Flagship economic indicator: What does GDP reveal about U.S.?

Economists say standard measure of growth paints part of the picture, ignoring social and environmental goods

Economic growth slowed to a near standstill in the first quarter of 2014, after an abnormally cold winter for most of the U.S. The 0.1 percent annualized figure announced Wednesday follows data from the fourth quarter of 2013 showing 2.6 percent growth, despite the drag of a 16-day government shutdown in October. This year’s figure is especially anemic compared to the third quarter 2013 growth number, revised upwards to 4.1 percent.

Without fail, every month and quarter of the calendar year sees the regular publication of economic numbers, causing stocks to slouch, pundits to pontificate and buyers to beware. Before and after the stats hit the press, analysts dissect the quantitative verdict.

Real change in gross domestic product (GDP) reveals the value of all goods and services produced. Besides GDP growth, the unemployment rate and the Consumer Price Index of inflation, which looks at cost of living, are among the tools that mainstream economists tend to view as most reliable.

In addition to the these commonly cited metrics on the health of the American economy, there are scores of other routinely computed government statistics covering significant areas such as housing starts and consumer confidence.

There are also countless unofficial indices that help illustrate day-to-day reality. These range from the Lipstick Index, which shows that women consume relatively cheaper makeup products during tough times, to the Consumer Consumption of Beer, which highlights when people purchase cheaper beverages to drink at home rather than at a bar.

Al Jazeera spoke with two economists for more perspective on GDP: Adam Hersh at the Center for American Progress and Allen Sanderson at the University of Chicago.

The task of assessing the market worth of a country’s overall output in a given year is done efficiently by GDP. But are national welfare, infrastructure development and human progress beyond the scope of this metric

Adam Hersh: GDP is a useful indicator of the trajectory of the economy. But recognize that there are other important outcomes not captured. [GDP is] not taking into full account, in particular, the economic costs of public environmental goods. On the investment side, GDP measures changes in the capital stock of productive assets and other built construction assets. But we also have social capital, a key component of human well-being and functioning. There are changes to that not being measured at all, and policies targeted to that create misguided incentives.

Allen Sanderson: GDP is an imperfect measure, but the alternatives are even more imperfect. GDP, with all its shortcomings, is at least science. As any textbook says, GDP doesn’t count a lot of things, like non-market activities, whether it’s legal or illegal — babysitting, prostitution or drugs. Canada, for example, has a shadow or mirror GDP number where they try to estimate the value of household production … But the U.S. has a huge stock of durable goods. The real value we’re getting there doesn’t show up ... Also, GDP doesn’t measure wealth, [or] TV sets, washers, dryers. In Italy almost nobody dries clothes [in a machine]. It’s a cultural thing, and also an income thing.

Does the conventional way of assessing macroeconomic growth make sense?

Hersh: [We need an] empirical, holistic understanding of what is in the economy — relationships between people and the resources that make the material, and relationships between people and people. The neoclassical model is a simplified understanding of how the world works and how people make economic choices. Evidence from lots of social and behavioral sciences shows [we’re] not able to make long-term optimizing decisions. [The model should explain] how people make decisions about what to buy and invest in, who to partner with, and so on — taking account of institutions and the historical context of solutions.

Sanderson: One hundred years ago versus now, the average person had 20 hours more leisure time. A lot more things can be accomplished in a lot less time. It doesn’t take a whole day to do the things that it used to. Throwing that into GDP would greatly increase the number. If you could pick any moment in time to be born … the answer is certainly 2014 because per capita income is higher and life expectancy [too]. Both were lower as you go back. In Europe, Japan, urban China — it’s 80 years. Two hundred years ago, that was 30. Huge gains in life expectancy and health correlate strongly with GDP. 

GDP is an imperfect measure, but the alternatives are even more imperfect. GDP, with all its shortcomings, is at least science.

Allen Sanderson

Economist, University of Chicago

In general, as explained by Sanderson, GDP does not reflect the value of leisure, happiness or community — which are subjective and hard to tally. Nor does it reflect inequality levels, which are measured by the Gini coefficient. Moreover, goods which promote societal well-being — schools, as compared with jails — do not factor any differently into GDP.

At the household level, the GDP lacks perspective on the growth, or lack thereof, in median family income — and is thus not a perfect judge of purchasing power.

Additionally, domestic work is not included in GDP, so home gardening, cooking and other untaxed parts of the $1 trillion underground economy are largely ignored. Informal output is difficult to quantify, though often robust during recessions.

Resource depletion is also not taken into account, as mentioned by Hersh. For example, ecologically destructive activities in the timber industry that harm natural wealth are added into GDP without the true long-term cost. Some economists hope to incorporate measures of pollution that could be subtracted from GDP, although the monetary value of the environment is not easy to summarize.

And natural disasters, bizarrely, can cause an uptick due to the flurry of construction activity after a major hurricane or earthquake, resulting in an economic boom. 

Untaxed parts of the $1 trillion underground economy are largely ignored [in GDP]. Informal output is difficult to quantify, though often robust during recessions.

Improving the calculation process for GDP is one possibility suggested by many activists, but others have cautioned against trying to include too much in one statistic. However, the methodology for determining the primary economic indicator could be reformed or updated.

Some scholars such as the Federal Reserve's Jeremy Nalewaik have suggested relying more on the gross domestic income figure in order to speed up how quickly the status of the economy is grasped by officials. These scholar say changing the calculus could avoid a repeat of 2009, when Congress was debating the stimulus bill with legislators acting on a negative growth number much less severe than later revisions would reveal.

While theoretically most objective and quantifiable, GDP is limited in what it measures. Complementing the use of GDP with metrics like the Genuine Progress Indicator is increasingly common, yet indicators like Gross National Happiness contain ideological biases as well.

Predicting macroeconomic trends is a dangerously volatile art. Newer schools such as "post-autistic economics" hold that conventional indicators are too narrow and don’t give us all the relevant information about capitalism's ups and downs. But American society appears forever hooked on the metric it knows best. 

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