Undercover Economist

Don’t blame statisticians for counting the wages of sin

Officials used to size up economies like butchers size up cows, writes Tim Harford

The good news is that the UK economy is about to surge by 5 per cent. The bad news is that this surge does not actually reflect economic growth but a change in statistical definitions. And the weird news is that this is happening in part because EU statistical guidelines demand that spending on cocaine and hookers be reflected in the UK’s official statistics.

Feel free to raise one eyebrow at this point. Recall that Greece’s economy grew overnight by 25 per cent after the country’s official statisticians included sex work and illegal drugs as part of their estimates of economy activity – a move that, by an astonishing coincidence, flattered the country’s budget deficit. That was in September 2006; the story has not gone well since then.

It is certainly true that the Office for National Statistics has only the vaguest sense of what is going on in the British economy’s nether regions. (Individual statisticians with a sense of adventure may know more, of course, but their observations are unlikely to be statistically reliable.) Most recreational drugs are illegal in the UK, while sex work is on the margins of legality. One suspects that not every transaction for sex or drugs is faithfully recorded on a tax return.

The ONS has made valiant assumptions in estimating that 60,879 sex workers are each employed 1,300 times a year at an average rate of £67.16. If true, that is an industry big enough to allow every man in the country between the age of 15 and 64 to visit a sex worker every three months. We might quibble that the ONS has no idea, really, how big these black-market businesses really are. Dr Brooke Magnanti, author of The Sex Myth – and pseudonymously of various memoirs of her time as a sex worker – is not impressed with the ONS’s methodology. “Why not ask escorts themselves? It’s not as if we’re hard to find,” she has written.

She may be right – but even if the ONS does not know exactly how big the sex industry is, we can be pretty sure that the answer is not “zero”. The ONS estimates are surely an improvement on what went before.

Critics will feel this is missing the point. Why should we celebrate drugs and sex work by immortalising them in the national accounts? Are politicians now to subsidise Rizla and Durex in the hope of boosting our economy further? But such criticism is confused in a way that affects far more than this particular statistical revision.
“The critics of GDP give it too much credit. It is not the guiding star for economic policy, public morality, or anything else”

We need to understand three things about gross domestic product statistics. First, GDP itself is ineffable – an attempt to synthesise, for practical purposes, something that defies description. Second, the national accounts are not designed to give a round of applause to the good stuff and a loud raspberry to the bad stuff. They are supposed to measure economic transactions. And, third, anyone who thinks politicians try to maximise GDP has not been paying much attention to politicians.

A hundred years ago, if you had asked someone, “how is the economy doing?”, nobody would have understood what you were saying. Back then economists might have tried to track the production of coal or the number of people with jobs. Yet the idea of putting all economic transactions into one big conceptual pile and trying to measure how big the pile was – that is a newer and quite radical invention. When economists such as Simon Kuznets first tried to calculate national income back in the 1930s, they were trying to understand the malfunctions of the Great Depression, and to measure the productive potential of an economy that was gearing up for war.

This number-crunching has always had a purpose. Governments used to size up economies like a butcher sizes up a cow; suddenly they were taking measurements the way a doctor takes a pulse. William the Conqueror’s Domesday Book, the definitive record of land ownership in Norman times, was replaced with the ONS’s Blue Book of national accounts. The organisation’s new efforts are designed to figure out how much money is being earned and spent – partly for the purpose of international comparison – and it is perfectly right that this includes all voluntary transactions, even undeclared or outright illegal ones. Let others argue over whether sex work and drug taking should be prosecuted or liberalised.

This error goes back at least as far as a speech given by Robert Kennedy in March 1968. The presidential candidate pointed out that official measures of economic output include napalm, nuclear warheads, cigarette advertising and jails – but not “the beauty of our poetry or the strength of our marriages”. It is a wonderful speech but like many wonderful speeches contains a rhetorical bait-and-switch. If poetry is dying and divorce is too common, that is not the fault of the statisticians.

If politicians truly aimed to maximise GDP, George Osborne, UK chancellor of the exchequer, would never have launched an austerity drive, there would be no subsidies for renewable energy, unemployment benefits would expire quickly if they existed at all, and everybody would be clamouring to increase immigration. There is more to life than mere prosperity and there is more to prosperity than GDP growth – and much as our politicians are a woeful gaggle of incompetents, even they seem to grasp that, both in their words and in their actions.

The critics of GDP give it too much credit. It is a painstaking attempt to try to measure the total production of the economy. It is not the guiding star for economic policy, public morality, or anything else.

Sex work and mind-altering substances have been around a long time. After this statistical tweak, it cannot be long before someone starts pointing at the pimps and the pushers, and blaming their existence on the Office for National Statistics.

Also published at ft.com.