Tyler Cowen and GDP

There are a few points I find problematic in Tyler Cowen’s interesting book review in the Washington Post of February 21. Warning: I have not read the books reviewed, so I reserve the right to change my opinion. I agree with nearly everything Cowen says, but I have a few main points of disagreement.

First, national defense or domestic security is as much a final good as heating oil for houses, home alarm systems, or private guns. So theoretically, national defense and domestic security should remain in GDP, although only as value added, not as total “sales” like in the current measurement.

Second, education is not only an intermediate input, it is also a consumption good and an investment good. So, in theory, at least part of education must remain in GDP.

Third, goods that are free of charge to consumers like Facebook or Google do enter in GDP by way of their value added, that is, the profits earned by their producers.

The source of this last problem (and perhaps of some others too) is, I think, the following. It must not be forgotten that GDP measures production, not welfare. It is not meant to measure welfare. Cowen, of course, understands this, but he perhaps does not draw all the implications. Viewed in a partial equilibrium framework, GDP would measure total expenditures (on final goods), not consumer surplus. So criticizing GDP for not measuring consumer surplus misses the mark.