History of GDP

In 2010, Jon Gertner at the NYT published an excellent history of the idea of GDP and its deficiencies.  One paragraph mentions that median income is better than GDP, but  the article focuses more on a “willfully obscure” initiative called The State of The USA, which is still just as obscure today, six years later.

the governments of the world have long held the view that only one statistic, …gross domestic product, can really show whether things seem to be getting better or getting worse. G.D.P. is an index of a country’s entire economic output …It’s a figure that compresses the immensity of a national economy into a single data point of surpassing density. The conventional feeling about G.D.P. is that the more it grows, the better a country and its citizens are doing.  …All the same, it has been a difficult few years for G.D.P. For decades, academics and gadflies have been critical of the measure, suggesting that it is an inaccurate and misleading gauge of prosperity. What has changed more recently is that G.D.P. has been actively challenged by a variety of world leaders, especially in Europe, as well as by a number of international groups, like the Organization for Economic Cooperation and Development. The G.D.P., according to arguments I heard from economists as far afield as Italy, France and Canada, has not only failed to capture the well-being of a 21st-century society but has also skewed global political objectives toward the single-minded pursuit of economic growth. “The economists messed everything up,” Alex Michalos, a former chancellor at the University of Northern British Columbia, told me recently when I was in Toronto to hear his presentation on the Canadian Index of Well-Being. The index is making its debut this year as a counterweight to the monolithic gross domestic product numbers. “The main barrier to getting progress has been that statistical agencies around the world are run by economists and statisticians,” Michalos said. “And they are not people who are comfortable with human beings.” The fundamental national measure they employ, he added, tells us a good deal about the economy but almost nothing about the specific things in our lives that really matter.  …

The Canadian Index of Well-Being is an interesting attempt to replace GDP, but it is too complicated and because people don’t understand it, it gets ignored.  Plus, it goes too far at downplaying income and lifespan as a measure of economic prosperity.  Median Expected Lifetime Income (MELI) would have a better chance at becoming influential.

For now at least, G.D.P. holds almost unassailable sway, not only as the key national indicator for the economic health of the United States but also for that of the rest of the world’s developed countries, which employ a standardized methodology — there’s actually a handbook — to calculate their economic outputs. And, as it happens, there are some good reasons that everyone has depended on it for so long. “If you want to know why G.D.P. matters, you can just put yourself back in the 1930 period, where we had no idea what was happening to our economy,” William Nordhaus, a Yale economist who has spent a distinguished career thinking about economic measurement, told me recently. “There were people then who said things were fine and others who said things weren’t fine. But we had no comprehensive measures, so we looked at things like boxcar loadings.” If you compare the crisis of 1930 with the crisis of 2008, Nordhaus added, it has made an enormous difference to track what’s happening in the economy through indexes like G.D.P. Such knowledge can enable a quick and informed policy response, which in the past year took shape as a big stimulus package, for example. To Nordhaus, in fact, the G.D.P. — the antecedents of which were developed in the early 1930s by an economist named Simon Kuznets at the federal government’s request — is one of the greatest inventions of the 20th century. “It’s not a machine or a computer,” he says, “and it’s not the way you usually think of an invention. But it’s an awesome thing.”

Our ability to measure GDP has helped us develop policies to fight recessions.  But GDP also misleads us into giving up on fighting recessions too early and letting unemployment persist.   Efforts to fight the recession (and thereby fight unemployment via Okun’s Law) ended when GDP turned around, but median income kept plummeting for years.  That means that the majority of Americans were still in a recession and still needed continued policies to fight the recession.

G.D.P. statistics are calculated a dozen times a year… For an entire day, the suite of offices where [the] group works is placed under… “lockup.” Cellphones are handed in; land lines and Internet connections are cut off; curtains are drawn tight. Only certain personnel are allowed in and out. The men and women …then spend the day following a process that has been refined over the past 50 years. It is a complicated affair, involving the convergence of some 10,000 streams of data that describe recent economic activity in the U.S., but the group’s goal is fairly simple: to arrive at a single number and then explain it in a press release. By tradition, no one in the room says the final number aloud — a throwback to the old days, apparently, when the fear of hidden microphones prompted silent acclamation. The finished press release is photocopied a couple of hundred times and then locked up, except for a single copy delivered at the end of the day to the chairman of the president’s Council of Economic Advisers. Anyone who knows the figure at this point is forbidden to reveal it, lest its premature unveiling roil the global financial markets. Not until 8:30 the next morning will [the Bureau of Economic Analysis] release the G.D.P. number to the rest of the world.

Government statisticians …do not push any equivalency between an expanding G.D.P. and national progress. For them, G.D.P. is what it is and nothing more: a description of total national production that can be helpful when setting economic policy. The longtime tendency of politicians to use G.D.P. as a proxy for national well-being is not a practice the Bureau of Economic Analysis endorses or could necessarily control, even if it wanted to. That the Obama administration, for instance, has pointed to rebounding G.D.P. numbers rather than our unusually high unemployment numbers reflects a political calculation rather than a case of economists beating a drum for the glory of G.D.P.

Although unemployment is a better measure of recessions, the US political system is inherently biased towards prioritizing GDP mmutilitarianism over unemployment because our political elites’ fortunes are measured more accurately by GDP than by unemployment.  The elites who run our media, government, and businesses feel like unemployment statistics are out of touch with their reality because unemployment among highly-educated (and well-connected) elites is much lower than for the average American.  In contrast, GDP is heavily influenced by high-income earners because it reflects their incomes much more than the incomes at the median to say nothing of the poor.

Posted in MELI & Econ Stats

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