THE ECONOMIST Apr 30th 2016
The
21st-century economy How to measure
prosperity
GDP is a bad
gauge of material well-being. Time for a fresh approach
Timekeeper
WHICH would you prefer to be: a medieval
monarch or a modern office-worker? The king has armies of servants. He wears
the finest silks and eats the richest foods. But he is also a martyr to
toothache. He is prone to fatal infections. It takes him a week by carriage to
travel between palaces. And he is tired of listening to the same jesters. Life
as a 21st-century office drone looks more appealing once you think about modern
dentistry, antibiotics, air travel, smartphones and YouTube.
The question is more than just a parlour game.
It shows how tricky it is to compare living standards over time. Yet such
comparisons are not just routinely made, but rely heavily on a single metric:
gross domestic product (GDP). This one number has become shorthand for material
well-being, even though it is a deeply flawed gauge of prosperity, and getting
worse all the time (see article). That may in turn be distorting levels of
anxiety in the rich world about everything from stagnant incomes to disappointing
productivity growth.
Faulty
speedometer
Defenders of GDP say that the statistic is not
designed to do what is now asked of it. A creature of the 1930s slump and the
exigencies of war in the 1940s, its original purpose was to measure the
economy’s capacity to produce. Since then, GDP has become a lodestar for
policies to set taxes, fix unemployment and manage inflation.
Yet it is often wildly inaccurate: Nigeria’s
GDP was bumped up by 89% in 2014, after number-crunchers adjusted their
methods. Guesswork prevails: the size of the paid-sex market in Britain is
assumed to expand in line with the male population; charges at lap-dancing
clubs are a proxy for prices. Revisions are common, and in big, rich countries,
bar America, tend to be upwards. Since less attention is paid to revised
figures, this adds to an often exaggerated impression that America is doing far
better than Europe. It also means that policymakers take decisions based on
faulty data.
If GDP is failing on its own terms, as a
measurement of the value-added in an economy, its use as a welfare benchmark is
even more dubious. That has always been so: the benefits of sanitation, better
health care and the comforts of heating or air-conditioning meant that GDP
growth almost certainly understated the true advance in living standards in the
decades after the second world war. But at least the direction of travel was
the same. GDP grew rapidly; so did quality of life. Now GDP is still growing
(albeit more slowly), but living standards are thought to be stuck. Part of the
problem is widening inequality: median household income in America, adjusted
for inflation, has barely budged for 25 years. But increasingly, too, the
things that people hold dear are not being captured by the main yardstick of
value.
With a few exceptions, such as computers, what
is produced and consumed is assumed to be of constant quality. That assumption
worked well enough in an era of mass-produced, standardised goods. It is less
reliable when a growing share of the economy consists of services. Firms
compete for custom on the quality of output and how tailored it is to
individual tastes. If restaurants serve fewer but more expensive meals, it
pushes up inflation and lowers GDP, even if this reflects changes, such as
fresher ingredients or fewer tables, that customers want. The services to
consumers provided by Google and Facebook are free, so are excluded from GDP.
When paid-for goods, such as maps and music recordings, become free digital
services they too drop out of GDP. The convenience of online shopping and
banking is a boon to consumers. But if it means less investment in buildings, it
detracts from GDP.
Stop counting, start grading
Measuring prosperity better requires three
changes. The easiest is to improve GDP as a gauge of production. Junking it
altogether is no answer: GDP’s enduring appeal is that it offers, or seems to,
a summary statistic that tells people how well an economy is doing. Instead,
statisticians should improve how GDP data are collected and presented. To
minimise revisions, they should rely more on tax records, internet searches and
other troves of contemporaneous statistics, such as credit-card transactions,
than on the standard surveys of businesses or consumers. Private firms are
already showing the way—scraping vast quantities of prices from e-commerce
sites to produce improved inflation data, for example.
Second, services-dominated rich countries
should start to pioneer a new, broader annual measure, that would aim to
capture production and living standards more accurately. This new metric—call
it GDP-plus—would begin with a long-overdue conceptual change: the inclusion in
GDP of unpaid work in the home, such as caring for relatives. GDP-plus would
also measure changes in the quality of services by, for instance, recognising
increased longevity in estimates of health care’s output. It would also take
greater account of the benefits of brand-new products and of increased choice.
And, ideally, it would be sliced up to reflect the actual spending patterns of
people at the top, middle and bottom of the earnings scale: poorer people tend
to spend more on goods than on Harvard tuition fees.
Although a big improvement on today’s measure,
GDP-plus would still be an assessment of the flow of income. To provide a
cross-check on a country’s prosperity, a third gauge would take stock, each
decade, of its wealth. This balance-sheet would include government assets such
as roads and parks as well as private wealth. Intangible capital—skills,
brands, designs, scientific ideas and online networks—would all be valued. The
ledger should also account for the depletion of capital: the wear-and-tear of
machinery, the deterioration of roads and public spaces, and damage to the
environment.
Building these benchmarks will demand a
revolution in national statistical agencies as bold as the one that created GDP
in the first place. Even then, since so much of what people value is a matter
of judgment, no reckoning can be perfect. But the current measurement of
prosperity is riddled with errors and omissions. Better to embrace a new
approach than to ignore the progress that pervades modern life.
http://www.economist.com/news/leaders/21697834-gdp-bad-gauge-material-well-being-time-fresh-approach-how-measure-prosperity
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