Peter Thiel on Child Care and GDP, 7/26

He and others miss an important philosophical point

Mary Harrington interviews Peter Thiel. Pointer from Tyler Cowen.

Thiel argues, much of what passes as “progress” in economic terms is actually an accounting trick. For example, much of what looks like GDP growth since the Fifties was simply a matter of changing how we measured the value bundled up in family life. If, he points out, “you shift an economy from a single-income household with a homemaker to one with two breadwinners and a third person who’s a child-carer, statistically you have three jobs instead of one and therefore you have more GDP, and you will exaggerate the amount of progress that’s happened”.

I am philosophically opposed to Thiel’s argument. GDP is supposed to measure economic activity. The way I think about economic activity, GDP is getting it right.

What has happened since the 1950s is that some child care has shifted from uncompensated work, usually by wives, to compensated work, provided in the market. This shift increases GDP. But is this increase artificial?

First, consider the “third person.” The third person is doing a job that previously received no compensation. Does that mean that the third person’s services should not be counted as GDP? Just because a job is relatively new does not mean it should be excluded from GDP. In fact, every economist would agree that child care services paid for in the market properly count as GDP.

It would be more common to make the point that in the 1950s many wives provided uncompensated child care. Many people would argue that if you had counted as production the value of that child care in GDP, then GDP would have been higher then, and the growth rate from then to now would be lower.

But I disagree with that approach. I do not think of GDP as some objective measure of production, as if we all work in a GDP factory.

Instead, I think of GDP as a measure of economic activity. And every time we go to the market for something instead of providing it for ourselves, that is economic activity. That is true when we take an Uber instead of driving ourselves, when we eat in a restaurant instead of cooking at home, when we hire a contractor instead of building a deck as a do-it-yourself project.

Economic activity consists of specialization of trade. That means outsourcing. In a primitive economy, you do your own farming, your own cooking, make your own clothing, and so on. In an advanced economy, you do less of these things. You outsource them, in a pattern of specialization and trade.

We also outsource indirectly by using capital equipment. We could take our clothes down the the lake and wash them ourselves, but instead we outsource that work to a washing machine. Perhaps you could say that we outsource to the people who built the washing machine.

Should a surgeon mow her own lawn? That would be silly, given that in an hour of surgery she can earn enough to pay for many weeks of lawn mowing.

Should the surgeon stay home to do child care? Again, in a world of specialization and trade, that is not the case.

If anything, we probably have too much uncompensated child care in the economy. A parent who goes into the market economy pays taxes on earnings, while staying home to provide uncompensated child care incurs no tax. The taxes really discourage this form of economic activity.

Why would both parents work? It must be that: (a) the market values the secondary earner’s work very highly (so that after taxes the family is better off); and/or (b) the parents value paid child-care services very highly (because the secondary earner does not like doing child care full time). Indeed, given the need to overcome the tax penalty, perhaps the value of outsourcing child care has to be higher than that of outsourcing lawn mowing or building a deck.

If hiring someone for child care instead of doing it yourself is not economic activity, then using Uber instead of driving yourself is not economic activity. If counting the the former as GDP is an “accounting trick,” then counting the latter as GDP is an “accounting trick.” If you take this to its logical conclusion, then including anything at all in GDP is an “accounting trick.”

Again, there are many people, including, alas, many trained economists, who think that uncompensated child care should be counted in GDP. They are hung up on the notion that GDP measures production, rather than economic activity.

Another hang-up people have is the notion that GDP measures satisfaction. But it does not measure the satisfaction of building your own deck or caring for your own children.

Some will suggest that disrespect for women is the root cause of not counting uncompensated child care in GDP. But in reality it is not counted because it is uncompensated, not because it is child care.

I think that it is philosophically defensible to count only market-provided goods and services in GDP. It is consistent with the view that economic activity consists of specialization and trade.