GDP: Falling Short
by Diane Coyle, Professor of Economics at the University of Manchester in the United Kingdom,
GDP: Falling Short (from IMF website here )
Gross domestic product, or GDP, has been used to measure growth since the Second World War when economies were all about mass production and manufacturing. In this podcast, economist Diane Coyle, says GDP is less well suited to measure progress in today’s digital economy.
“I think the issue for GDP comes if the pace or scope of innovation is changing as much as it seems to be at the moment,” says Coyle. “So, that gap between what we’re measuring and the welfare effect seems quite large.”
Coyle, Professor of Economics at the University of Manchester in the United Kingdom, says while economists argue GDP was never meant to measure welfare, nearly everyone assumes it does just that.
“GDP is shorthand for welfare,” says Coyle. “So, if it’s becoming a less good indicator, that really matters.”
Another aspect of the economy that Coyle says GDP misrepresents is productivity. With all the technological advances in recent years one would expect that economies have become more productive. But GDP suggests the opposite is true. Coyle refers to this phenomenon as the productivity puzzle and says the mismeasurement of digital activities within the economy has a lot to do with it.
Coyle also emphasizes the role of official statistics in measuring productivity and growth. She says companies that are making huge profits from mining big data have a responsibility to share their data with governments. Because the purpose of official statistics is to enable governments to better run their countries.
“It’s part of the social contract,” says Coyle. “If you are a successful company taking advantage of the legal system, the infrastructure and public facilities in a country, then it’s just part of the deal that you cooperate with the statistical agencies.”
You can listen to the podcast HERE.
GDP and other numeric measures fail to capture ‘quality.’ For example, most have more computing power in their pocket than millionaires did 20 years ago. The quality and availability of health care, diet, entertainment, travel far exceeds the past.
You are likely richer than John D. Rockefeller was: https://fee.org/articles/you-are-richer-than-john-d-rockefeller/
If you want a measure of well being gdp per capita is a better measure than raw gdp. This takes population growth out of the equation, which is a second factor in GDP growth besides productivity. The recent low birth rate makes this side of the GDP calculation less meaningful.
If GDP is going to rise and productivity is going to rise, then the number of hours worked has to fall. If you do a naive computation and divide real GDP by total hours worked, it was flat from 2005-2008 and then from 2010-2015. By this measure or more conventional measures, productivity has been stagnant.
https://fred.stlouisfed.org/graph/?g=gZWy
I think a big problem is that the GDP, as it is measured, is increasingly divorced from the work most people do and what they get paid for it. The fraction of median weekly pay as a share of the GDP has been falling for decades. This means that at least 50% of all Americans can command less of the nation’s product than the once were able to. This is a formula for low productivity. We have a Soviet situation in which we pretend to pay people and people pretend to work.
https://fred.stlouisfed.org/graph/?g=gZY8
The data suggest that the problem is that the goal of a corporation is profit, not productivity, and since the 1980s corporations have increased profitability not by increasing productivity, but by driving down wages.
Karlberg,
Since when was it ever the goal of corporations to improve productivity????
Their goal has always and only been to make and then increase profits. Productivity as a means only applies if there are no other more profitable (greater roi) means of increasing or maintaining output and sales.
Offshoring is one means. Reducing labor union power by law &/or skirting the law is another, Utilizing lower paid part-time employment works too. Hiring “independent contractors” instead of regular employees is yet another. Replacing older more highly paid employees with younger and lower paid ones is also a favorite. Obtaining work permit visa’s to hire foreign workers at lower salaries while working them longer hours (exempt employees) has been in vogue lately as well.
And if you can reduce benefits and use the difference to increase productivity then that’s a real bonus… employees pay for replacing themselves.
mmm…
Why did nobody mention the killer here. Inequality. A dollar is not a dollar. It depends who gets it.
P.S. Having a wizzo smartphone but living in a fallen down dump isn’t so great either. There have been massive changes in relative prices as well. Sammy is right about quality being important, but of course he forgot that it cuts both ways. Some things are better and some things are worse, but which are more important?