The misguided critique of GDP

In yesterday’s Weekend Australian, Mike Steketee joined the list of GDP critics.

Some high-profile economists have given this critique some credibility. And it certainly needs some big names to rescue a very small idea.

There are two components to the critique, one resting on a mistaken assumption, and the other true but irrelevant.

The mistaken assumption is that we inappropriately use GDP as a measure of broad national welfare. Steketee uses as his examples of this:

When the Reserve Bank decides whether to raise or lower interest rates, it looks at a range of economic indicators, but none is more important than the quarterly GDP figures. The same applies to the government when it is framing its annual budget. GDP has become the de facto measure of national welfare.

But these examples are less than compelling proof of this assumption. The RBA’s major indicator isn’t GDP growth, it’s inflation. GDP is one of many indicators considered in the budget, but it is hardly inappropriate – since the government primarily taxes income and consumption, GDP is a crucial indicator of its fiscal capacity, as well as being correlated with other important indicators such as employment.

Steketee’s other point is that GDP doesn’t measure things it does not purport to measure. Well, obviously. It doesn’t measure depreciation or destruction of assets (that’s why it is called gross domestic product). It doesn’t count household production. (Steketee’s examples).

This point is true but irrelevant without an argument as to why these should be included in some new composite indicator, or how this indicator would be more useful than GDP in the contexts in which GDP is currently used.

Of the hundreds of social and economic indicators available GDP is certainly one of the most important. But it is still one among many we use to assess how well we are going.

8 Responses to “The misguided critique of GDP

  • 1
    Rajat Sood
    January 23rd, 2011 18:19

    I haven’t heard of any economists who think the floods have a ‘silver lining’ because they will increase GDP in the medium term. Economists are concerned about the inflationary effects of the floods, but this concern does not arise from the impact of the floods on GDP per se. The concerns derive from the destruction of productive capacity and the need to expend scarce resources on replacing that capacity. Replacing destroyed productive capacity happens to increase GDP, but interest rates would need to rise regardless of whether GDP was being measured or not.

  • 2
    Baz 'Da Ordinary Aussie'
    January 24th, 2011 08:10

    I wouldn’t enter the debate. See, the people raising this ‘GDP is no good’ debate are lefties, hellbent on pushing their ‘don’t worry about the money, sit down, smoke up, and be merry about life line’. e.g. the Gittens who keeps preaching that we all work too much (huh?), with John “Queenslander’ Quiggan and this skeletee not far behind.
    Even that Ken Henry would keep spitting out this rubbish. e.g. When I was at the Tsy, the mission statement was ‘improving the welfare of Aussies’. And then we would have to sit through 5 days of conference propaganda, where they would instruct us that raising GDP is not the same as raising welfare. The object of this was to stifle effort in pursuing policy reforms that lift productivity and to redirect those efforts towards lefty issues, like the environment.
    Now in this case, I accept skeletee is not pushing the same party line as other anti-GDP campaigners. But the bigger picture outcome they are pushing is still the same….to undermine GDP.

    So I say, don’t enter the debate. Accept that being rich is better than being poor. Assume that richer people are happier people…..and then get on with the job.

  • 3
    Son of the Ratpack
    January 24th, 2011 12:07

    Treasury is right. Baz needs to brush up on some basic economics. Raising GDP is not the same as raising welfare. All the money spent on fixing Queensland will raise GDP, and by more than it has gone down because of interrupted coal production etc.

  • 4
    Tom N.
    January 24th, 2011 13:49

    Skeketee is just another in a long line of critics of straw economic men. Its pathetic that this banal pap continues to get published.

  • 5
    Jeremy
    January 24th, 2011 19:02

    Tremendously disappointing to see that the intellectual level of the ‘GDP ain’t welfare’ debate hasn’t improved in two decades.

    A minimum of research would have revealed that this discussion has been had before:

    http://www.publish.csiro.au/pid/1555.htm

    Just lazy journalism in search of a barrow to push. The howler about the Reserve Bank speaks volumes.

  • 6
    Baz 'Da Ordinary Aussie'
    January 25th, 2011 06:04

    Sonny Ratpack, fully appreciate that GDP is not the same as welfare. What I’m railing against is a divergence in focus away from GDP to these soft BS welfare measures. For an example, the UK tried to side line GDP as the core welfare measure and instead tried to focus on a number of measures (including education, housing levels etc). It just seemed to me that the UK was saying we’re not focusing on GDP anymore, cause we know we’re no good at it. We’re not competiting anymore. Like the Europeans who can’t compete economicaly anymore who start saying their lifestyles are better than those in the US.
    My point is, GDP is everything. You don’t have a good GDP, your military will suffer and then you will get pushed around and eventually, your welfare will suffer….The Chinese understand this….when will we?

  • 7
    conrad
    January 25th, 2011 10:23

    “My point is, GDP is everything.”
    .
    No it isn’t. It’s just another measure, with various problems like all measures have. Unfortunately, it gets used as a strawman (like here), generally by people who arn’t offering a better one, by people who point out problems already known with it despite all measures having problems, or by people who falsely claim it is in opposition to some other measure.

  • 8
    Baz 'Da Ordinary Aussie'
    January 25th, 2011 14:18

    Goon on ya Conrad…anyway, interesting what happenned in Moscow this morning.
    How does the saying go?…
    ‘Another bombing, another-accident-from-a-peaceful-relegion-member’…deary me, when will it end.