|July 28, 2010
GDP is a Bad Statistic. Alternatives Coming
By Ron Robins, Founder & Analyst -
Investing for the Soul
Hell could have just as big a GDP as heaven! Some
could argue that hell’s ‘inhabitants’ under duress might
produce even more than those in heaven. GDP makes no
distinction between good and ‘bad’ production. Disasters
like that of BP’s Deepwater Horizon oil spill increase
GDP. The rising costs of crime and building more prisons
raise the GDP. Haitian type earthquakes and Pacific
tsunamis may massively boost GDP.
The GDP statistic is really bad in helping us understand
our economic well-being. It is misunderstood, misused
and overhyped. Fortunately, modifications and
alternatives to it are gaining ground.
Everywhere politicians, the general public—and even many
economists—crave to increase the GDP. Falsely, I
believe, they feel that the GDP measure offers the
ability to make real cross country comparisons in living
standards and economic growth, much like one compares
football scores. But for many reasons, comparisons are
erroneous without knowing much more about other factors.
Even the U.S Bureau of Economic Analysis does not
endorse the idea of GDP reflecting Americans’
The GDP was never intended for measuring our well-being.
It was created in the 1930s and came into use during
World War ll to measure war output. It is simply the
value of all final goods and services within a country.
Elaborating on why the GDP cannot be used to describe
our well-being is the following by Clifford Cobb and
colleagues. They state, “much of what we now call the
growth of GDP is really just one of three things in
disguise: (1) fixing blunders and social decay from the
past [paying for pollution, costs of crime, etc.]; (2)
borrowing resources from the future [GDP excludes the
costs related to farmland depletion, water, other
resources]; or (3) shifting functions from the
traditional realm of household and community to the
realm of the monetized economy [i.e. eating out rather
than at home].”
My personal big issue with the GDP is its non-accounting
of debt and thus the illusory halo of purported economic
strength it showed in past years. According to Comstock
Partners, Inc., the debt required to produce a one
dollar increase in GDP jumped from $1.53 in the 1960s to
$6 in the first decade of this century. This burgeoning
debt productivity problem, unrecognized in the GDP, led
to an intolerable level of debt that has begun to
meltdown. Only after the credit crises began to knock
down two of GDPs principle components, private
consumption and gross investment, did we see it decline.
Thus, GDP is blind to debt and therefore a deceptive
statistic in informing us about our true financial and
economic condition or well-being.
There are two ways forward to formulate a better measure
of our well-being. One way is to add new parameters to
the GDP, and the other is having numerous different
indicators that all mesh in representing society’s
overall functioning. Typical of the first variety is the
United Nations’ Human Development Index (HDI) and of the
second is the ‘State of the USA.’
The HDI, now twenty years old, adds educational and
health measures to the GDP. Educational measures include
literacy and educational attainment, and health measures
are based on life expectancy. However, the HDI leaves
out key information related to debt, sustainability,
climate change, carbon footprint, ‘happiness’ measures,
and so on.
The recognition of the limitations of GDP and even the
HDI has led groups in some countries to try and develop
a broad set of new measurements.
The U.S. administration under President Obama recognized
this need and embedded in its recent healthcare
legislation the creation of a new agency under the
National Academy of Sciences (NAS) to develop a system
of key national indicators. It appears that the State of
the USA will become that agency. It aims to be
officially launched sometime this summer and is
developing about three-hundred different metrics.
In Europe, the European Commission has also been
creating an array of indices that will reflect societal
well-being. Their plan is to first issue a “pilot
version of a comprehensive environmental index.” Unlike
the U.S., the Europeans expect to integrate it into
their present macro-economic statistical systems.
Other potential GDP replacements are: the
Calvert-Henderson Quality of Life Indicators; Canadian
Index of Wellbeing; Genuine Progress Indicator (GPI),
Index of Sustainable Economic Welfare (ISEW); and the
National Accounts of Well-being.
GDP is a bad statistic as it does not paint a real
picture of our well-being. Blind adherence to it has the
potential for leading society down a slippery slope to a
place it would not want to go. GDP does not discriminate
between what really benefits society and what does not.
It treats costs related to pollution, crime and
disasters as gains. It does not account for resource
depletion. By excluding debt the GDP statistic provides
an imaginary picture of our true economic condition.
Because of these and numerous other inadequacies,
governments and private organizations around the world
are zealously creating new measures that will add to, or
replace, the GDP. May GDP’s reign end soon.