How GDP measure of economic growth is flawed

Don YF · 2018-06-07T10:25:12+00:00

The GDP myth: The planet's measure for economic growth is deeply flawed and outdated By business reporter Stephen Letts Posted 5 days ago, updated4 days ago Earth seen from space IMAGE Is GDP the best way to measure the planet's economic wealth and health?(Supplied: NASA) Just as it has every three months for the past six decades, next week the Australian Bureau of Statistics will unleash a torrent of numbers that make up the national accounts. Common criticisms of GDP: Hopelessly flawed measure of welfare. It ignores leisure and women's work in the home. GDP ignores distribution. In the richest country in the world, the US, inequality has risen sharply. We should stop looking for policies to raise GDP and look instead for policies that promote happiness. Even if higher GDP were a good idea on other grounds, it is not feasible because the environmental damage would be too great. Source: Nicholas Oulton, London School of Economics The one number that will define the whole exercise, and more importantly Australia's economic health, will be Gross Domestic Product, or GDP. It's the stuff of headlines, political pointscoring and national pride or shame. It is something of an economic speedometer that central bankers use when deciding to squeeze the monetary accelerator or hit the brakes. As such, it has a big impact on interest rates and the cost of the money we borrow. It is also flawed, outdated and a very narrow measure of a nation's economic wellbeing. The ABS is not alone. Every nation trots out the same thing, although with varying degrees of accuracy. The numbers churned out by China, the world's second biggest economy, is the most obvious example of doubts surrounding the merit of GDP as a measure of economic health and wealth. China's questionable numbers Why does China even bother producing GDP numbers that few economists see as credible, asks Stephen Letts. Read more "Across the globe, a continuous increase in GDP ranks on top of political and regulatory agendas," Urs Rohner, chairman of the giant investment bank Credit Suisse, said while launching his bank's detailed report on The Future of GDP. Mr Rohner is not an unabashed fan of GDP as the major tool of global economic policy and in particular governments' use of it to validate policy, given its glaring deficiencies. "It has been argued for some time, however, that decision-making ought to reconsider the fixation on GDP, which tends to be imprecise in considering assets and often fail to account for liabilities," Mr Rohner said. "GDP metrics provide no indication of societies damaging their capital, such as withholding education from certain groups or depleting natural resources for immediate economic benefit." Credit Suisse is no left-wing think-tank with a distaste for global capitalism. It is one of the world's biggest and most powerful investment banks and manages around $US400 billion ($530 billion) in assets. There are two big problems with GDP identified by the Credit Suisse report: It is of dubious value in capturing many of the difficult policy issues governments face, particularly on the environment, health and equality Being backward looking, GDP is of little use to financial markets and investors in making decisions about future cycles These days, big investors look at much more idiosyncratic data such as oil rig counts and app download statistics when deciding where to dispatch their capital. Nominal GDP can be measured with reasonable accuracy, but when inflation is introduced for "real GDP" and in volume terms, things can become even more wobbly. There are not only components of GDP without prices, which need artificial proxies to be created, but inflation data is very slow at picking up the impact of new goods and price-deflating technological breakthroughs. A narrow measure But the bigger issue is social capital. As Cambridge University economics professor and one of the report's contributors Diane Coyle says, economic growth is more than important — it is a moral imperative. "Growth is driven by innovations that ultimately improve and lengthen people's lives and wellbeing, reduce infant mortality, and create fulfilling work for more people," Professor Coyle said. "A growing economy is one where people have a sense of possibility for the future, of hope. "However, the increase in GDP — as defined now — this year, or this quarter is quite a narrow measure of what matters for people's economic welfare." GDP may have had its uses, but as Professor Coyle argued, a statistical framework established around 70 years ago is no longer an adequate measure of economic growth. GDP's anomalies An exhausted oil-covered brown pelican IMAGE Cleaning up environmental disasters like the 2010 Gulf of Mexico oil spill add to GDP growth.(Sean Gardner: Reuters) GDP certainly throws up a lot of anomalies. Ireland's Central Statistical Office announced Irish GDP was on world record pace back in 2015, growing at an extraordinary 26 per cent. A deeper look showed it was almost entirely due to multinationals shifting subsidiaries to a more tax-friendly environment built on the now infamous "Double Irish Dutch sandwich" tax dodge. It made not a "zonk's" difference to Irish living standards. Credit Suisse's home is another classic example. Evidently a very wealthy nation, it is a loser in the GDP growth stakes. On OECD figures, the Swiss domestic economy has on average had the lowest price-adjusted GDP growth of all the industrial countries over the past 50 years, plodding along at sub-2 per cent pace. Smog over Beijing, China, people wear masks, as air pollution takes over December 19, 2015 IMAGE China has world-beating economic growth, but the liability of pollution does not show up in GDP ledger.(ABC News: Zhang Qian) China, held up as the champion of global growth, has averaged closer to 10 per cent a year over the same period. However, through the prism of Yale University's respected Environmental Performance Index, the Swiss are ranked number one, China comes in at 120 out of 180 nations. Australia sits just outside the top 20. The Credit Suisse report points out that one of the great paradoxes of GDP growth is that an environmental disaster — such as decent sized oil spill — can be a real positive. "Costs associated with cleaning it up are often counted in GDP, thus inflating GDP figures and making the oil spill look like growth," the report observed. Putting it another way, a nation could boost its GDP almost immediately by clear-felling all its forests and shipping out the timber. That would neither be sustainable, nor add much to the overall richness of life. It is not a particularly original thought. Former Treasury secretary, now NAB chair Ken Henry was bemoaning GDP's limitations almost a decade ago. Northern hairy nosed wombat IMAGE Former Treasury boss Ken Henry's favourite wombat, the critically endangered northern hairy nose, does not show up GDP data.(Supplied: Tina Janssen) "GDP does not adequately measure non-market production, such as the quality and quantity of government services," Dr Henry told a National Statistics conference in 2010. "And GDP deals poorly with environmental matters," Dr Henry, the noted champion of the endangered Northern Hairy-Nosed Wombat, added for good measure. "Difficulties in measuring the value of market consumption and wealth notwithstanding, in a world with readily available market measures of things like employment and commercial asset values, the lack of similarly accepted measures of the value of the environment creates the risk that society will fail to get the balance right," Dr Henry said. Dr Henry said economists and economic modellers need to keep in mind the maxim: "Not everything that counts can be counted and not everything that can be counted counts." The alternatives So if GDP is past its use-by date, what could replace it? The Credit Suisse team considers several options, none of them entirely adequate for the big job of becoming the new global benchmark. Sustainable National Income: Unlike GDP, not only does SNI incorporate sustainability in its income measures, but it can also be used to measure environmental degradation through a simple calculation of the difference between actual and sustainable income. Largely theoretical, at best an adjunct to GDP calculations. Genuine Progress Indicator: Takes into consideration both environmental and social aspects, which are neglected by GDP. The GPI starts with consumption data similar to that used in GDP calculations. It then adjusts this by costs of crime, environmental degradation and loss of leisure, while adding the impact of items like services and public infrastructure, as well as the benefits of volunteering and housework. Its limitations include a heavy reliance on subjective judgement. Adjusted Net Savings: Uses the standard national accounting of gross saving, adjusted by deducting the consumption of fixed capital, adding current public expenditure on education, deducting estimates of resource depletion and deducting for damages from carbon dioxide and particulate emissions. The interpretation of ANS is straightforward; a negative ANS denotes depletion capital stocks, whereas a positive ANS means wealth is building. Credit Suisse's verdict is the ANS is a step in the right direction, but not a ready-made alternative. Human Development Index & Inclusion Development Index: Both treat people, rather than the sum of material wealth, as the important assets of a nation as humans are both the means and the ends of economic development. These indicators concentrate on improved health and education, as well as reduced economic and gender inequality. Their adoption could nudge policymakers away from macroeconomic and stability outcomes to more inclusive growth, the Credit Suisse paper argues. Happiness Index: Complied in the World Happiness Report, the HI is based on theory that happiness among nations can largely (75 per cent) be explained by six variables; GDP per capita, life expectancy, social support, trust (in both government and business), personal freedoms and generosity, with the first three the most important factors. Credit Suisse said this supports the idea that GDP growth can boost happiness, but has to be supported with social factors. Happiness vs growth The happiest countries — including Australia, ranked 10th last year — score well across all six categories, but do not necessarily shoot the lights out in their GDP per capita ranking. The Credit Suisse report said China on the other hand is a cautionary example. "Despite a startling increase in GDP, Chinese citizens are no happier than they were 25 years ago. "This is why, rather than ignoring GDP growth or obsessing over it, it is best to supplement it with other indicators that will provide a better overall picture and more insight for policymakers," the Credit Suisse report concludes. Country Happiness Index ranking (2017) Real GDP per capita ranking (2017) Finland 1 25 Norway 2 6 Denmark 3 20 Iceland 4 14 Switzerland 5 9 Netherlands 6 13 Canada 7 22 New Zealand 8 31 Sweden 9 16 Australia 10 18 Source: World Happiness Report, IMF The stakes on getting things right are very high given the importance of the conventional statistics in determining policy across the globe. "What if [the] statistics are too uncertain to be meaningful? Governments justify politically contentious policies in terms of likely contribution to GDP growth. What if what we think we know about the economy is a chimera?" Cambridge University's Professor Coyle asked. "The most obvious kinds of change happening in people's lives now are not reflected anywhere in official statistics," Professor Coyle said. However, Professor Coyle said for the time being GDP should not be tossed out. "In thick fog, some light is better than none. For such purposes, GDP serves us reasonably well," she said. But it will take considerable time and effort for any meaningful change. "Nobody wants to change until everybody changes. Statisticians, reporters, policymakers and the public are all locked into the existing standard." Certainly, it will be the "same old" when the ABS hits the publish button on the National Accounts at 11:30 on Wednesday morning.

Thread starter Don YF
Start date Jun 7, 2018

Don YF

JamiiForums uses cookies to help personalise content, tailor your experience and to keep you logged in if you register.
By continuing to use this site, you are consenting to our use of cookies.

Accept Learn more…

Back

Top Bottom

Forums

New posts

How GDP measure of economic growth is flawed

Don YF

JF-Expert Member

Our Community

Regional Communities