We Are In An NGDP Factory

Arnold Kling has a new post discussing the issue of wages and productivity. He argues that productivity is increasingly difficult to measure:

We are not in a GDP factory. As the share of GDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where real output and the quality of labor input are extremely difficult to measure.

This is also my view if GDP means RGDP (which, in context, it clearly does.) Indeed Kling and I are probably out on the extreme, in terms of being especially skeptical (relative to other economists) of the usefulness of measures of RGDP, real productivity, the price level, etc.

Over at Econlog, I argue that while the problem of measuring real productivity is very real, it’s largely unrelated to the so-called “wage decoupling issue—which is mostly about the gap between nominal wages and nominal productivity. Fortunately, errors in measuring real productivity have no impact on measures of nominal productivity.

So while I entirely agree with the Kling quotation above, I also strongly believe the following to be true (please read carefully):

We are in an NGDP factory. As the share of NGDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where nominal output and the quantity of labor input are relatively easy to measure.

So why is this second claim so different from the Kling quotation? Because RGDP and NGDP are radically different concepts, almost unrelated. Thus we can say with some confidence that the nominal health care industry has expanded from (say) $36 billion to $3.6 trillion since the mid-1960s, but I have absolutely no idea how much real health care output has grown, as I don’t even know what the output of the health care industry is. What are they trying to produce? (Recall that Robin Hanson says that health care is not about health.)

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