I want to skip back in time to some of the blogging on GDP. A few bloggers picked up on Stiglitz’s point that GDP is not a good proxy for wellbeing. No doubt.

I have made the point before that even basic supply and demand analysis the GDP equivalent (market revenue) is not equal to the wellbeing equivalent (consumer surplus). Nonetheless it is true, both in the simple supply and demand case and the aggregate, that the GDP and wellbeing are correlated.

Broadly speaking more resources mean more options. Assuming that people know what’s good for them, more options will lead to greater wellbeing. To pick up on Felix Salmon’s example: You could always run down a hill for free. Now you can also go skydiving. If people are paying to go skydiving when they can still run down hills for free then we can safely assume that they prefer skydiving.

However, there is another often missed issue. We only tax market goods. Which means that in the current world, the second best world in econospeak, there is an effective externality to GDP. The higher GDP the higher taxes. That means, contra most econ 101 lectures, that I am better off when my countrymen are wealthier.

As a citizen of the US I have an effective equity stake in the output of every person in the US. But, I have no stake in their happiness. That means, all else considered I would prefer them to be less happy and more productive.

This is the inverse of the problem of marginal taxation. Marginal taxation means I have an incentive not trade no market goods for market goods since I pay tax on market goods. The inverse is that society has an incentive to encourage me to produce market goods.

Thus we should not find it strange that our institutions attempt to maximize GDP. Higher GDP has spillovers for the rest of society.