Is GDP Still Important?
Every pundit, politician, and economic forecaster (even smarmy financial dilettantes such as myself) have remarked that the recent recession was the worst economic calamity since the great depression.
It's a very dramatic, historic and urgent thing to say — something that you want to have on record that you said — if for nothing else than to be part of history.
Yeah, except it's dead wrong, in a manner of speaking. How would we know whether this past recession is actually the worst recession since the Great Depression? The measure of what is or isn't recession, Gross Domestic Product (GDP), wasn't even invented and implemented until after 1941. And wouldn't you compare it to other recessions, and not to the Great Depression, when there was no SEC, no Social Security, no FDIC no HUD, etc. back then?
So why is GDP so important? Or is it even important anymore? One critic of GDP, Alan Atkisson, even goes so far as to call GDP the "Manhattan Project of Economics."
I wouldn't resort to nuclear and apocalyptic allusions, but I will say that perhaps it's time to reevaluate how we measure economic growth and how we psychologically mind-bomb people by telling them that if there is no GDP growth they have to get scared.
In a nutshell, GDP measures economic growth based on production and consumption of goods and services, or to be more accurate, it is a measurement of "final goods and services officially made" quarter by quarter through a full calendar year.
I asked a friend, a former investment banker for Goldman Sachs and other institions, what he thinks of GDP. He said, "Ask yourself what we're 'officially making' in this country right now and you have my answer."
Elaborating further, he said the formula for GDP is flawed and has outlived its usefulness: Private consumption + Government Spending + (Exports-Imports).
What does that equal? Well in typical I-banker vernacular which I won't repeat here, he said the country, based on this formula of measuring economic health, is headed for the same fate as a nut or bolt twisted and fastened to a wall.
Since I'm a solutions-oriented man, I won't spend the whole post whining. In that vein, there are three upstarts that could, should, or might make a run at the shiny title belt GDP now holds around its bloated consumption-dependent waist.
- The Index of Sustainable Economic Welfare: Expenditures balance against mutually-assured environmental destruction.
- The Genuine Progress Indicator (GPI): Production growth that actually demonstrates the betterment of human beings.
- The Happy Planet Index (HPI): Are we happy with our stuff? Is killing the planet and contributing to standard of living inequities actually fulfilling in the long run?
- Gross Personal Product (GPP): All of the stuff that we buy: plastics, deliberate obsolescence polymers, and really gross food packages that aren't biodegradable. Oh, and the sticky oil from the Gulf of Mexico — ewww, grosssss.
OK, so the "GPP" is something that you saw here first and exclusively (maybe) — I made it up. But doesn't it start with our personal attitudes? Are you tired of having your homeland measured by cold, impersonal, flawed statistical comparisons? What makes you happy: what you produce or what you consume?
I now leave you with the words of Simon Kuznet, commissioned by the State Department to study political economy in the late 1930s and early '40s and often considered the inventor of GDP. (Ironically, he then essentially said in the 1960s, "don't use this measure.")
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.
With pressing environmental concerns and an unsustainable economy based more than 70% on the consumption of stuff — more than 90% of which we basically don' t need — those "distinctions" that Kuznet spoke of are what we have to figure out as individuals and as a nation.