A Better Way to Measure GDP
Daily News

A Better Way to Measure GDP

As governments craft policies to “build back better” following an economic crisis, they need indicators that reflect a meaningful conception of “better.” This doesn’t mean governments need to abandon the standard GDP. Rather they should transform it into a series of indicators — much like existing US statistics for unemployment are reported as “U1” through “U6,” with each number reflecting different aspects of unemployment. Other statistics, including consumer price indices and the money supply, are similarly reported as a series instead of a single number. While GDP, or G1, would be standard national income, G2 could give a fuller picture of income, revealing how equitably it is distributed, while reflecting the contributions of unpaid labor, like care for children and elders. G3 might look to the future, ensuring that today’s output does not hamper tomorrow’s by exacerbating environmental challenges or depleting resources. G4 could seek to account for our overall day-to-day wellbeing, including, for example, measures of health and social connection.

The news of the record-shattering 33.1% percent annualized GDP growth in the U.S. in the third quarter of 2020 seemed, to most people, like a farce. It’s not that the data — reflecting the rebound from an abysmal spring and summer — was technically wrong. It’s that it bore no resemblance whatsoever to most people’s lived experience.

At a time of a massive public health crisis, long lines at food banks, record-breaking hurricanes, glaring racial disparities, and mounting feelings of stress and overwhelm, no one wants to hear about the historic triumph of an abstract number that’s supposed to tell us how well our society is doing. This raises the question: Why do we measure our economy according to a metric that says so little about our well-being?

This isn’t just an academic musing. It’s a practical question for governments today. The measurement that most societies use as the benchmark for national progress doesn’t meaningfully account for successful management of priorities like public health, economic equity, climate action, or racial justice. This poses a problem because, in government, as in business, “we manage what we measure.”

For example, GDP doesn’t reflect whether an economic recovery is equitable. The growing divide of the pandemic — wherein the wealthiest individuals have seen unprecedented income gains and tens of millions of families have lost income — has had no discernable bearing on GDP numbers. Likewise, GDP hasn’t registered the widening gap between Black and white unemployment in recent months, or the ongoing devastation of the opioid epidemic. Other equity stressors — like climate impacts — may even be contributing to its rise. Financial analysts have estimated that, if anything, past hurricanes have caused a slight increase in GDP due to the activity associated with cleanup and rebuilding. A decade ago, the worst environmental disaster in U.S. history, Deepwater Horizon, registered as a plus for GDP for similar reasons, according to JP Morgan estimates.

While GDP is useful in its official objective of measuring short-term economic output, it’s a flawed proxy for national progress. Unfortunately, that is precisely how it’s used — as the primary indicator of the success or failure of leaders and public policies. Consider, for example, the flawed claims that the third quarter’s GDP numbers served as empirical proof that the Trump administration “was right” about how to handle the coronavirus. The lesson is that if we focus attention on a measure of raw output rather than wellbeing, we risk policies that sacrifice what’s truly important.

Thankfully, there’s a growing movement in economics to overcome the fixation with this one indicator. The 2019 Nobel laureate economists Esther Duflo and Abhijit Banerjee have written that it may be “time to abandon our profession’s obsession with growth.” Advancements in data collection, statistics, and computing help make it possible to upgrade our metrics. Countries including Germany, France, and the United Kingdom have, for example, started investigating more comprehensive national indicators. Policymakers and researchers in U.S. states including Maryland, Vermont, Oregon, and Utah have explored new indicators that account for costs like commuting time and benefits like higher education. Still, in spite of the research and official interest, little has actually changed in national accounting to date. The politics and the technical work of reforming such a widely-used statistic remain challenging.

So, here’s an actionable solution: Given that standard GDP still has its uses, governments don’t need to abandon it. Rather, governments should transform it into a series of indicators — much like existing U.S. statistics for unemployment are reported as “U1” through “U6,” with each number reflecting different aspects of unemployment. Other statistics, including consumer price indices and the money supply, are similarly reported as a series instead of a single number.

While GDP, or G1, would be standard national income, G2 could give a fuller picture of income, revealing how equitably it is distributed while reflecting the contributions of unpaid labor, like care for children and elders. G3 might look to the future, ensuring that today’s output does not hamper tomorrow’s by exacerbating environmental challenges or depleting resources. G4 could seek to account for our overall day-to-day well-being, including, for example, measures of health and social connection.

To see why such differences matter, look to the last economic recovery — the long climb out of the Great Recession. During that period of regrowth, the top decile of U.S. earners captured about half of all income gains, and GDP rose accordingly. By accounting for inequality, G2 would have better reflected the sluggish rebound that most people, and particularly Black households, experienced. Similarly, G3 could have offered a more accurate assessment of long-term liabilities associated with environmental externalities. For example, researchers from the Dallas Federal Reserve estimated that the shale boom during the 2010 to 2015 period accounted for one-tenth of GDP growth during that time. A G3 indicator could have subtracted the long-term costs of associated methane emissions and groundwater pollution, presenting a more refined estimate of the net effect.

New indicators wouldn’t only spotlight societal problems. The aim would also be to capture important gains that GDP currently misses. For example, both G3 and G4 would have outpaced GDP in response to the $522 billion green stimulus that countries including China, the U.S., and South Korea enacted after the Great Recession. In addition to counting the economic boost from new investments in renewable energy and energy efficiency, G3 would have included climate benefits, while G4 would have reflected gains from cleaner air and improved health.

Today, as governments once again craft policies to “build back better” following an economic crisis, they need indicators that reflect a meaningful conception of “better.” The incoming Biden administration has the opportunity to start the process of reimagining GDP right away. By directing the Bureau of Economic Analysis at the Department of Commerce to start working on modernizing measures, the administration likely wouldn’t need to wait for legislative action.

To be clear, upgrading GDP isn’t a creative way to find quantitative justification for a set of ideological priorities. While issues like equity and sustainability tend to be the domain of the political left, it was, after all, the conservative former French president Nicolas Sarkozy who commissioned a groundbreaking study of GDP alternatives because he saw that rural constituencies felt alienated with how the media and urban elites were portraying the state of the real economy. Rural and industrial communities in countries like the U.S. and the UK voice similar concerns today.

While matters of statistical computation rarely capture the public imagination, this one gets to the heart of a deep and timely question: How to pursue genuine thriving rather than growth for its own sake. And at a time when people across societies are seeking systemic change, reimagining GDP is one plausible way that governments can deliver.

Read More

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

More in:Daily News

Leave a reply

Your email address will not be published. Required fields are marked *