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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.
Peter Thiel on Child Care and GDP, 7/26
I see where you're coming from but I'm not entirely convinced. To extend the old jib against Kenysians, just because the government lets out a contract for a construction company to dig a hole and a contract for another company to fill it up again, instead of directly employing the guys with shovels doesn't mean there was anything productive accomplished even if the former situation has all the hallmarks of happening 'in the market'.
You're making the assumption that the surgeon would have spent the hour mowing the lawn performing surgery, i.e compensated work. I think it's equally reasonable to assume she could have spent that hour reading a book, or playing a musical instrument, or running. She could have also have spent that hour at a museum or play or musical performance, which would also have generated some GDP but less than an hour of her performing surgery, but we don't try to account for the difference between the two.
Part of Theil's, and many other people's arguments, about the effect of second jobs on GDP is that a person with a non-working partner has to demand compensation sufficient to support their dependents. I think that makes it something of a misnomer to say that the stay-at-home spouse was uncompensated. They are being compensated by the working spouse in the same way a child care provider would but he's absolutely right that those intra-family transactions were not captured in GDP historically. So we're comparing GDP measured using family units against GDP measured by individual activity. If we deconstructed historical GDP to account for the intra-family transactions we might very well see the lower levels of growth.
Some people are trying to define GDP one way, and you're trying to define it another. You're talking past these people by ignoring the concept they are trying to get at, it's not clear you're providing a new insight by doing so.
What we observe in the real world is that uncompensated childcare is highest amongst low and high skill people. Low skill people can't afford daycare. High skill people can afford to live on one income. It's the wives of the wealthy, usually themselves high skill and potentially high earning, that have a higher stay at home rate than the middle class. In this sense we could call being a SAHM a superior good as shown by revealed preferences.
Talking to most actual parents, it seems that there are three things that keep women in the workforce when they have young kids.
1) Two incomes only way to afford basic necessities (especially real estate).
2) Worry that if one takes a break for five years they won't be able to get back into their career (impact after returning rather than lost wages during).
3) Even when adequate, husbands income not reliable enough to risk it all on single income.
The net result of turning childcare from something with low marginal cost (a parent watching three kids instead of two doesn't cost anything more) to something linear (each additional kid costs more daycare) has the effect of deeply depressing fertility. Perhaps daycare is part of the general trend to pull forward consumption to the present at the expense of the future (when you have a lot of grandkids).