De-Fetishising The GDP

There was a great editorial in yesterday’s Financial Times around De-fetishising the GDP

From the Financial Times:

It is a sobering time for number-crunchers. From quantitative risk analysis to credit ratings, many financial statistics have revealed more artistic licence than resemblance to reality. Even gross domestic product is being scrutinised: a commission created last year by Nicolas Sarkozy, the French president, will soon report on whether GDP captures what should be governments’ goal. This is in principle a useful exercise. It can help voters direct leaders to what they care most about. But a better measure of the alternatives we face is no substitute for choosing between them.

GDP was never meant to be an overall measure of how well a society is doing. It is a measure of production not even designed to capture all economic output. GDP is blind to non-monetised production - it includes care given in crèches and old people’s homes but not the same care given by family members for free. And a country that whittles down its non-renewable resources may record high GDP growth while really just using up its wealth.

Even properly measured, not all production makes us better off. Some parts of GDP - weapons, prisons and 24-year-old derivatives analysts come to mind - rather reflect production it would be good to have less of. More opulence is worth little if it benefits only those at the top. Then there are values besides wealth. For instance, with each rise in GDP we forgo enjoying the same productivity growth as leisure time.

In spite of this, GDP remains, fetish like, the yardstick for economic performance. Attempts to improve on it must distinguish the technical question of how to measure what we care about from the political question of what we (and governments) should care about. We can measure economic production better and Mr Sarkozy has recruited some of the world’s best economists to tackle the technical part.

But we should not pretend to engineer a figure that will tell us how important economic production and wealth are relative to other values. We ought to resist turning “happiness” - which one of the commission’s working groups is looking at - into a new fetish for governments. Instead, elevate other objective indicators of human well-being (such as already existing health, education and environmental sustainability measures) to the status now enjoyed by GDP.

Material wealth remains crucial; most of the world has too little of it. It is governments’ duty to promote growth while securing non-material values voters hold dear. Better statistics can help voters force politicians to make the best trade-offs. They cannot choose on their behalf.

For the record I’m not posting this in order to disabuse or somehow diminish the significance of today’s GDP numbers, because it’s still our primary measure of economic output and provided we use it consistently a YoY change is still quite significant. Instead I post this to remind us of not only the current measure’s flaws, but the fact that it is indeed an engineered measure and that we should also scrutinize the numbers in order to better understand the underlying story.

In other words: don’t take it at face value, always dig deeper and don’t assign it level of significance that it doesn’t possess.

Source:

The Financial Times: “De-fetishising the GDP” — January 29, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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