Defending GDP

Of all the statistics produced by the ABS, GDP stirs the strangest reactions. In Fairfax papers over the weekend, Don Edgar tells us that:

Gross domestic product has failed as an indicator of either national progress or individual happiness.

That’s quite probably because it is not a measure of national progress or individual happiness. It measures the value of goods and services produced over a particular time period. Pointing out, as Edgar does, that ‘GDP goes up with increased spending on crime, natural disasters’ is true but a silly criticism. We would be better off if crime and natural disasters did not occur, but spending on them usually leaves us better off than we would be if we did nothing (the ‘gross’ is intended to explain that no account is taken of capital depreciation, or destruction in the case of crime and natural disasters).

GDP clearly cannot be taken as equivalent to national progress or individual happiness. But one reason that it is a very useful statistic is, as Will Wilkinson points out, that it correlates with other statistics that get closer to progress, such as levels of health and education.

Up to a point, GDP correlates with happiness (there is a debate about how much extra happiness more GDP delivers to already rich countries; the current empirical evidence suggests a small amount). It also correlates with the employment level, the decline of which is a major negative for numerous objective and subjective measures of well-being.

Another reason that GDP is a useful statistic is that policymakers can to some extent increase or decrease it. We talk about budget deficits or surpluses and interest rates a lot because these have observable effects. By contrast, there are no easy policy levers to pull that directly influence subjective well-being.

Edgar prefers composite well-being indicators. These are in my view intellectual junk (the happy planet index being a particularly bad example). Though the underlying data series are usually valuable, combining them is not. There are serious problems of incommensurable measures and tendentious value judgments in what to include and what weight to give the different indicators.

GDP certainly doesn’t tell us all we need to know. But unlike composite well-being indicators, it does tell us useful things.

15 Responses to “Defending GDP

  • 1
    conrad
    October 5th, 2009 07:07

    It’s funny that people are still going on about what GDP doesn’t measure. Perhaps the recession wasn’t bad enough.

  • 2
    Rajat Sood
    October 5th, 2009 07:31

    The GFC is a great test for the growth-doesn’t-bring-happiness lobby. I love this:

    We are now told the global economy is recovering. So why don’t a lot of us feel our lives are better? Because conventional economists and GDP track only the supposed benefits of economic growth, not the costs, such as increasing family stress, environmental degradation and civic disengagement.

    The mood in most western countries (apart from Australia)is sombre because GDP has fallen by 3-5% and unemployment is heading towards 10%. Moreover, much of the fall in output has been driven by a reduction in consumer spending and ‘deleveraging’, which is exactly what the happiness proponents have been pushing. So traditional economic measures actually explain the collective mood very well, and I suspect a lot better than happiness indicators.

  • 3
    Andrew Norton
    October 5th, 2009 08:30

    Rajat – I haven’t seen any happiness surveys tracking 2007-2009, but as you say this is a big test for the anti-GDP group. On the other hand, having followed them for many years now, they appear to know no intellectual shame. Being proven wrong will not stop articles like this from appearing.

  • 4
    John Farrell
    October 5th, 2009 09:47

    Andrew, the fact that policymakers can increase or decrease GDP is EXACTLY what’s wrong with it, because they can claim success if they increase this number which is only vaguely correlated with well-being. Managing to metrics makes it easy to measure (and hence claim) success, but not so easy to achieve anything meaningful. Good for politicians, not so impressive to the rest of us.

  • 5
    Andrew Norton
    October 5th, 2009 10:27

    John – Apart from (absurdly) criticising GDP for not doing things it cannot, these critiques show naivety or ignorance about what governments actually do. Most actions by government have nothing to do with maximising GDP (though they are all funded by it) and are aimed, with widely varying degrees of success, at improving the interests or well-being of some group in the community. GDP is just one of dozens of statistical series that inform this process.

    Your alternative seems to be letting politicians claim success (or failure, if talking about their opponents) without using objective indicators. All indicators only measure directly what they are designed to measure, and all statistics are subject to interpretation and error (GDP is often revised, for example, as more information is received). But that does not make them inferior to speculation or ideological claims.

  • 6
    John Farrell
    October 5th, 2009 10:59

    Actually, it’s a jolly good job that governments don’t govern so as to increase GDP, yet we’re all supposed to be happy when GDP increases. If we increased petrol prices and drove a lot more GDP would increase, but that’s not really what we want. GDP measures activity but also waste.

    It’s certainly not my intent that politicians could claim success without any measurement at all, but the focus always seems to be on GDP. What’s the second most important job in the government – the treasurer (OK, maybe third at the moment, but with previous treasurers it would have been second). Why not the Health Minister? Why does the government always congratulate itself on high growth rates? Well, because they can have some effect on those numbers, and the treasurer needs to be on TV saying how good the government is. The government doesn’t want to appear on the news saying “well, we think people are getting to work more easily with the new transport system but we can’t really say because it’s too hard to measure”.

    GDP gets way more attention than it deserves because it’s measurable and manipulable, not because it’s useful. Maybe with an adversarial political system and a public that has no time for fine detail that’s the best we can hope to achieve, but it is frustrating.

  • 7
    Rajat Sood
    October 5th, 2009 11:37

    Actually, it’s a jolly good job that governments don’t govern so as to increase GDP, yet we’re all supposed to be happy when GDP increases.

    I don’t think politicians or the public place care too much about GDP directly most of the time. GDP has been relevant recently because we have been on the cusp of a recession. People care about a recession because a recession means job losses, which have a real impact on many people. The fact that we’ve avoided a technical recession means that job losses have been a lot lower than forecasters were predicting a year ago. Surely, this is something to be grateful for? At the same time, there are plenty of news stories about problems in the health system or education system, so I don’t quite understand what you think the problem is John. The reason why the role of the Treasurer is so important is that it is the Treasurer’s Budget that allocates funding for everything; and of course, without an economy, you don’t have taxes and you can’t have any spending on public health or education services.

  • 8
    Russell
    October 5th, 2009 11:51

    “they appear to know no intellectual shame” – that sounds like an invitation ….
    .
    John links GDP to growth, which raises two issues. If we are evaluating the benefits of growth by life expectancy etc why aren’t we also considering the costs? Yes, they’re harder to measure, but economists should be able to do a little better.
    .
    The other thing about growth is sustainability. We should always consider what the future effects of what we’re doing now. It’s a hugely complex thing to consider (like climate change) but we do seem to be reaching tipping points in various places. To keep doing what was good in the past, boosting easily measurable economic activity, isn’t necessarily a good strategy for the future.

  • 9
    Andrew Norton
    October 5th, 2009 12:14

    Russell – Costs are constantly assessed at the micro level, especially in the private sector where there are both their own cost-benefit analyses and for most big projects numerous environmental, planning and other regulatory hurdles to jump. And of course while there are policy interventions such as taxes, government spending and interest rates with effects across the economy,
    GDP is ultimately the cumulative result of millions of projects and billions of transactions. Macro policy is a blunt instrument; costs are best assessed at lower level.

    The whole climate change scenario seems to be a classic refutation of your second point: a massive global effort to model climate change and the policies needed to reduce carbon emissions (which rely heavily on macroeconomic models used to estimate GDP).

  • 10
    Russell
    October 5th, 2009 12:39

    Andrew, it seems to me that most organisations are only interested in displacing costs, either onto others, or into the future, and that’s for activities where the costs are immediately apparent. where they’re harder to determine, well, anything goes.
    .
    GDP may be a blunt instrument but it’s being used to claim benefits, so the costs should also be in the equation. If economists can’t do it, then it will be left up to speculation, as you say.
    .
    Please explain about the climate change thing: so far we have the science, the rest is just a mess. It might turn out to be a serious attempt to address one of the areas where growth is toxic, but we’ve hardly taken a step down that road. (First we have to get past that pothole of ignorance known as the Liberal Party).

  • 11
    Callum J
    October 5th, 2009 12:49

    Thanks Andrew – very clear criticism.

    To me, public acceptance of composite measures of national progress implies policy should target those measures. But as you said, the formulation of those measures is arbitrary, which I think makes it highly susceptible to government manipulation and interpretation — much more so than GDP. Even if GDP is not perfect, I prefer it as a somewhat objective summary of national progress.

    For example, from what I’ve been able to find, The Happy Planet Index weights ‘Life Satisfaction’, ‘Life Expectancy’, ‘Happy Life Years’, and ‘Ecological Footprint’ to get the HPI for 143 countries. I’m not sure what weights it places on each of these but I’m sure I can adjust the weights to get whatever ordering of countries I want.

    On a side note, with a measure of ‘ecological footprint’, it’s not surprising that developing countries dominate the top 40 by the HPI — as countries become richer, their citizens show a preference for increased energy consumption. Should we really believe the HPI as a measure of national progress when it says that men and women in Egypt and Saudi Arabia are 12th and 13th most well-off in the world (Australia is 102nd)?

  • 12
    Andrew Norton
    October 5th, 2009 13:32

    Russell – All statistics require interpretation; that the political process has not delivered the result you prefer does not mean that there has been a failure to collect the relevant information. As my media survey last year showed, there is a torrent of statistical claims of climate doom, along with a trickle questioning the data.

    There is a lot of cost data implicit in the GDP figures, since it is a measure of value added (ie the inputs into a production process are deducted from the value of goods and services produced for calculating GDP). Essentially, your argument is that costs producers have not paid for be included. Conceptually this may be desirable, but it is difficult to say with any precision what these costs are in $ terms. Free household labour is excluded (which Edgar complains about) for the same reasons: hard to measure and hard to value.

    I’m certainly not against having discussions on these subjects, but I don’t think a data set with a fairly high level of reliability should be distorted with data that is at very best a guess involving signficant value judgments by the statistician.

    Callum – A perfect example of how politicised statistics produce worthless results.

  • 13
    Son of the Ratpack
    October 5th, 2009 18:46

    Large differences in GDP, such as between Australia and Papua New Guinea, are obviously indicative of, and the causes of, large differences in meaningful standards of living. But that isn’t true of small differences. The United States has more GDP per capita than Canada, but it’s not obvious which country has a higher living standard, all things considered.

  • 14
    Andrew Norton
    October 5th, 2009 19:26

    S of R – True. Living standards is a much broader concept than GDP or individual income.

  • 15
    Tom N.
    October 6th, 2009 15:02

    I had much the same reaction to Elder’s article as you, Andrew, and might have written a letter to the editor correcting the assertion that “conventional economists” use GDP as a welfare measure except that, in my experience, The Age has little interest in informing its readers about the reality of economics; it is much more interested in setting up and then knocking down straw economic men.