There is a longish article on the value (and misuse) of the GDP stats in the Sunday NYT magazine. The author lays out the case that the US will, over the next few years, supplement or perhaps even replace GDP as the ultimate measure of economic growth.

In its place? Several 100 metrics that measure all manner of other factors, both quantitative and qualitative.

This is intriguing, for numerous reasons. First, of all the official economic data points the government releases, GDP is the easiest to game — you simply under-report inflation, and GDP appears to be better than it is. And ever since the Boskin Commission’s misbehavior (I call it a cowardly theft from the elderly), we have been dramatically under-reporting inflation data. Hence, we have nearly two decades of bogus GDP data in the can.

Second, and perhaps more significantly, GDP simply measures how much stuff we produce, buy and sell, and the folks we hire to make that stuff. It ignores all manner of other elements that go into that process.

I am not suggesting that GDP is a valueless measure (at least, if it were somewhat more accurate). But it is woefully incomplete. And the impact of making policy towards GDP has had very specific, corporate benefits. If we were to incorporate other more human factors, the net result could be quite substantial.

I wonder if we might see some sort of a pushback on this, especially from the Randians and Chicago-ites.

Regardless, it is a worthwhile topic to think about, if you are at all interested in how the government deploys its substantial resources into the economy.

Here is an excerpt:

“Whatever you may think progress looks like — a rebounding stock market, a new house, a good raise — the governments of the world have long held the view that only one statistic, the measure of gross domestic product, can really show whether things seem to be getting better or getting worse. G.D.P. is an index of a country’s entire economic output — a tally of, among many other things, manufacturers’ shipments, farmers’ harvests, retail sales and construction spending. It’s a figure that compresses the immensity of a national economy into a single data point of surpassing density. The conventional feeling about G.D.P. is that the more it grows, the better a country and its citizens are doing. In the U.S., economic activity plummeted at the start of 2009 and only started moving up during the second half of the year. Apparently things are moving in that direction still. In the first quarter of this year, the economy again expanded, this time by an annual rate of about 3.2 percent.

All the same, it has been a difficult few years for G.D.P. For decades, academics and gadflies have been critical of the measure, suggesting that it is an inaccurate and misleading gauge of prosperity . . . In the U.S., one challenge to the G.D.P. is coming not from a single new index, or even a dozen new measures, but from several hundred new measures — accessible free online for anyone to see, all updated regularly. Such a system of national measurements, known as State of the USA, will go live online this summer. Its arrival comes at an opportune moment, but it has been a long time in the works. In 2003, a government official named Chris Hoenig was working at the U.S. Government Accountability Office, the investigative arm of Congress, and running a group that was researching ways to evaluate national progress. Since 2007, when the project became independent and took the name State of the USA, Hoenig has been guided by the advice of the National Academy of Sciences, an all-star board from the academic and business worlds and a number of former leaders of federal statistical agencies. Some of the country’s elite philanthropies — including the Hewlett, MacArthur and Rockefeller foundations — have provided grants to help get the project started. “

That’s your weekend homework assignment . . .

>

Source:
The Rise and Fall of the G.D.P.
JON GERTNER
NYT Sunday Magazine May 10, 2010
http://www.nytimes.com/2010/05/16/magazine/16GDP-t.html

Category: Data Analysis, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “The End of GDP ?”

  1. Its Me says:

    “That’s your weekend homework assignment . . .”

    Yes professor.

    But if we spot the hedonistic inflation rate can we get hedonistic grade inflation?

  2. tamesthyena says:

    The US moved from GNP to GDP when those pesky Exports-Import accounts started going negative in the early Eighties. The US authorities then encouraged the IMF to rebase their Purchasing Power Parity adjustments at the core of making real international economic comparisons when the Nominal GDP numbers using regular Dollars started to make the Chinese economy look too large for comfort two or three years ag0.
    Now they are focusing on what, Happy National Production as the measure for economic performance? These adjustments are to clear thinking macroeconomics and policy making what Pro Forma earnings are to Accurate Accounting and investing; they initially intentionally delude the public, and end up softening the blow of relative economic decline

  3. constantnormal says:

    but but but … how will we compare ourselves to the rest of the planet?

    (dons tin foil hat) … perhaps this is all a conspiracy to support a form of “data isolationism”, with our “metric of merit” being carefully constructed to show Us as being better off than Them.

    OK … having said my piece, now I’ll go and actually read the article.

  4. engineerd1 says:

    Gosh, this assignment was easy. I went to the web site and can report without fear of contradiction that this is yet another sh_tface liberal initiative to attempt to move us more quickly down the toilet of European Social Democracy. The measures will mirror on a global level the sort of metrics that make Amerika’s most liveable city that which offers the most condoms for kids, handouts for bums, dyke firefighters, gay councilmen, and emasculated cops.

  5. riverrat says:

    Progressive and environmental economists have long recognized that GDP is a grossly inaccurate measure of how well we are doing economically. Principal reasons are that it counts a lot of “bads” as well as “goods”- anything that generates cash flow (e.g. money spent on cigarettes) and externalizes (does not count) a range of negative externalities that arise from economic activity (e.g. pollution produced when we import goods on container ships).

    One of the original alternative measures to gain traction was the Index of Sustainable Economic Welfare (ISEW), which is similar to the later Genuine Progress Indicator (GPI).

    Here is a link to info about the latter, including its theoretical foundation:
    http://en.wikipedia.org/wiki/Genuine_Progress_Indicator

  6. The Curmudgeon says:

    The problem with measuring GDP cuts to the heart of what an economic system is for. Presumably, economic systems exist to maximize the welfare of their participants in some way. Whenever GDP is mentioned intelligent analysis should necessarily include what the GDP level means for per capita income and then how that income is distributed. Otherwise, you just get an abstract, meaningless number.

    When China takes the top GDP spot in the world in the next few years as it surely will, its people will still, on average, be far less well-off than the US, Japan, and most every other developed economy on the basis of both per capita income and the distribution of that income among its people.

  7. flow5 says:

    You can throw away all of the statistics now collected. Mathematically, forecasts are infallable. Banks debits say it all (the old G.6 release).

  8. flow5 says:

    It’s impossible to miss economic forecasts.

    As I said in Dec:

    Contrary to economic theory, & Nobel laureate Dr. Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length. However the lag for nominal gdp (the FED’s target??), varies widely.

    Assuming no quick countervailing stimulus:

    2010
    jan….. 0.54…. 0.25 top
    feb….. 0.50…. 0.10
    mar…. 0.54…. 0.09
    apr….. 0.46…. 0.10 top
    may…. 0.41…. 0.01 stocks fall

    Stock market makes a double top in Jan & Apr. Then the real-output of final goods & services falls/inverts from (10) to (1) from Apr to May. Recent history indicates that this will be a marked, short, one month drop, in rate-of-change for real-output (-9). So stocks follow the economy down (with yields moving sympathetically?)
    Apr 13 09:08 am

  9. constantnormal says:

    Nicely put, Curmudgeon.

  10. Bomber Girl says:

    The bit at the end was interesting, concerning how one could “click” on a subject such as health insurance coverage or obesity and see how states compare. One could then look at measures of interest – if something is important to you for your own well-being, policy, or whatever, there is more data for tracking that specifically instead of a global GDP figure. That said, the data is what it is….if “rack rate” equivalent data is included, you really can’t tell what people are paying for the room and it’s just as gameable as GDP, only more detailed. Obesity, right, whose checkin’ those scales?

    Surprised the article didn’t mention the GNH thing, coined in Bhutan. awhile back. http://en.wikipedia.org/wiki/Gross_national_happiness. Of course, I think the King of Bhutan probably had it pretty good.

  11. riverrat says:

    Curmudgeon: “When China takes the top GDP spot in the world in the next few years as it surely will, its people will still, on average, be far less well-off than the US, Japan, and most every other developed economy on the basis of both per capita income and the distribution of that income among its people.”

    To which I would add that citizens in many other developed economies also enjoy a host of non-market benefits from things like stronger environmental laws and better developed social infrastructure and institutions. These benefits include better physical and mental health, greater autonomy and freedom for self determination. Since they are not traded in markets, these important benefits to overall well-being and quality of life are not included in GDP.

  12. constantnormal says:

    I really doubt that our government (whether under R or D rule, in this case it really doesn’t matter) has the self-confidence to honestly accept an indicator of the “goodness” of our economy, a measure that takes into account such things as our environment, national heath, national level of education (even such simple measures as basic literacy, let alone the level of academic education achieve by the “average” citizen), average compensation as related to average basic life support expenses, savings rate, etc.

    When this new measure shows us to come in towards the middle of the pack in the developed world, with many nations clearly outperforming us, and behind even some of the emerging nations, the tendency will not be to improve our nation, to improve our lives, it will be to attack the “new metric”.

    We have been, as a nation, too intent upon chanting “we’re number one!” to notice how far we have slid from that once-true statement. And somewhere along the way, the will to work, the will to compete has vanished.

    “Good Enuf” has replaced “The Best” as our national work ethic, and Homer and Marge Simpson are the new stereotypical Americans.

  13. alfred e says:

    Ouch! I still sting from how Clinton and Boskin raped America for the federal government’s benefit. CPI my ass.

    Once I have that recalled I am off-base and beyond logic.

    It just all becomes more unbelievable every day. And we get to eat it.

  14. mgkurilla says:

    It’s even worse than merely comnig to grips with a realistic and honest GDP figure. Currently GDP makes no effort to evaluate the sustainability of the growth. All the low interest rate credit inducing growth earlier in the decade was worse than unsustainable, it was metastatically toxic to everything else.

    In addition, we don’t distinguish between GDP contributors that are functionally merely extractive based generators of GDP (like GS) versus the truly growth promoting activities. If you pay to tear down an eyesore in a city, you contribute to GDP. But there’s a difference if you stop there versus doing something economically useful with that location.

    Health care is another component that can go either way. Spending 25% of our health care dollars on the last 6 months of life is not going to produce returns down the road. This is why there is usually a disconnect between main street and wall street.

  15. ezrasfund says:

    GDP is a very crude measure, indeed. Yesterday’s computer, slow and expensive, added more to GDP than today’s much faster and cheaper device. The NYTimes I read today online, updated every few minutes, adds less to GDP than the paper that was printed, distributed and sold. That unnecessary surgical procedure adds more to GDP than a wellness program. That auto accident resulting in a totaled car adds more to GDP than a safe trip. Our pursuit of GDP has gotten us a lot of things we don’t need, including plenty of financial services, lots of expensive medical procedures, and some houses in AZ.

  16. willid3 says:

    i seem to recall a few years ago that some economists (and politicians) were pushing the US to add to the US GDP ‘savings’ (i.e. the inferred value added by shipping work else where was to be considered as an add to the US GDP) from other nations. which seemed to me pretty stupid, byt then they were economists and politicians pushing it

  17. Moss says:

    Well stated ezrasfund.

    The existing GDP measure always puts emphasis on more quantity with no real measure of feedback loops either positive or negative. Energy efficiency, clean air or water, safety, health…. Eating less will reduce GDP but probably go along way to having a healthy population and a much less expensive health care system.

  18. Joseph Martinez says:

    Since the hegemony forces are behind the ‘State of the USA’ that is the overpaid all-star board from the academic and business world and some of the country’s elite philanthropies just how accurate can it be? As part of the middle class I have seen the middle class real income increase 0% in the past ten year and have watched that the income of the people that are behind the ‘State of the USA’ increase 100% to 1000%. I can’t take any prudence in the report. I know that the USA status in the world is in question but to have another report out moving numbers around again is not what we need.

  19. evans says:

    Best argument against GDP per capita as a measure of comparative well-being is the position of Ireland in OECD or World Bank tables.

    One only has to spend a few days traveling around there to realize that its “wealth” is illusory (as we are now discovering).

    Even back in 2007 when it was flying, it was a “poor” country: crappy houses; crummy public infrastructure; and–not that it counts in these figures– a provincial and derivative culture.

    The fact that it scores higher than Canada, Denmark, or Germany says it all.

    1 Luxembourg 78,559
    — Macau 59,451
    2 Norway 58,141
    3 Singapore 49,288
    4 United States 46,716
    5 Ireland 44,195
    — Hong Kong 43,922
    6 Switzerland 42,534
    7 Netherlands 40,850
    8 Austria 38,153
    9 Sweden 37,383
    10 Iceland 36,770
    11 Denmark 36,604
    12 Canada 36,444
    13 Australia 35,677
    14 Germany 35,613
    15 United Kingdom 35,445
    16 Finland 35,426
    17 Belgium 34,493
    18 Japan 34,099
    19 France 34,045

    World Bank GDP p.c. (PPP) 2008

  20. Nelson says:

    They should just abolish statistics like Sir John Cowperthwaite recommended. He believed “that statistics were dangerous: they would led the state to to fiddle about remedying perceived ills”

    http://www.quebecoislibre.org/06/061029-5.htm

  21. Mike in Nola says:

    Ezrafund has it right.

    Moreover, the existence of a GDP stat gives positive feedback to the Keynsian babboons who think that juicing the number with QE or stimulus number is the equivalent of a recovery. I think while back I had compared their thinking to the cartoon characters who think they can move the elevator up and down by manipulating the indicator.

    They don’t seem to get the difference between cause and effect: a good economy will produce a good GDP, but having a good GDP doesn’t mean you have a good economy.

  22. kaleberg says:

    Actually, GDP overstates national well-being. From the point of view of anyone who works for a living, the GDP is nearly irrelevant. Since the start of the 80s, an hour of work has meant less and less in terms of per-capita share of the GDP. That is, the GDP has grown, and it has grown faster than the population, but working an hour gets you less and less of it. If you look at the current recession, which has supposedly ended because the GDP is rising again, then you can see the disconnect is complete. GDP can rise all it wants, but your hour of work will get you no more, and that’s assuming you can get an hour of paid work.

  23. riverrat says:

    MikeinNOLA: “Ezrafund has it right…moreover, the existence of a GDP stat gives positive feedback to the Keynsian babboons who think that juicing the number with QE or stimulus number is the equivalent of a recovery….They don’t seem to get the difference between cause and effect: a good economy will produce a good GDP, but having a good GDP doesn’t mean you have a good economy.”

    Ezrafund does indeed have it right. Same point I was trying to make, but in a less verbose and more direct fashion.

    I think MikeinNOLA misinterprets the potential of Keynesian stimulus though.

    To be sure, shoveling borrowed money into the economy without proper analysis of true costs and benefits can easily exacerbate problems with mindless GDP growth that alternative measures of economic well-being are designed to account for. But if stimulus money is spent on sustainability-oriented infrastructure such as mass transit, greater energy efficiency, etc. per capita economic well-being may very well increase over the longer term.

    In other words, whether or not Keynesian stimulus spending makes sense depends to a great degree on what the money is being spent on or invested in. Analytical tools such as ISEW and GPI are intended to facilitate better decision making about precisely these kinds of issues.

  24. [...] On the search for a better measure of economic health than GDP.  (Big Picture) [...]

  25. markwax says:

    “Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. . . . Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.” Robert F. Kennedy, 1968.

  26. mathman says:

    The end of GDP? Hell, this is the end of humanity:

    http://questioneverything.typepad.com/

  27. Mike in Nola says:

    riverrat: You from NOLA, too?

    Although, I can’t claim an extensive knowledge of Keynes theory, it seems mostly to prescribe deficit spending during recessions. I don’t count what you describe as really Keynsian; it’s just common sense spending that might do some good along the way and probably should have been started even when we didn’t have huge deficits. As long as we are having to pay extended unemployment, we should have a new WPA, not just thowing money at states to support the same old bureaucracies that employ many administrators who don’t really produce anything.

  28. To criticize GDP because it doesn’t measure well being or sustainability is to miss the point. It’s like criticizing dogs because they don’t build dog houses. GDP measures gross domestic production, nothing more. It’s a handy measure, but if you want more, use a different measure.

    A more compelling criticism is that inflation is mis-measured, which affects GDP comparisons.

    Nevertheless, if you don’t think GDP represents the real world, what about debt/GDP, a one-year measure of production divided by a 225 year measure of net money ever created by the government — perhaps the silliest economic fraction ever devised. See: http://rodgermmitchell.wordpress.com/2009/11/08/federal-debtgdp-a-useless-ratio/ Yet economists continually use this fraction to prove whatever they wish to prove.

    By the way, using a statistic based on dozens or hundreds of ratios begs the question: How do you measure and weight the relative effects of each ratio?

    Rodger Malcolm Mitchell

  29. ezrasfund says:

    The absurd situation of the GDP of Ireland brings in another point.

    As has been discussed in the media recently, Ireland has one of the lowest corporate tax rates in the world, so corporations maneuver to report more their profits from Irish operations. An American drug maker which manufactured drugs in Ireland that are sold in the US, reports all of the profits to manufacturing rather than to sales and patent rights.

  30. Kimble says:

    A statistic involving several hundred estimates cannot possibly be without value judgements, and therefore biases.

    Consider that situation if inequality is included, as I reckon it would be. Is rising inequality necessarily bad? Go and google the very significant argument against the various measurements of inequality. There will be a few thousand pages dedicated to it on the internet. Consider, or even better, research the problems with many studies that try to measure the “happiness” of a country.

    ~~~

    BR: Ahh, but GDP has implicit value judgments as well . . . specifically, that these other factors do not matter.

  31. Ted Kavadas says:

    Good post…I too agree that GDP is flawed in many respects.

    Until a better method is developed and “accepted”, I believe that a variety of economic indicators and forecast indices should be used. The ones that I have been tracking have been indicating present and future economic activity to be below that shown by GDP.

    Here is a link to my latest post on various indicators for those interested:

    http://www.economicgreenfield.com/2010/04/30/updates-on-economic-indicators-4/