Friday, August 14, 2009

GDP ‘Growth’: a tool to fool

Statistics on economic growth are misleading measures of a nation’s economic health, but they are widely used anyway.

The front page of today’s Washington Post hailed a “modest growth” in France and Germany as the “latest sign of a global comeback, and reported that “improving indicators” are pointing to an end of the recession in the United States, China, and even Japan.

Yet another story in today’s Post, this one on page 11, headlined: “Optimism Bypasses Consumers,” with this subhead “Retail Sales, Foreclosure Data Show Outlook Remains Bleak for Households.”

The difference between the two stories is that the optimistic one builds on a small climb in the Gross Domestic Product, the commonly used measure of how the economy is faring. But GDP is an unreliable indicator. It is one measure of the economy, but by itself “a deeply foolish one,” according to a long analysis in the August 10 New York Times.

The title, “GDP RIP,” overstates the article’s content and reality. GDP is not dead. In fact, the author, Professor Eric Zencey of Empire State College, bemoans “our habit of taking it as a measure of economic welfare,” and recommends that it be renamed “gross domestic transactions.”

Criticism of GDP is not new. The Organization for Economic Cooperation and Development (OECD) has analyzed its weaknesses, without dampening its use. (See “GDP = Grossly Distorted Picture” in the March 1, 2006, issue of my Website, Human Rights for Workers.)

In his analysis, Zencey has numerous examples of GDP’s basic flaw: it adds up all economic activities (for example, rebuilding New Orleans after Hurricane Katrina is a plus in GDP, but the $82,000,000,000 in damages is not an activity and thus not subtracted). Zencey offers this enlightening parallel:

“If you kept your checkbook the way GDP measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together. The resulting bottom line might tell you something useful about the total cash flow of your household, but it’s not going to tell you whether you’re better off this month than last or, indeed, whether you’re solvent or going broke.”
A much better measure of the economy, to my mind, is the level of employment and unemployment. Using this measure is enlightening, and sobering. Take this U.S. “job picture” painted by the Economic Policy Institute on August 7:
“The 6,700,000 jobs lost since the start of the recession understates the magnitude of the hole in the labor market. To keep up with population growth, the economy needs to add approximately 127,000 jobs every month, or, across the full 19 months of recession, 2,400,000 jobs. This means the labor market is currently 9,100,000 jobs below pre-recession employment levels.”
Yet, as the EPI points out, without the boost added by the American Recovery and Reinvestment Act, the job picture would be even worse. Thanks to the stimulus, the economy created or saved an estimated 720,000 jobs in the second quarter of this year alone.

Bottom line: effective recovery policies require restoring employment, not saving bankers’ bonusus.

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