GDP, Hedonics, and Imputation
A recent repost over at Naked Capitalism brought to my attention the question of how US GDP is calculated. In particular, this snippet caught my eye:
No other country makes these so-called adjustments, using a hedonic price index. And the cumulative distortion is massive. In 2005, economist/investment advisor Michael Shedlock contacted the Bureau of Economic Advisers and they supplied some dated information on hedonics (including a spreadsheet). He found that hedonic adjustment to GDP was 2.257 TRILLION dollars, or 22% of then-current GDP.
So I checked. First of all, several other countries do indeed use hedonic measurements in GDP (source, click to enlarge):
Okay, so the problem isn't so drastic when it comes to cross-country comparisons. But how bad is it when it comes to a real measure of prosperity? In order to find the answer, I checked out the Michael Shedlock claim cited above. It led me to this BEA paper, which contained the following table (click to enlarge):
So that's where the $2.2 trillion figure comes from. But reading it carefully, it appears to me that the value of the adjustment is not $2.2 trillion, but only the value of the adjusted components is. I can't find a figure for the value of the adjustment, but information in the same paper suggests that it might be as little as 2% of that amount, or $44 billion annually (0.4% of GDP). That seems like a reasonable magnitude of adjustment to me, assuming you agree with the underlying rationale for hedonic adjustment.
The next step was evaluating Shedlock's paired claim regarding the impact of "imputed" GDP. These adjustments are made in order to account for the value of unbilled services, like owner-occupied housing and free checking accounts. Shedlock is correct in asserting that this accounts for a significant share of GDP - according to BEA, about 15% in 2006. Reviewing their policy, however, leads me to doubt that there is a significant concern here.
First, owner-occupied housing and employer-provided health care make up a full 70% of imputations. Obviously, these are huge non-marketed goods that have real value, and they are therefore included in GDP as their opportunity costs indicate they should be. In fact, for owner-occupied housing, the adjustment may be even too low, since market rates are clearly insufficient to convince the owner to rent out his house, suggesting he receives greater-than-market utility from owning his own home.
Half of the remaining imputations are covered by "financial services" and half are other miscellaneous items, so if we consider this entire segment to be unwarranted bunk, we end up shaving about 4.5% off of reported GDP. That's a significant, but not massive, amount - it's about 85% the size of the Recovery Act.
All this, of course, means that the hysteria is a bit misplaced, even taking the worst-case scenario that BEA is full of a bunch of monkeys who report GDP figures based on die rolls and dart throws. I guess we can sleep easy tonight knowing that the great government conspiracy hasn't got totally out of control yet.
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