BOOK EXTRACT: Chronicles: On our Troubled Times

An extract from the latest collection of essays by infamous economist Thomas Piketty.

Extracted from Chronicles: On our Troubled Times by Thomas Piketty, published by Viking, RRP: $40.00. Reprinted by permission.

In January 2008 President Nicolas Sarkozy announced that he had asked Nobel  Prize-winning economist Joseph Stiglitz to lead an expert commission to investigate new statistical indicators of economic progress.

Economic statistics had been a subject of controversy in recent years; some had argued that official data offered too rosy a view of the average French household’s economic situation.

The task of the Stiglitz Commission, the president said, would be to find ways to move beyond a narrow understanding of gross national product, which he termed ‘an overly quantitative and  accounting-oriented approach.’

On September 14, 2009, the commission delivered its final report.

Enough of GDP,
Let’s Go Back to National Income
October 6, 2009 

The Stiglitz report on new economic indicators has been criticized for lacking new ideas, and especially for offering recommendations that are as vague as they are numerous.

It does, however, contain one concrete proposal that, though not novel, deserves to be supported. We should stop using GDP and emphasize NNP (net national product) instead. Net national product, more commonly called ‘national income,’ was widely used in France before 1950, and still is today in the  Anglo‑Saxon countries.

It can still be calculated from the detailed accounting tables produced by France’s national statistics agency, INSEE. Unfortunately, it never gets highlighted, either in official publications or in public debate. That’s a shame, and the reason can be summarized simply: in trying to measure the various incomes actually available to the residents of a country, national income seeks to place human beings at the center of economic activity, whereas GDP to a large extent reflects the productivist obsessions of the postwar decades. GDP is a reflection of an era when the accumulation of industrial goods was thought to be an end in itself, and an increase in production seen as a solution to everything.

Today it is high time we go back to national income.

What are the differences between GDP and national income?

The first is that GDP is always ‘gross,’ in the sense that it adds together all goods and services, without deduct‑ ing the depreciation of capital that made the production possible. In particular, GDP does not take into account the wearing out of housing and buildings, equipment and computers, and so on.

Yet INSEE makes meticulous estimates of this depreciation, which are obviously imperfect but which at least have the virtue of existing. In 2008 the total was estimated at €270 billion, versus a GDP of €1.95 trillion, hence a net domestic product of €1.68 trillion.

Taking depreciation into account allows us to see, for instance, that French companies are currently in a situation of negative saving: they distribute more to their share‑ holders than they actually have to distribute, so that what they have left over is not even enough to replace  used‑ up capital. Many countries have also started to integrate depreciation of natural capital into their estimates, along with the damage to the environment caused in the production process.

These efforts should be pursued. The second difference is that GDP is ‘domestic,’ in the sense that it tries to measure the wealth produced within the domestic territory of the country in question without worry‑ ing about its final destination, and, in particular, not taking into account the flow of profits between countries.

For example, a country whose firms and productive capital are entirely owned by foreign shareholders could well have a very high GDP, but a very low national income, once repatriated prof‑ its are deducted.

For France in 2008 this correction hardly makes a difference: according to INSEE and the Bank of France, French residents own roughly as much wealth in their foreign holdings as the rest of the world owns in France. France’s national income is thus practically the same as its net domestic product (€1.69 trillion). But things are quite different in many other countries, and not just poor ones, as the case of Ireland shows.

Scaled up to France’s population, Ireland’s GDP is more than €31,000 per capita, but its national income is only €27,000. Of course, this is still greater than the average income actually pocketed by French citizens, since it includes the value of goods and services financed by taxes (education, health, etc.), which is legitimate.

But it does get closer. National income can thus help narrow the gap between statistics and perception. But only as long as we also publish the distribution of national income, and not just averages. The latest update from the  top‑income data series that we have created with economist Emmanuel Saez thus shows that the share of national income going to the top 1 percent of Americans has risen from less than 9 percent in 1976 to nearly 24 percent in 2007, a transfer of 15 percent of national income. Between 1976 and 2007, 58 percent of U.S. growth was thus absorbed by 1 percent of the population (this figure reached 65 percent between 2002 and 2007).

The concept of national income lends itself well to this kind of social accounting of growth, and that is not the least of its virtues.

Copyright © Chronicles: On our Troubled Times by Thomas Piketty, published by Viking, RRP: $40.00. Reprinted by permission.

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