Book Club: How Our Economic Indicators Fail Us

J. Scott Applewhite

The deficiencies of Gross Domestic Product (GDP) as a measure of national health have long been recognized. The responses, however, haven’t really gotten to the nub of the problem.

Yes, GDP only measure how much stuff a nation makes and consumes; yes, how that is defined changes over time; and yes, the production and consumption of stuff can be a great good, but it can also be a great problem. GDP goes up after natural disasters because of the rebuilding, but hurricanes, tornados, droughts and earthquakes are hardly a healthy recipe for economic growth.

Those limitations led to a backlash in the 1970s, along with new ideas for better measurements of national economic and societal health. Bhutan Gross National Happiness Index was one of the first major initiatives. That has been followed over the past decades by a plethora of others, ranging from the Human Development Index created by the United Nations to the Genuine Progress Index to time studies of contentment and well-being. The cornerstone of many of these alternative indexes is to broaden the spectrum beyond simple production and consumption of stuff and incorporate quality life, health, education, subjective measures of contentment, and the sustainability of long-term economic health.

Many of these offer improvement on GDP. They add needed elements that even the creators of GDP and national accounts understood have profound value. When the initial structure of national accounts was created in the 1930s, one of its primary progenitors, Simon Kuznets, argued that domestic work should be part of output. No one argued that cleaning the house, caring for children, and attending to the home were not vital economic activities, but because they did not have a market price, they were left out. GDP was never designed to be an all-inclusive metric of national well being, but it certainly has become one over the years.

The need to free ourselves from the tyranny of GDP is undeniable. The slavish use of the number rewards politicians for augmenting short-term output, which is easy enough. You can cut taxes or spend on easy projects (Sochi anyone?), and that will make GDP look good. It may not make the country any healthier.

Yet the search for an alternative is a will-o-the-wisp in its own right. The lure of an easy number to encapsulate complicated, multifaceted systems is deeply rooted in human nature and our history. We want to know, to capture, to control and simplify. We want rules and patterns that illuminate the messiness of the present, make sense of the past and give us the illusion of control over the future.

The creation of national accounts, of GDP, and indeed of the entire panoply of indicators that form of our-present day map of the economy were driven by the same scientific urges to make sense of the chaos of economic cycles. The economists and statisticians who invented them looked to the physical sciences as models, and believed that once these numbers were invented and codified, economic cycles could be tamed and prosperity unleashed.

The invention of these indicators has done much good. Economic cycles are not as dire and destructive as they were, and these metrics are one reason. Policy makers have been able to see more clearly what is unfolding in real time and derive responses, and GDP is one reason.

But the belief that economies are mechanistic systems as amenable to static numbers as physics is a profound limitations to understanding what are, in fact, fluid constantly changing systems. GDP was designed to capture the output of mid-20th century nation states, and not the more abstract but still real contributions of information technologies, services, and global supply chains. Unlike the physical world, economic systems are not at all static (and indeed, even physicists recognize that in an ever-expanding universe even laws of physics may begin to morph, though not at a pace that we are able to notice). Static, simple numbers such as GDP cannot and will not keep pace. That is one reason why even with expanding GDP, job growth has not followed familiar patterns, nor have prices. If a factory can make thousands of units with dozens of robots, it can boost GDP without adding much to employment.

Today, any proposed alternatives to GDP will fall short of describing our fluid economic systems. They may fall short for different reasons than GDP does, and may capture important variable like health and happiness. But fall short they will.

In truth, no one number can possibly suffice. No simple round figure can bear the weight that GDP now does, as an end-all, be-all of “are we doing well” or “are we strong or weak?” Any alternative number would be wrong as well, even if it were wrong for different reasons. The fault lies less with the number than with the belief and need and desire to have one number speak for all, to have one synthetic figure represent this notional entity called “the economy.”

GDP, along with all of our indicators, has some utility. It describes vital aspects of our lives. But we do need to lessen our dependence on it, and swapping with a new and improved number will simply replicate the problem in a different form.

The answers to the questions we have about our world today – ranging from income inequality to the nature of growth to the sustainability of economic models and the utility of our policies – will not be harder without easy reliance of GDP. They may actually get easier, as partisans would be forced to grapple more with the wealth of information now at our technological fingertips rather than use the facile up or down of GDP as an ultimate referendum.

True, partisans can find whatever data they please to prove their case, and we are already dealing with the challenges of dueling data in an information age, where one side marshals its own figures to challenge the figures of the other side. But without the easy hook of GDP, proving cases and allowing for the genuine uncertainty of future outcomes would be more the order of the day.

It may not be as satisfying to call for the fading of a key fixture of our day without offering an alternative. But it is more honest to accept that reducing complex systems to a few simple numbers will solve none of our problems. More honest, and ultimately more productive. Gross National Happiness, Gross Domestic Product, Human Development are noble goals all, but the messiness glorious complexity of our world is not served by them, nor by the human desire to capture and control that as surely as we have tried to capture and control the atom. We have more information than ever before to address income, health and the challenge of an emerging global middle class. We need to learn how to us that information in the 21st century without forcing it all into a narrow 20th century model.

Part of TPM Cafe Book Club for THE LEADING INDICATORS: A Short History of the Numbers That Rule Our World.

Zachary Karabell is an author, money manager, commentator, and head of global strategy at Envestnet. He is also the president of River Twice Research, where he analyzes economic and political trends. Educated at Columbia, Oxford, and Harvard, Karabell has written eleven previous books. He is a regular commentator on CNBC, MSNBC, and CNN. He writes the weekly “Edgy Optimist” column for Reuters and The Atlantic, and is a contributor to The Daily Beast, TIME, The Wall Street Journal, The New Republic, The New York Times, and Foreign Affairs.