GDP – Flaws

At present, GDP is universally taken to be shorthand for national well-being

Richard Tomkin, assistant director of the ONS – Office for National Statistics – says: “GDP is used as an all-encompassing proxy for people’s living standards although never designed for this and it doesn’t fully capture” 

However, it was the late Robert Kennedy who said: “GDP measures everything except that which makes life worthwhile”

We agree

Indeed, in our view, GDP is well past its usefulness date:

  • First, it does not measure everything – much countable economic activity is not counted, whilst more is deemed uncountable – much is spent on failure and putting things right, examples being repairing or replacing shoddy goods, repeat visits to doctors or hospitals to be cured or dealing with youth suicides, exam failures or litter louts and fly-tipping
  • And much that enables people to live lives that are meaningful and satisfying goes uncounted – worthwhile modern living is much more than just consuming goods and services

Bank of Canada Governor Stephen Poloz agrees – he doubts the appropriateness of GDP and whether we are accurately measuring economic activity in the digital age, saying:

  • “Traditional measures were developed to measure the manufacturing-based economy of old – to count the number of widgets produced in the factory by the workers employed
  • But the economy has become a very different animal, dominated by services, and those services are hard to measure and properly value – digital services in particular”

The overriding concerns now are whether the gains from technology are being fully captured by GDP statistics – whether the apparent decline in advanced country national productivity levels over the last decade or so is because of slow economic growth or whether other valuable activity is being overlooked

At present, we guestimate the composition of any developed economy’s GDP to be as follows:

                          COUNTABLES       UNCOUNTABLES                           

COUNTED                 50%                        20%

                          _______________________________                       

UNCOUNTED            15%                       15%           

 

A. Counted Countables (50% – trend flat):

  • Private sector goods and services all have a selling price – customers assess the VFM on offer, some buy them – those sales are counted, albeit some are fraught with errors  
  • Public sector services usually don’t have a price – input costs are thus assumed to be equivalent to notional output prices paid and so the value obtained by tax-payers – but, if one pours extra tax-payers’ money into such services, GDP rises, so the economy and national productivity appear to improve when the opposite may be the case
  • Professor Hal Varian, Chief Economist at Google commented on the impact of technological progress in this quadrant:
    • “In 2000, there were 80bn photos taken worldwide – now, it’s about 1,600bn i.e. 20 times as many
    • The cost of each photo, the film, developing and printing was about 50p each – now it’s effectively zero, so a decline in GDP but a huge increase in enjoyment/ pleasure and so our standard of living”
  • Thus, if a nation keeps reducing unit costs of existing stuff, even if it keeps increasing the quality/ value offered, overall GDP will be reduced
  • Equally, if technology keeps replacing much existing stuff – for example, smart phones replacing files, letter paper and envelopes, postage stamps, diaries, watches, atlases, cameras, video-recorders as well as old phones – then GDP will fall
  • Hence, for GDP to grow, nations must either sell more volume of existing stuff at existing or higher prices and/ or sell new stuff too
  • Brent Moulton, formerly of the US Bureau of Economic Analysis which collects US GDP data, has two major concerns:

    • How to account for the effects of innovation on new products and quality changes

    • How to measure price changes – how much of any change in the sales of a particular good or service is due to price inflation and how much due to changes in real output, either the quantity or quality of that good or service

  • The scope to under or double-count in this quadrant is also considerable, especially when outsourcing abroad or several suppliers are involved for the one product – it’s not just assumptions, estimates and forecast errors that muddy these waters

 

B. Counted Uncountables (20% of GDP –  trend flat):

  • There are many sizeable private sector areas where the ONS says economic estimates are now made, including:
    • Drug dealing
    • Prostitution
  • The ONS claims the annual proceeds from drug dealing alone are worth some £4.4bn to GDP whilst prostitution clocks some £5.3bn 
  • Apparently some ONS investigator, maybe team, was able to establish that the average price of a prostitute in the UK was, at the time, £67 without giving more detail
  • And then they ask us to believe their official GDP statistics are accurate to within 0.1%

 

C. Uncounted Countables (15% of GDP –  trend rising)

  • New economy activities, including:
    • Millions of us now use our computers and phones to complete clerical activities once done by secretaries, typing pools, bank and insurance clerks, even stockbrokers – what once cost money and counted for GDP is now done for free and so doesn’t count
    • Many organisations get their customers to do, for free, much of the admin paperwork once done by paid staff e.g. HMRC and tax returns, supermarkets and self-server checkouts
    • Much R&D investment is made hoping to find new products/ services for later years – GDP measures only the revenue and profits obtained from products/ services this year
  • White economy activities, including:
    • Housework – cleaning, cooking, DIY, gardening
      • The ONS says the value of unpaid housework is £1.25 trillion p.a.
      • This is bigger than the output of the non-financial sector and equivalent to about 2/3 of total GDP
    • Hobbies, arts, music
    • Charity work – RNLI lifeboatmen
    • Most child/ elderly care
    • Ferrying family members to/ from school, shops, friends, healthcare
    • Unregistered unemployed earning a few bob
  • Black economy activities, including:
    • Moonlighting
    • Working for cash
    • Crime – fraud, muggings, black markets 
    • Tax avoidance
    • Hidden incomes

 

D. Uncounted Uncountables (15% of GDP –  trend rising):

  • Environmental benefits:
    • Costs to ensure the sustainability of the environment – not having to later repair damage done now e.g. from pollution, global warming, atomic waste, less bees for pollination
    • Enjoyment of countryside, seaside, fresh air, clean seawater, diversity of flora and fauna
    • More trees, less flooding
    • Better infrastructure e.g. transport convenience and speed, broadband capacity
  • Physical benefits:
    • Longer lives
    • Healthier lives 
    • More caring/ altruism/ concern for others
  • Mental benefits:
    • More/ better leisure/ pleasure – more choice, better quality
    • Less boredom/ tedium/ slog doing boring work
    • More contentment if not happiness 
    • Better educated/ more skilled
    • Better informed, and quicker, so can make better decisions
    • Better/ quicker diagnoses of illnesses
    • Better/ quicker searches of legal precedents before court cases
    • More social connectivity
    • More working from home – less stress, less wasted commuting time

CONCLUSIONS

  • In developed nations, GDP counts most old-world physical/ tangible goods and services but misses other new-world mental/ intangible benefits on offer which make peoples’ lives worth living
  • In particular, GDP misses:
    • Some 30% of total material wealth generated 
    • Maybe 90% of mental wealth 
  • This means GDP and national productivity figures derived from it can be dangerously misleading, especially to governments who determine economic policies and tax regimes based on them 
  • Famous economist Joseph Stiglitz supports this view: “What we measure affects what we do, and if our measurements are flawed, decisions may be distorted” 
  • However, there is also cause for optimism – people may be much better off now than official statistics would indicate
  • Charlie Bean, economist and ex Deputy Governor of the BoE – Bank of England – believes: “The UK economy may be growing 0.75% per annum faster than official figures say”

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