[OPE] A revision of the GDP concept?

A measure remodelled
By John Thornhill

Published: January 27 2009 20:23 | Last updated: January 27 2009 20:23

(...) 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.

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.

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.

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.

"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."

Over the past year, the Stiglitz-Sen commission has been reviewing a vast array of alternative economic indicators while debating three main issues: how to improve standard GDP; how to incorporate new measures of economic, social, and environmental sustainability into the data; and how to devise fresh indicators for assessing quality of life. The commission may not invent a single measure to replace GDP but it could suggest a "dashboard" of indicators aiming to stimulate broader debate about the use - and abuse - of economic statistics.

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."

Although many statisticians are dissatisfied with GDP, it still has virtues, not least being that it is clear about what it includes and excludes, is based on objective prices thrown up by free markets and is comparable across countries. The Organisation for Economic Co-operation and Development concluded in 2006 that GDP remained crucial for any assessment of economic well-being, even if other complementary measures were needed to fill out the picture.

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."

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.

"GDP was originally intended as a measure of production and economic activity. It was never meant to measure well-being. That is beyond the statistician's remit," he says. "But there are now so many things that affect well-being above and beyond GDP that it is worthwhile to try to improve GDP."

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.

French households in this income group therefore had good reason to believe their standard of living had been squeezed even if GDP numbers suggested that the country's overall wealth was increasing. Such knowledge could help politicians devise better policies targeting the most affected people. "Perceptions may be biased but truth is sometimes on the side of perception," Mr Cotis says. "Feeling poor is already being poor in a philosophical sense." (...)

Complete story at http://www.ft.com/cms/s/0/638d2ba8-ecab-11dd-a534-0000779fd2ac.html?nclick_check=1

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Received on Wed Jan 28 15:09:15 2009