Welcome to the new version of European Tribune. It's just a new layout, so everything should work as before - please report bugs here.

FT: Is GDP the wrong indicator?

by Melanchthon Wed Jan 28th, 2009 at 08:15:15 AM EST

The Financial Times published today a column about the lack of relevance of using GDP as an indicator:

FT.com / Comment / Analysis - A measure remodelled

Across the world, standard measures of economic performance are suddenly producing terrible results. Maybe it is time to change them. Most experts agree that the commonly used indicator, gross domestic product, is an imperfect yardstick of economic activity. The trouble is, no one has yet invented a better one.

Well, it's nothing new for ET readers. We've discussed this many times before ...

Promoted by Colman


See the following diaries:

On (moving beyond) GDP:

Beyond GDP - Day 2 (afternoon) Summary
Minor Errors
Anyone attending "Beyond GDP"?
Measuring Progress (pt. 1)
Happiness and Economics
Regrettables
Socratic Economics I: Why GDP growth above all else?
Let's Ban the GDP

On lying with statistics:

How To Lie With Numbers 2 - Laffer Nonsense From The WSJ
How To Lie With Numbers 1½
How To Lie With Numbers - a short guide to politics and other things
Soundbite Statistics: the Unemployment Rate (1) (with further links)
Lies, Damn Lies and Fertility Statistics
How to lie with statistics, or Spin 401

The FT highlights the flaws of GDP:

FT.com / Comment / Analysis - A measure remodelled

But GDP is a quantitative measure, not a qualitative one. It takes no account of the distribution of income and includes no moral judgments about the worth of the activity performed (other than excluding illegal activities such as the trade in illicit drugs). So, for example, government spending on prisons counts the same as government spending on universities. Cleaning up a nuclear accident would add to GDP in the same way as the production of solar power. When oil is extracted from the ground and sold to consumers, this is counted as an addition to a nation's wealth rather than a depletion of its resources.

In testimony last year to the US Senate, Jonathan Rowe, a Californian writer, highlighted some of the absurdities of mechanically measuring the economy by counting how much it produces. Measuring healthcare by inputs rather than outputs - the sale of medical services and drugs rather than the number of (healthy) people - can lead to particularly perverse perspectives. In this view, the economic "hero" of GDP statistics would be a terminally ill cancer patient going through expensive medication and a costly divorce.

"Next we will hear about the `disease-led recovery'," Mr Rowe scoffed. "To stimulate the economy we will have to encourage people to be sick so that the economy can be well."


The FT mentions the works of the Commission on the Measurement of Economic Performance and Social Progress set up by the French government:

But wait: a 24-member commission of prominent economists led by Joseph Stiglitz and Amartya Sen, both Nobel prize winners, is due to report in April on ways of improving our economic bookkeeping. The aim is to render economic data more comprehensive, more intelligible to the public and more relevant for policymakers by taking into account such factors as environmental degradation and quality of life.

In changing the way we calculate economic activity, some commission members hope, we might also be able to change our political priorities and build happier, greener societies.
...
Mr Stiglitz, a professor at New York's Columbia University, says that as an indicator of the market value of all goods and services produced in an economy, GDP has always been a flawed measure of economic performance, let alone social progress. He argues that the current global economic turmoil has made its deficiencies even more glaring. "This crisis has shown that the GDP numbers for the US were totally erroneous. Growth was based on a mirage," he says.


Here are some links to the Commission's Working Papers and Reports

Proponents of the GDP often claim that it's simple and it would be difficult to design indicators which could be understood by laymen. Amartya Sen debunks this argument:

FT.com / Comment / Analysis - A measure remodelled

Mr Sen, professor of economics at Harvard University, says people are perfectly capable of getting to grips with more than one economic number and would probably welcome different perspectives. "Indicators are ways of generating public discussion," he says. "Once they are out there I hope there will be a lot of focus on these indicators and that will affect policy."

Jean-Philippe Cotis, the head of Insee, France's statistics agency, and a commission member, says the big task is to try to narrow the gaps between objective measures of economic production and subjective perceptions of well-being.
...
Mr Cotis suggests that one of the most practical services statisticians can perform is to examine the components of GDP in more detail, to gain a clearer picture of what is happening. Insee has been studying the budgets of French families between 2001 and 2006, distinguishing between their fixed costs - such as housing, taxes and utility bills - and discretionary spending. "Basically, the `free cash flow' of the lowest quintile was 45 per cent of income in 2001 - but five years later it was down to 25 per cent, mostly because of an increase in housing costs," Mr Cotis says.
...
Similar subjective judgments come in when trying to assess the quality of life. The United Nations has developed its own Human Development Index, which attempts to measure social factors such as mortality rates, literacy and standards of living. Mr Sen, who was instrumental in developing the HDI, has long stressed the importance of educational opportunity and social justice in formulating economic policy.
...
But Mr Sen insists that economists and psychologists should try harder to understand what people think and how they act in real life, rather than just imputing rational motivations to them. "Economists usually focus on the rationality of market behaviour. We think that economic actors are strong, silent, rational men and you can sneak up on them and see what their preferences are. Instead, we are going to ask them questions," he says.

Display:
Hat tip to nanne. I haven't listed all the stories/diaries about GDP. Please, feel free to add some more.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Wed Jan 28th, 2009 at 07:30:38 AM EST
There was a recent diary by Paul Spencer:

LQD - James Speth (Yale University) on "happiness"

by nanne (zwaerdenmaecker@gmail.com) on Wed Jan 28th, 2009 at 08:17:22 AM EST
[ Parent ]
FT.com / Comment / Analysis - A measure remodelled
This ambitious initiative was launched last year by Nicolas Sarkozy, France's president, who had grown concerned about popular distrust of economic statistics. All too often, he argued, official data seemed to conflict with personal experience, creating a dissonance between politics and ordinary life. The threat of catastrophic climate change should also force policymakers to recalibrate the broader environmental impact of economic growth, he said.


Truth unfolds in time through a communal process.
by marco on Wed Jan 28th, 2009 at 07:31:08 AM EST
The FT notes that Sarkozy has created a commission to look into creating new indicators. While this commission has the right people (Sen, Stiglitz), it partially ignores the initiatives that have already been going on. Like so many of Sarkozy's actions. One of these other ongoing projects is the EU's Beyond GDP initiative, the launch of which I covered on the European Tribune in two diaries.
by nanne (zwaerdenmaecker@gmail.com) on Wed Jan 28th, 2009 at 08:09:48 AM EST
[ Parent ]
There are three kinds of lies: white lies, damned lies, and GDP statistics.
by das monde on Wed Jan 28th, 2009 at 07:37:54 PM EST
[ Parent ]
Was preparing a more snarky title FT: 'By the way, our metrics sucked'

Here's one reason:

In spite of growth, people were worse off on average, as Stiglitz says:

"Many people looked at US GDP growth in the 2000s and said: `How fast you are growing - we must imitate you.' But it was not sustainable or equitable growth. Even before the crash, most people were worse off than they were in 2000. It was a decade of decline for most Americans."

And of course this was a big part of what caused the crash. Note Jerome's diaries 'The One Graph That Damns the Bush Economy' and 'Blame the Poor'.
by nanne (zwaerdenmaecker@gmail.com) on Wed Jan 28th, 2009 at 08:08:38 AM EST
Economic 'growth' can result from undesirable spending:
So, for example, government spending on prisons counts the same as government spending on universities. Cleaning up a nuclear accident would add to GDP in the same way as the production of solar power. When oil is extracted from the ground and sold to consumers, this is counted as an addition to a nation's wealth rather than a depletion of its resources.

See the European Tribune story 'Regrettables'.
by nanne (zwaerdenmaecker@gmail.com) on Wed Jan 28th, 2009 at 08:10:42 AM EST
[ Parent ]
Here's a still-relevant quote by ThatBritGuy in 'Socratic Economics I: Why GDP growth above everything else?'
Yes, but 'productive capital' is a complete fiction. Capital doesn't exist as a physical thing. It only exists if people choose to believe in it.

Natural resources certainly exist, and the destruction of natural resources has an obvious real-world effect.

So why do economists apparently prefer to deal with fictions than realities?

by nanne (zwaerdenmaecker@gmail.com) on Wed Jan 28th, 2009 at 08:12:34 AM EST
[ Parent ]
The choice of metric is a political choice, since it represents what we want to maximize. Thinking it is possible to have a single "objective" metric that would allow to rank progress in any country seems absurd ; thankfully most countries in the world have singular objectives for the evolution of their nation.

Saying that the well being of a nation can be summed up in a single indicator is framing of the political possibilities. Dumping GDP is necessary ; replacing it, maybe not.

But then the claim by economists of the possibility of finding an "optimal" state of the economy falls down. Maybe that claim has caused enough damages lately, any way...

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Wed Jan 28th, 2009 at 08:18:35 AM EST
The whole idea is ridiculous, yet our economic discourse is dominated by these sorts of numbers. Unemployment is another area where the metric is broken. We've basically been designing policies with the aim of optimising numbers that make little sense.
by Colman (colman at eurotrib.com) on Wed Jan 28th, 2009 at 08:23:41 AM EST
[ Parent ]
... the insane idea of "a" metric for something as complex as a national economy is not the cause for a quiet chuckle before getting back to work.

There are at least five purely economic macro-level goals ... full employment, moderately low inflation, high standard of living, improving standard of living, and sustainable external relations.

The idea that any one metric can encompass all five ... indeed, that any one metric can inform us about any one ... is laughable.

Most of the "critique of GDP" is criticizing one quite important number for being unable to do what no single number can do. And of course, framing the question as "what is the right metric" ensures that the question is never answered satisfactorily, because every single other metric will indicate something about something less well than GDP does, so it will not be "unambiguously superior".

Current dollar value of newly produced goods and services is something we need to keep track of. Modifying it to try to accomplish the impossible is like looking for an alloy with mercury that does a better job of turning lead into gold than pure mercury does.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Jan 28th, 2009 at 08:53:56 AM EST
[ Parent ]
Full employment is already a policy goal - at least in the way the question is being currently asked. And it's a goal that skillfully hides the question of whether the current organization of human labor is changeable.

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Wed Jan 28th, 2009 at 10:35:09 AM EST
[ Parent ]
... abandoning full employment as a policy goal is a big part of what was Revolutionary about the Reagan Revolution. It went from being mostly lip service under Nixon, Ford and Carter to being actively undermined by monetary policy increasing interest rates in response to the threat of getting near full employment.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Jan 28th, 2009 at 10:42:20 AM EST
[ Parent ]
What I meant was that setting up a measure of employment, whether or not you want it to be full, is already accepting the current notion of employment and its organization - which the Reaganites did, like all the others that "matter".

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Wed Jan 28th, 2009 at 10:56:43 AM EST
[ Parent ]
Yes, we can only measure employment under our current labor institutions. Even there, in the US, we have six different measures of unemployment, because it would be stupid to pretend that you can keep track of national unemployment with a single number ... and still, the mess media only reports U3.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Jan 28th, 2009 at 11:01:47 AM EST
[ Parent ]


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]