Red GNP

The omission of human capital from the national accounts & population policy

The wealth stock of a typical country is estimated to distribute as follows: 2/3 in human capital, 1/6 in natural capital, and 1/6 in produced capital. The numbers vary by country & estimation method, but all studies (so far as the author could retrieve) have human capital in excess of 50% of total wealth stock, and range as high as 90% in developed countries.

GNP excludes the component of human capital; thus, population policy suffers an omitted variable bias in parallel to the Green GNP debate: natural capital thither, human capital hither; and to choose a corresponding color: ‘Red GNP’.

A glance at the U.N. System of National Accounts (UNSNA) verifies the absence of a human capital account.: The official UNSNA manual:

http://unstats.un.org/unsd/nationalaccount/sna2008.asp

A second glance at the underlying components and data set of China GNP (loosely built to UNSNA standard) verifies the same. The official government website:

http://www.stats.gov.cn/

Depopulation and its costs thus pass invisibly – or at least opaquely – to the economics field; e.g., in the past decade, not a few economists have lauded the post-1979 period as the “20 or 30 years of best growth ever.” Under-birthing, however, does not necessarily impact GNP for 18 years whence; thereafter, the missing labor & talent begin to show as anemic growth – or in the case of Japan, outright GNP shrinkage.

A crude, first order estimate: if the produced capital & natural capital grow 10% in a given year & the year’s age cohort shrinks 50%, the true GNP components of 1/6, 1/6, and 2/3 multiply by 1.1, 1.1, and 0.5 respectively, to generate an ugly, ugly adjusted real growth rate of -30% - that is, minus 30%. How is it possible a country shrinks at 30% a year? – the value of the buildings going up is exceeded by depletion of human capital stock.

The numbers,of course, depend highly on optimal population size: If the commis have it right, the above calculation is moot. If the commis have it wrong, the number -30% begins to quantify the cost of genocide.

GNP Inclusions and Exclusions

To rather simplify the country’s GNP calculation: the national accounts adds up an individual’s market and near-market value-added over the 1,300,000,000 persons in China. Ceteris paribus, more is better; but…

It is commonly understood GNP omits non-market production: e.g., household production – dad chops down backyard tree to build a set of good furniture; mom plants home garden, etc. Or those related to Green GNP – the drinking water, formerly pure, is no longer so; or in cleanup, the vice-versa.

The omitted variables of population quantity involve the time dimension. GNP, a Flow measure, excludes change in accumulated Stock: e.g., while parents away a fire consume the home killing the children inside (thus zeroing out their future earnings) but GNP does not register change. In the macro-parallel, the country’s births may drop to zero for 18 years and GNP again does not necessarily register; GNP may even receive and artificial boost as otherwise homebound, would-be mothers do career work.

Three suggestions: (1) A satellite account of Human Capital, (2) a partition of GNP1, GNP2, and GNP3, and (3) a National Balance Sheet

In order that economic planners may “have their cake” (the original purpose of GNP as macroeconomic planning tool) and “eat it” (a more comprehensive measure of national power – as the CPC often uses it), the monetary partition into the increasingly comprehensive measures of M1, M2, and M3 supplies a methodological inspiration. Output measures too, may be ordered in the degree of informational confidence, possibly with a narrow ‘GNP1’ built to UNSNA standards (to retain comparability with other countries), a broader GNP2 to include items such as natural capital, and finally GNP3, inclusive of satellite accounts whose imputation involve the greatest uncertainty. It poses no conceptual difficulty to track human capital value-added from the moment of conception until demise (e.g., see value of statistical life methodology.) In addition, a measure of national wealth Stock, a so-called National Balance Sheet – which, for instance, countries such as Canada have – ought to complement the Flow of GNP. None of these suggestions are unprecedented or difficult to implement, and give national decision-makers a more comprehensive view of national power.