The Clothesline Paradox

In his quest to join his father and his brother in the presidency, Jeb Bush recently pledged to produce 4% GDP growth if he is elected.  Many economists have questioned his claims, but the bigger question is whether GDP growth is a good measure of our national well being.  Chances are that it is not.

To understand why, think about what happens when you dry your clothes on a clothesline instead of in a dryer. Because you are neither consuming energy nor making use of the nation’s factories, you are failing to contribute to GDP.  Nevertheless, you still get dry clothes.

That, in a nutshell, is the clothesline paradox and it is far more pervasive than you might think.  In so many areas we now produce less and get more, which improves our lives, but diminishes GDP.  That doesn’t mean we should abandon basic economics, but it does mean we should take a more expansive view.  Progress can’t be reduced down to a single number.

The Miracle Of Flight

In 1908, Wilbur Wright flew his airplane in front of a series of amazed crowds in Europe to drum up demand for his new invention.  Yet as David McCullough explains in his new book about the Wright Brothers, just one year later at an exhibition in Reims, 22 pilots flew in as many different planes.  It was at that point that the era of flight had truly begun.

The economic impact of flight has been enormous.  The IATA estimates that global airline industry revenues at over $600 billion and Boeing projects that the global market for new airplanes over the next 20 years will exceed $5 trillion.  For comparison, when Wilbur flew the total GDP in Europe was only about $1 trillion.

Yet these days, the focus of the airline industry is less, not more.  Boeing’s newfound emphasis on 3D printed parts aims to reduce the weight of its airplanes by 20%, allowing it to use less materials and fuel.  The company also claims that its new 777x will reduce operating costs by a full 10%.  Its competitor, Airbus, has similar efforts underway.

While these cost savings are likely to increase airplane usage and expand the market somewhat, all of this newfound emphasis on efficiency will surely be a drag on overall GDP. (e.g. It is highly unlikely that demand for airline travel is perfectly elastic).  Is that really a problem?

The Economics Of Technological Innovation

When the Apple II launched in the late 70’s, it had less than 100 kilobytes of memory and cost between $1000 and $2000 ( four times that in today’s dollars).  You could get more memory, but at that time 10 megabyte disc would cost $5000, more than the computer itself. Yet today, you can buy 5 terabyte hard drive—500,000 times more memory—for about $100.

As Albert Wegner of Union Square Ventures explains, there are many innovations that diminish economic growth.   For example, in Peter Diamandis’s new book, Bold, he estimates that a smartphone today replaces applications that were worth $900,000 when they were first introduced, thanks to a phenomenon known as accelerating returns.

As the IT industry shifts from installed to cloud based solutions, this trend will advance further.  Large enterprises, which used to hire highly paid technicians to maintain expensive systems on site, are now utilizing much cheaper solutions that are housed hundreds of miles away.  In many, if not most cases, performance improves despite the lower cost.

We continually hear about the technology boom, but Gartner estimates a 5.5% decline in global IT spending this year.  Yet does anybody really believe that technology is in decline?

Decreasing Medical Costs, Improving Outcomes

Another major component of the economy is healthcare, which as recently as 2012 was expected to rise to 20% of GDP.  Now, however, it’s going the other way, with healthcare costs decreasing as a share of GDP and, more recently, in relation to wages.  What’s more, Lynda Chin of the UT Healthcare system points out that improving care can also reduce cost.

She points to pilot studies which suggest that even fairly basic strategies like improving coordination of care and medication adherence can lower the cost of treating diabetes patients by 20%-30%.  Considering that we spend $276 billion a year on direct treatment—not including complications like heart attacks, kidney problems, etc.—that’s a ton of money.

Dr. Chin also explains how advanced therapies like genomic testing in cancer patients can reduce costs.  Before we had these tests, doctors were basically flying blind.  Now, they can target treatment based on specific genetic markers.  Other approaches currently in trial, like immunotherapy, may prove to be even more effective still.

Improved healthcare outcomes will also be a drag on measured output, as pharmaceutical companies and hospitals will experience less demand for their services.  Although we will see some gain in GDP from increased productivity, many of the most important benefits, such as increased longevity, improved quality of life and families kept intact, won’t be accounted for.

A National Sense Of Mission?

To be clear, I’m not arguing that GDP as an economic statistic is somehow illegitimate or that we should not seek economic growth.  It is also important to note that there are other factors at work besides the clothesline paradox, such as diminishing productivity growth and slowing labor force growth that we can, and should, improve upon.

However, I do think that it is absurd to boil our national well being down to a single metric, especially one conceived of in the 1930’s for a much different economy.  As I’ve pointed out before, numbers can lie.  While there is support building for alternatives to GDP, such as happiness indices, we are still largely confusing metrics for meaning.  We can do better.

And in the past, we have.  Eisenhower’s vision created the Interstate Highway System, Kennedy inspired us to go to the moon, Johnson’s Great Society programs pulled millions out of desperate poverty.  More recently, we decoded the human genome and are now embarked on a similar quest to replicate the human brain, but nothing on a truly national scale.

In the private sector, we certainly do not lack for vision.  Entrepreneurs like Steve Jobs and Elon Musk, not to mention a more recent crop of billion dollar startups such as Theranos and Bloom Energy, turn dreams into realities and make a positive impact on the world.  For every great endeavor, the mission drives the strategy.

Yet what do we aspire to today?  Where is our public sense of mission?  If we truly are an exceptional nation, what is our next great national ambition?

– Greg