GDP Doesn't Include Proceeds of Crime. Should It?

Date : 12/06/2019 @ 10:59AM
Source : Dow Jones News

GDP Doesn't Include Proceeds of Crime. Should It?

By Jo Craven McGinty 

When the U.S. calculates its gross domestic product, it only includes things that are legal. But if the wares of drug dealers, pimps, bookies and other black-market denizens were included, the GDP would expand by more than 1%, according to one estimate.

It would also align our national accounts more closely with those of the European Union, whose members already incorporate some illegal activities in their tallies.

Countries all over the world measure the size and structure of their economies based on international standards published by the United Nations and known as the System of National Accounts, or SNA.

"It's the set of recommendations every country uses across the world," said James Tebrake, assistant director of the statistics department of the International Monetary Fund. "The key thing is we all do it the same way so we can compare the U.S. economy to the Canadian economy to the European economy."

GDP, one of several metrics in the SNA, measures the total value of the final goods and services produced within a country in a year. It's the main measure of economic output, and it typically includes things like clothing, food and housing.

But the SNA has long recommended including illegal activities as well because, it argues, omitting them distorts a nation's GDP, undermines its monetary policies and upsets the uniformity of the accounts.

"If France does not include illegal activities, and Germany does, the German economy will be bigger," Mr. Tebrake said.

In the past, countries resisted accounting for illegal goods and services because of the difficulty of assessing their value and because they assumed the activity might not be significant.

But Canada has found that accounting for illicit sales of cannabis alone would add around 0.4% to its GDP. The U.K. has estimated that prostitution and illegal drugs represent around 0.4% of its GDP. And in the U.S., Rachel Soloveichik, a research economist with the Bureau of Economic Analysis, has estimated that in 2017, illegal activities would have added more than 1% to the GDP. She presented her analysis last month at the IMF Statistical Forum.

The EU began accounting for illegal activities in its national accounts about five years ago.

"The standard is not really new," Mr. Tebrake said. "What is new is that more and more countries have decided, yes, it's time to put it into our national accounts."

The EU has focused on drugs and prostitution, but Dr. Soloveichik explored how four illegal activities -- drugs, prostitution, gambling and theft from businesses -- would affect the U.S. accounts.

To estimate the value of illicit activities, she used other data as proxies, including fraud and embezzlement arrests as a proxy for the number of people stealing cash and arrests of female prostitutes for the number of illegal prostitutes.

According to her estimates, illegal drugs would have added $111 billion to the U.S. GDP in 2017; illegal prostitution would have added $10 billion; illegal gambling would have added $4 billion; and theft from businesses would have added $109 billion.

As a percentage, the amount would represent a larger portion of the GDP than agriculture, forestry, fishing and hunting. But including the value of illicit goods and services in the national accounts wouldn't necessarily change economists' view of the strength of the economy.

"If it grows at the same rate, it doesn't matter," Mr. Tebrake said. "But if the illegal economy were growing at, say, 1% faster than everything else, that's a dynamic we might want to pick up."

Such a shift might signal that government policies or regulations need to be adjusted.

In the U.S., Dr. Soloveichik found that real illegal output did grow faster than overall GDP during the 1970s and after 2008 -- but she concluded the growth ameliorated the economic slowdowns that occurred in those periods.

Dr. Soloveichik worked on her analysis for two years but considers it a first cut, and for now, the U.S. isn't ready to include the illegal activities she documented in its national accounts.

"We have to explore if this is something we could possibly do going forward," a spokeswoman for the BEA said.

Until then, illegal sex, drugs, gambling and theft will remain off the books.

Write to Jo Craven McGinty at Jo.McGinty@wsj.com

 

(END) Dow Jones Newswires

December 06, 2019 05:44 ET (10:44 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.


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