses of GDP–trying to measure how well the commercial economy is functioning and a measure of our well-being. As more stuff shifts out of commercial activity and into volunteerism/free stuff, the bigger the gap between those two measures. What I should have emphasized is that the issue matters most when the ratio of paid stuff to unpaid stuff is changing. What we’re usually looking at is the growth in GDP not the absolute level. If that ratio is changing, the growth rate isn’t measuring just the change in the size of the commercial economy.

The latest GDP report came out this week showing very very weak growth–a tenth of a percent, teetering exceedingly close to zero or negative growth. This prompted news reports, see here and here (HT: King Banaian) that health care spending–which surged dramatically–was keeping the economy afloat. From The Guardian:

GDP, the measure of the economy’s growth, was disappointing last month, and many economists blamed it on the weather.

But there was one bright spot: people are paying for healthcare, and a lot of it. Republicans may hate hearing this, but it has to be said: you can thank Obamacare.

“Obamacare is boosting consumption,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The sharp increase in health care spending can be attributed to the opening of the insurance exchanges, he said, adding that there has been a 9.9% leap in spending on healthcare services. In fact, if it weren’t for Obamacare, the US economy would be shrinking right now.

“If healthcare spending had been unchanged, the headline GDP growth number would have been -1.0%.”

Uh, no. It doesn’t work that way. That last statement is only true if every other component in GDP would have been unchanged if health care hadn’t grown by 9.9%. And that’s simply not true. Maybe if health care spending had been unchanged, something else would have grown by 9.9%. As somebody responded to me on twitter about this–it implies that an increase in cancer increases GDP. It doesn’t. It might increase spending on health care. But unless there’s more income, increased spending on health care just means less on something else.

Here’s the fallacy. Suppose I want to know your income for the year. I ask you and you tell me you made $50,000 in salary. Another way I can get to that number is to add up everything you spent money on–food, rent, clothing, entertainment, savings and so on. As long as I count everything, I get to the same number, $50,000.

Suppose I find out you spent $5000 on entertainment. It would be very wrong to say that without that spending, your income would only have been $45,000.

The mistake of assuming health care spending adds to GDP is partly confusing accounting with economics. Or arithmetic with economics. It is arithmetically true that your income is equal after the fact to your spending on A+B+C and so on, the different things you can spend money on. But that doesn’t mean that changes in A, B, or C change your income.

A Keynesian might respond that in times of slack, increased spending can stimulate the total through the multiplier. I don’t really know what that means in a world where everything is connected. The whole idea of government spending increasing GDP in a time of recession relies on the idea that increasing government spending leaves all other spending unchanged. I’m a skeptic about that. But even if you’re a Keynesian, it’s hard to argue that increasing one component of consumption spending (health care) means the total amount of spending has to go up by the size of the increase.