Advertisements
jump to navigation

Why GDP growth is totally wrong as a measure of economic and social success January 28, 2018

Posted by OromianEconomist in Uncategorized.
Tags: , ,
add a comment

Odaa Oromoooromianeconomist

 

 

5 ways GDP gets it totally wrong as a measure of our success,  by  David Pilling, World Economic Forum 

GDP is flummoxed by the Internet. Wikipedia provides all human knowledge free of charge, but in GDP terms, it is worth zilch

GDP is flummoxed by the Internet. Wikipedia provides all human knowledge free of charge, but in GDP terms, it is worth zilch

Image: REUTERS/Gary Cameron


The beauty of gross domestic product is its single figure. It squishes all of human activity into a couple of digits, like a frog jammed into a matchbox. As this image of an unfortunate amphibian suggests, this condensing is also GDP’s flaw. How can the sum total of everything we do as human beings be so compacted? How can our activity be conflated with something as complex, nuanced and contested as our wellbeing?

GDP’s inventor Simon Kuznets was adamant that his measure had nothing to do with wellbeing. But too often we confuse the two. For seven decades, gross domestic product has been the global elite’s go-to number. Fast growth, as measured by GDP, has been considered a mark of success in its own right, rather than as a means to an end, no matter how the fruits of that growth are invested or shared. If something has to be sacrificed to get GDP growth moving, whether it be clean air, public services, or equality of opportunity, then so be it.

GDP is how we rank countries and judge their performance. It is the denominator of choice. It determines how much a country can borrow and at what rate. But GDP is well past its sell-by date, as people are starting to realise. However brilliant the concept, a measure that was invented in the manufacturing age as a means of fighting the Depression is becoming less and less capable of imparting sensible signals about complex modern economies.

Pointing out the defects of GDP and even tentatively suggesting alternatives is no longer controversial. Former French President Nicolas Sarkozy commissioned a panel led by Joseph Stiglitz, a Nobel economist, to examine the issue. It was creating a dangerous “gulf of incomprehension”, Sarkozy said, between experts sure of their knowledge and citizens “whose experience of life is completely out of sync with the story told by the data”.

What is so gross about gross domestic product?

GDP is a gross number. It is the sum total of everything we produce over a given period. It includes cars built, Beethoven symphonies played and broadband connections made. But it also counts plastic waste bobbing in the ocean, burglar alarms and petrol consumed while stuck in traffic.

Kuznets was uneasy about a measure that treated all production equally. He wanted to subtract, rather than add, things he considered detrimental to human wellbeing, such as arms, financial speculation and advertising. You may disagree with his priorities. The point is that GDP makes no distinction. From the perspective of global GDP, Kim Jong-un’s nuclear warheads do just as well as hospital beds or apple pie.

Is that all that’s wrong with GDP, then?

No. Don’t get me started. In a short article like this, there’s not enough time to go into everything. But here are a few points, all of which are covered in much greater detail in my book, The Growth Delusion: Wealth, Poverty and the Well-Being of Nations.

GDP is born of the manufacturing age. It measures “things you can drop on your foot”. Yet in advanced economies such as the US, up to 80% of production is in the service industry. GDP doesn’t do services – at least not very well. It is good at quantity, but lousy at quality. If the food or service improves in your local restaurant, GDP will not notice. Ditto, if an airline’s safety record improves. In fact, GDP might prefer a plane crash – so that it can build a new plane.

GDP is flummoxed by the Internet. If I buy my own cheap airline ticket, check myself in online and pick my own aisle seat, my convenience has gone up. But GDP has gone down. I am my own travel agent, a job that would once have been performed by a fully paid-up GDP-producing employee. Wikipedia provides all human knowledge free of charge. In GDP terms, it is worth zilch.

GDP deals in aggregates; GDP per capita in averages. In an age where a huge cause of social dislocation is inequality, GDP has nothing to say about distribution. Averages are misleading. Medians are better than means. A rise in average GDP could actually be retrograde, if it leaves 99% of people resentful at how the 1% is making good.

From GDP’s perspective, bigger is always better. In the real world, that is not always so. When the financial sector got bigger and bigger, it ended in financial crisis. When the US health service gets bigger and bigger, it means costs are out of control.

In general, GDP measures only cash transactions. In Europe that includes heroin and prostitution. However, volunteer work, housework or looking after an ageing relative count for nothing. GDP has skewed priorities.

In poor countries, the informal sector is practically invisible to GDP. Yet in much of the world, the informal economy counts for most. Monitoring economic activity from space, through satellite images of nightlights, might be more accurate than on-the-ground GDP, academic studies have found.

Is GDP really such a bad measure of wealth?

GDP is not a measure of “wealth” at all. It is a measure of income. It is a backward-looking “flow” measure that tells you the value of goods and services produced in a given period in the past. It tells you nothing about whether you can produce the same amount again next year. For that, you need a balance sheet – a measure of wealth. Companies have balance sheets as well as income statements. Nations don’t.

When Nigeria was busy selling high-priced oil to the world before the price crash, its GDP was soaring. But its wealth was falling. Oil deposits were used up, but cash was not reinvested in human, physical and technological capacities to ensure future income. Only wealth accounts could have drawn attention to that.

In January, the World Bank will release a groundbreaking study of comprehensive wealth for 141 countries between 1994 and 2014. It is well worth a read.

Should GDP be dethroned?

Yes. GDP is an ingenious measure. It tells us something. It should definitely not be scrapped – it is still far too valuable a policy tool for that. And GDP growth can provide the wherewithal for the other things we want in life: health, education, security, opportunity, goods.

But we need to pay more attention to other measures to complete the picture, some of which already exist and some of which we may have to invent. Measures of wealth, equality, leisure, wellbeing and net domestic product, adjusted for negatives like pollution, are places to start.

Everyone will have their favourite data point. One of mine is hours of sleep, which might be a proxy for work-life balance or stress. The number of hours of sleep in the US has been steadily declining from about eight hours in 1940 to 6.8 hours today. Now that’s a statistic I know how to act on.

Advertisements

WEF: Five measures of growth that are better than GDP April 20, 2017

Posted by OromianEconomist in Economics.
Tags: , , , ,
add a comment

Good jobs.  Wellbeing.  Environment. Fairness.   Health.


It is, of course, entirely possible for an economy to go faster and faster without getting closer to meeting these goals – indeed, while heading in the opposite direction.

World Economic Forum: Five measures of growth that are better than GDP


GDP is like a speedometer: it tells you whether your economy is going faster or slower. As in cars, a speedometer is useful but doesn’t tell you everything you want to know. For example, it won’t tell you whether you are overheating, or about to run out of fuel.
 Above all, the speedometer doesn’t tell you whether or not you’re going in the right direction. If you suggest to a car driver that you might be on the wrong road, and the response is “then we must go faster”, you might think that’s pretty stupid. Yet this is what happens whenever complaints about the state of the economy elicit a commitment to boost growth.

So what is the right direction for a modern economy? That’s a relatively easy question to answer: when you ask people, they say much the same things. A good economy meets everyone’s basic needs. It means people are healthy and happy with life. It avoids storing up potential sources of long-term trouble, such as extreme inequality and environmental collapse.

It is, of course, entirely possible for an economy to go faster and faster without getting closer to meeting these goals – indeed, while heading in the opposite direction.

Now the trickier part. What would be the economic equivalent of a compass? We need to measure the direction of economic travel in a way that’s comparable to how GDP measures its speed – easy to communicate, and amenable to being influenced by policy decisions.

The New Economics Foundation (NEF), where I was the Executive Director until December 2015, proposed five indicators in an October 2015 report. Imagine them arrayed like dials on a dashboard that you can glance at for an overall picture, as well as study in more detail if you want. Why five? It’s hard to capture everything that matters in one metric, and psychological research demonstrates that people struggle to hold more than five things in their heads at once.

1. Good jobs. Employment statistics tell us what proportion of people have jobs. They don’t tell us what proportion of those with jobs are paid too little to afford a decent standard of living, or worry about whether they’ll still have work next month.

According to UK government figures, 94% of people were in work in 2014 – up nearly two percentage points in four years. However, the NEF calculated that only 61% were in secure jobs paying a living wage – down a similar amount in the same period.

2. Wellbeing. A growing economy is not an end in itself – it’s a means to improving people’s lives. Few would disagree that the ultimate aim of public policy is wellbeing; we care about GDP because we assume it means more wellbeing. So why not also measure wellbeing directly?

The validity of research into measuring wellbeing, by asking people about their life satisfaction, is now widely accepted. Such measures capture a range of things that people care about and that policies can influence – from income and health to housing and social connections.

Some governments do measure life satisfaction, including the UK (it increased from 7.4 to 7.6, on a scale of 0-10, in the four years to 2014). However, it remains at the margins of policymaking.

3. Environment. The NEF propose a national indicator of lifestyle-related carbon emissions, relative to an allocation calculated from global targets for avoiding dangerous levels of climate change.

In four years, the UK’s position deteriorated from using 91% of its allocation to 98%. As climate is a global problem, this indicator is effectively a measure of responsible global citizenship.

4) Fairness. Research increasingly shows that high income inequality has negative social consequences, while casting doubt on the idea that it incentivises hard work.

Comparing the average incomes of the top and bottom 10%, inequality in the UK has been worsening by an average of 0.8% a year for the last four years.

5) Health. The NEF proposes “avoidable deaths” as a simple, easily-understandable measure that captures the quality of health interventions – not only treatment, but also prevention.

Here, the UK shows a positive trend, but with plenty of room for further improvement – the latest figures suggest 23% of deaths need not have happened.

Image: New Economics Foundation (NEF)

The NEF designed these measures with the United Kingdom in mind, working with the UK’s Office of National Statistics. But they are, in principle, just as meaningful for other countries.

The shortcomings of GDP, as a measure of what we want from an economy, are not a new discovery. The NEF and others have been making the case for years. But while various proposals for alternatives have engaged the interest of policymakers and technocrats, they have not yet taken hold among politicians.

That’s understandable: any politician who suggests new ways to judge their performance is also creating new ways to fail, and many policies that will pay long-term dividends on these indicators will also impose short-term costs.

More broadly, there remains a reluctance to move away from viewing economics as a hard, mathematical science, and accept the need to incorporate more of a social science mindset. In effect, we need another value shift in economics, comparable to those that shaped the last century – Kenyesianism and neoliberalism.

However, while the problems with the current economic system are increasingly widely appreciated, we still lack a compelling, coherent, simple alternative narrative. I hope these indicators can help that narrative to develop.


Click here to read more at wef

How and why we are moving beyond GDP as a measure of human progress January 13, 2017

Posted by OromianEconomist in Uncategorized.
Tags: , ,
add a comment

Odaa OromooOromianEconomist


How we track our economy influences everything from government spending and taxes to home lending and business investment. In our series The Way We Measure, we’re taking a close look at economic indicators to better understand what’s going on.


Ever since 1944, Gross Domestic Product (GDP) has been a primary measure of economic growth. It’s in the news regularly and, even though few can define what it means, there is general acceptance that when GDP is growing, things are good.

There are problems with this simplistic formulation.

GDP measures production only. It does not capture collapsing fish stocks, increasing obesity and diabetes, or new types of synthetic drugs. When people choose to work part-time to have a better work-life balance, GDP actually goes down.

This narrow focus distorts our perception of progress. It guides our representatives to focus only on certain things – what is measured – and allows them to ignore what isn’t quantified and regularly reported.

But a new set of measures is slowly being established, which aims to capture a wider range of human experiences and reset our idea of “success”. Called the UN Sustainable Development Goals (SDGs), these aim to include all the main pillars of a progressive society, from physical safety through to economic opportunity and good health.

SDGs will force action by highlighting what is currently covered up by the narrow measures of how our economy and society are faring.


Click here to read at more at the conversation