A Blog by Jonathan Low


Mar 5, 2014

How Our Economic Indicators Fail Us

Cut to the chase. That old movie reference (the audience wants to see the action, not all that other talking heads stuff) is our harried response to anything that takes longer to explain than an elevator speech or a nanosecond

So we just love us those numbers that purport to summarize economic activity and financial opportunity in one easy view. Nothing too long or complex. None of those Greek symbols. Just two or three digits. Sure, throw in a percentage sign if it makes you feel better but dont get all hot and bothered about the deeper meaning. We'll either figure that out for ourselves or take the word of our favorite air-brushed news reader.

Which leads us to numbers like GDP, Gross Domestic Product. It serves the purposes of those who hew to it because it enables economists, politicians, government officials and others who may stand to benefit from its implications - or torment others to whom they may ascribe guilt.

It's relatively simple, has a relatively long history of usage so that many people who care may purport to understand what it means - and it is probably utterly misleading in today's economy.

This is part of a larger problem having to do with the way we account for economic activity. Our systems no longer reflect the underlying reality they ostensibly represent because most of the world is creating value through intangibles which are not measured by any of these extent metrics.

Yes, many people and the countries they inhabit still make locomotives and refrigerators and warships and other physical goods, but their significance has declined in economic terms relative to the overall growth of terrestrial or supra-terrestrial value. Ideas and concepts and designs and lawsuits and other ephemera are creating massive tangible benefits but we have not been able to agree on how to report them. Those who have something to lose by changing the reporting conventions are squared off against those who have something to gain. Neither side is willing to concede anything to the other.

So we muddle along with a wink and a nod, allowing whoever holds the digital megaphone to blather on about whatever they want it all to mean. Meanwhile, enterprises frustrated with this institutionalized inaccuracy have taken to releasing the data they want people to see, which is not necessarily the same as the data they need to see or should see. Ultimately, it's all about how much risk we are willing to tolerate. Unfortunately, we have a history of figuring out the meaning of 'too much' or 'too little' or 'oops' only after the fact. JL

TPM excerpts Zachary Karabell's The Leading Indicators:

You can cut taxes or spend on easy projects (Sochi anyone?), and that will make GDP look good. It may not make the country any healthier.
Those limitations led to a backlash in the 1970s, along with new ideas for better measurements of national economic and societal health. Bhutan Gross National Happiness Index was one of the first major initiatives. That has been followed over the past decades by a plethora of others, ranging from the Human Development Index created by the United Nations to the Genuine Progress Index to time studies of contentment and well-being. The cornerstone of many of these alternative indexes is to broaden the spectrum beyond simple production and consumption of stuff and incorporate quality life, health, education, subjective measures of contentment, and the sustainability of long-term economic health.
Many of these offer improvement on GDP. They add needed elements that even the creators of GDP and national accounts understood have profound value. When the initial structure of national accounts was created in the 1930s, one of its primary progenitors, Simon Kuznets, argued that domestic work should be part of output. No one argued that cleaning the house, caring for children, and attending to the home were not vital economic activities, but because they did not have a market price, they were left out. GDP was never designed to be an all-inclusive metric of national well being, but it certainly has become one over the years.
The need to free ourselves from the tyranny of GDP is undeniable. The slavish use of the number rewards politicians for augmenting short-term output, which is easy enough. You can cut taxes or spend on easy projects (Sochi anyone?), and that will make GDP look good. It may not make the country any healthier.
Yet the search for an alternative is a will-o-the-wisp in its own right. The lure of an easy number to encapsulate complicated, multifaceted systems is deeply rooted in human nature and our history. We want to know, to capture, to control and simplify. We want rules and patterns that illuminate the messiness of the present, make sense of the past and give us the illusion of control over the future.
The creation of national accounts, of GDP, and indeed of the entire panoply of indicators that form of our-present day map of the economy were driven by the same scientific urges to make sense of the chaos of economic cycles. The economists and statisticians who invented them looked to the physical sciences as models, and believed that once these numbers were invented and codified, economic cycles could be tamed and prosperity unleashed.
The invention of these indicators has done much good. Economic cycles are not as dire and destructive as they were, and these metrics are one reason. Policy makers have been able to see more clearly what is unfolding in real time and derive responses, and GDP is one reason.
But the belief that economies are mechanistic systems as amenable to static numbers as physics is a profound limitations to understanding what are, in fact, fluid constantly changing systems. GDP was designed to capture the output of mid-20th century nation states, and not the more abstract but still real contributions of information technologies, services, and global supply chains. Unlike the physical world, economic systems are not at all static (and indeed, even physicists recognize that in an ever-expanding universe even laws of physics may begin to morph, though not at a pace that we are able to notice). Static, simple numbers such as GDP cannot and will not keep pace. That is one reason why even with expanding GDP, job growth has not followed familiar patterns, nor have prices. If a factory can make thousands of units with dozens of robots, it can boost GDP without adding much to employment.
Today, any proposed alternatives to GDP will fall short of describing our fluid economic systems. They may fall short for different reasons than GDP does, and may capture important variable like health and happiness. But fall short they will.
In truth, no one number can possibly suffice. No simple round figure can bear the weight that GDP now does, as an end-all, be-all of “are we doing well” or “are we strong or weak?” Any alternative number would be wrong as well, even if it were wrong for different reasons. The fault lies less with the number than with the belief and need and desire to have one number speak for all, to have one synthetic figure represent this notional entity called “the economy.”
GDP, along with all of our indicators, has some utility. It describes vital aspects of our lives. But we do need to lessen our dependence on it, and swapping with a new and improved number will simply replicate the problem in a different form.
The answers to the questions we have about our world today – ranging from income inequality to the nature of growth to the sustainability of economic models and the utility of our policies – will not be harder without easy reliance of GDP. They may actually get easier, as partisans would be forced to grapple more with the wealth of information now at our technological fingertips rather than use the facile up or down of GDP as an ultimate referendum.
True, partisans can find whatever data they please to prove their case, and we are already dealing with the challenges of dueling data in an information age, where one side marshals its own figures to challenge the figures of the other side. But without the easy hook of GDP, proving cases and allowing for the genuine uncertainty of future outcomes would be more the order of the day.
It may not be as satisfying to call for the fading of a key fixture of our day without offering an alternative. But it is more honest to accept that reducing complex systems to a few simple numbers will solve none of our problems. More honest, and ultimately more productive. Gross National Happiness, Gross Domestic Product, Human Development are noble goals all, but the messiness glorious complexity of our world is not served by them, nor by the human desire to capture and control that as surely as we have tried to capture and control the atom. We have more information than ever before to address income, health and the challenge of an emerging global middle class. We need to learn how to us that information in the 21st century without forcing it all into a narrow 20th century model.


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