The Limits of GDP

Tyler Cowen observes that “Fiscal policy can raise measured gdp without improving the economy or human welfare.”

This, however, just seems to me to be a special case of the well-known fact that measured GDP can increase without improving the economy or human welfare. Consider two stay-at-home moms. They could agree to go work full-time as housekeepers and babysitters for each others’ families, each at a salary of $20,000 per year. That would raise measured GDP but nobody would be better off. And of course the costs of living in a city whose skies are ruined by smog isn’t really captured by GDP measures. But on the other hand, GDP doesn’t really measure the value of “new goods” properly. There are all kinds of problems with this metric. But it plays an important role in our broad understanding of the economy and nobody’s got a better statistic to use so we muddle on. I don’t see this has having much to do with the merits or demerits of fiscal policy as such.