How economists use gdp to think

That is the topic of my latest Bloomberg column.  Here is one bit:

An appreciation of GDP helps keep things in perspective. Say there is some social or economic trend you dislike or think dangerous. One inclination would be to try to visualize that trend as a share of GDP. Most things are a pretty small fraction of GDP, reflecting the scope and the robustness of the U.S. economy. In one sense America is a vast and sprawling system of shopping malls, restaurants, factories, coffee shops, construction sites, art galleries, and much, much more.

So even if the social or economic trend you find disturbing is in fact a bad thing, America — as defined by its GDP — will proceed unperturbed. People who get annoyed at small changes in America tend not to appreciate the true magnitude of America’s GDP. This also works the other way: The latest positive trend may also take a long time to truly affect GDP.

And more concretely:

The GDP comparison is especially apt for large changes which will cost a noticeable percentage of GDP. Consider climate change. The instinct of the economist is to try to pin down exactly what these costs are as a percentage of global and national GDP.

One recent estimate suggests that climate change is likely to destroy about 10% of global welfare (a GDP effect plus an amenities effect) by the year 2200. To the economist, that is a truly significant quantity of resources. Furthermore, the distribution of those losses may be unfair — and just how unfair is more easily judged if one has a sense of the magnitudes involved.

The upshot is that, all of a sudden, it is pretty easy to see that a system of carbon pricing and R&D subsidies is very likely to more than pay for itself, at least if the policies are executed with reasonable competence.

Climate change is a difficult topic to study and predict, and I am far from sure that percentage estimate is the right number. Nonetheless, it is an important step in mapping some structure onto the problem. As an economist, I am skeptical of analysis that doesn’t try to produce any number at all. Once you understand the size and scope of GDP, you understand that any list of climate disasters that destroyed 10% of GDP would be a very long list of disasters.

I was struck by a recent 10-country study showing the fears of young people about climate change. Four in 10 are afraid to have children. Almost half said that fears about climate change caused them stress and anxiety in their daily lives.

Economics also helps to put these worries in perspective. If the costs of climate change are 10% of global welfare, that is roughly equal to a few years of (non-pandemic) global economic growth. The world economy plausibly can be expected to grow about 3% a year. These kinds of simple points are missing from most climate change debates, again noting the need for better estimates of the actual forthcoming costs.

Overall thinking in terms of gdp I consider to be relatively scarce.

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