THE NUMBERS DO LIE

Why we can no longer rely on GDP to measure our economy

We’re no better off than ten years ago, apparently. Our productivity performance is lamentable, or so we’re told. The economic numbers are not good, and who dares disagree? Well, there’s certainly growth in second guessing, for the numbers we use daily to measure how we are doing are now looking very flawed.

How is it that with all the advances in digital technology, the internet revolution and the onward march of robotics, we seem to be doing so poorly? Due to the dramatic transformation of the past 20 years we are surely working more effectively, more efficiently – and certainly, it feels, working longer.

With Wi-Fi, the personal computer and the mobile phone, we seem to be on call 24/7, our kitchen tables doubling up as work stations and the mobile phone a constant nagging summons to work-related tasks. Why has that totemic indicator, Gross Domestic Product (GDP), not soared as a result? How come our productivity is lacking?

Today, something akin to panic has set in over the latest GDP numbers, which show barely any growth in the first quarter, and a slew of pundits telling us we’ll be lucky to match the already-modest forecasts for the year as a whole.

But before we start beating ourselves up, let’s start with a basic reality: that GDP is no accurate reflection of our economic state, that it’s a distorted reflection we’re seeing, and that the numbers we have accorded cult status to are, well, mince.

Because GDP is a monetary measure of the market value of all final goods and services produced in an economy over a period of time, it is heavily reliant on the measurement of physical things – bricks and mortar, engine parts, cars and trucks. But it has always struggled to capture services, which make up to 80% of our economy but which are notoriously difficult to measure.

GDP has never been a stable, static tool of measurement; it has been constantly tinkered with and redefined. Its origins can be traced to the 1930s, and the work of Russian émigré data analyst Simon Kuznets, the high priest of economic measurement in the New Deal era.

His 1934 report to Congress was heavy with caveats: an economy could not be reduced to a single statistic; the work was only a well-considered guess; the national welfare could not be inferred from a single measure.

But no one paid a blind bit of attention. Instead it received national attention for one explosive finding: that in the three years following the Wall Street Crash the US economy had almost halved in size.

Kuznets’ report put GDP on everyone’s lips, but right from the start there was disagreement over what should be included. Kuznets sought a measure of welfare, not just activity, and opposed including government spending – especially defence or war expenditure – in GDP.

Today the definitional challenge is greater than ever. We may work more efficiently with vastly more information as a result of the internet and digital technology, which would suggest GDP should be higher, but GDP has always been biased towards clunky physical products. Searching questions have burst to the fore. Has the internet made the economy larger –

GDP has never been a stable, static tool of measurement; it has been constantly tinkered with and redefined

or smaller? As David Pilling sets out in his book The Growth Delusion, many activities have been made redundant. We do not need big offices so much; we handle our own bank account transfers online, bringing about the closure of thousands of bank branches.

We shop online, closing many high street outlets with the loss of sales and support staff.

And GDP fails to capture the depth and extent of the invisible economy – services provided without direct user charge at the point of consumption, and the stuff that comes to us for free.

The scale of this omission is colossal. A recent paper from the US National Bureau of Economic Research attempted to measure this ‘free stuff ’.

It asked how much people would need to be paid to give up these new technologies and sought to estimate the value we get to consume through freeto-use technologies. On Google, for example, this is presently measured by the advertising revenue Google gains from operating it, which is about $25 per year, per user. But the NBER puts the value of search engines to us at $17,530, email at $8,414 and digital maps at $3,648 a year.

Put another way, the search engines that millions of us now access in our homes and offices are in GDP at near one thousandth of their true value, email at something similar, even Facebook is counted at less than that 10% of its real value ($322 a year, instead of around $20 that arrives in GDP).

As Tim Worstall of the Adam Smith Institute points out, this failure to take proper account of digital products has profound implications for all GDP-derived numbers. Productivity is GDP divided by the number of hours taken to create it. If value is higher then so is productivity, so all the hand-wringing over our poor performance is misplaced.

And where does that leave all the earnest attempts at economic planning and ‘growth strategies’ if they are founded on grossly inaccurate and misleading data?

As for inflation, this has been brought down by continuous improvements in mobile and internet technology. And if inflation is lower, should not GDP be higher?

It is time we took GDP down a peg or two, digitally speaking, and take care not to obsess with this one incomplete number as a measure of our economic pulse.

Rather than one number, we could use a score sheet showing, for example, latest labour market data – employment, unemployment and unfilled vacancies; latest figures on average earnings; business incorporations and major planning applications; retail sales data; announcements on foreign direct investment; traffic volumes at airports; housing starts and completions; and a business confidence index such as that produced by the Scottish Chambers of Commerce.

Impossible? It is already being done by the Edinburgh City Council’s excellent Economy Watch: a six-to-seven-page monthly summary of the latest data on all these fronts pertaining to the Edinburgh City region with a summary front page with arrows indicating the direction of data.

It is a wonderful pulse-check on the capital’s economy and provides an immediate and up-todate ready reckoner on business activity in the city. We now need a Scotland-wide score-sheet, while the boffins sort out GDP.