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

Scottish Field - - IN THIS ISSUE -

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.

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