Thursday, April 17, 2014

It's Time to Retire Gross Domestic Product (GDP) as a Measure of Prosperity

What if we used wellness (Gross Domestic Happiness) as a metric for prosperity rather than GDP?

Distilling an economy's success in delivering "prosperity" to a single number has outlived its purpose. Zachary Karabell describes the birth of GDP in far less complex times in (Mis)leading Indicators: Why Our Economic Numbers Distort Reality (Foreign Affairs): 
A GDP that is growing in sync with expectations can enhance a country’s reputation and thus its strength and power. A GDP that is contracting or failing to meet expectations, on the other hand, can lead to disaster. Yet a hundred years ago, the concept of GDP did not exist; history unfolded without it. The United States, for example, managed to win its independence, fight a civil war, and conquer a continent without any measure of national income. 
GDP’s origins lie in the 1930s, when economists and policymakers in the United States and the United Kingdom struggled to understand and respond to the Great Depression. 
It is not terribly surprising that economists and policymakers came to favor a statistical technique that helped the United States survive a depression and win a war. But not even the economists who invented this metric imagined that GDP would become so central to every state in the world within a few short decades.
The problem is this radical reductionism at the heart of any single measure is irrevocably flawed: 
Leading indicators were invented to measure the economies of the industrial nation-states of the mid-twentieth century. In their time, they did so brilliantly. The twenty-first century, however, is proving more challenging to measure. Industrial nation-states have given way to developed economies rich in services and to emerging industrial economies exporting goods made by multinational companies. The statistics of the 20th century were not designed for such a reality, and despite the assiduous efforts of statisticians, they cannot keep up. 
These shifts have created a temptation to find new formulas, better indicators, and new statistics. But the belief that a few simple numbers or basic averages can capture today’s multifaceted national and global economic systems is a myth that should be abandoned. Rather than seeking new simple numbers to replace old simple numbers, economists need to tap into the power of the information age to figure out which questions need to be answered and to embrace new ways of answering them.
The limitations of GDP are so severe that the number is at best misleading. Karabell identifies three intrinsic flaws in any single-number scheme to measure GDP:

1. GDP does not include vast swaths of economic output and value

2. GDP is useless in measuring real-world trade

3. GDP counts digging a hole and filling it but not conservation of energy or resources. 
If a steel mill produces pollution that then requires a cleanup, both the initial output (the steel) and the cost of addressing its byproduct (the cleanup) add to GDP. So, too, would the cost of health care for any workers or residents injured or sickened by the pollution. Conversely, if a company replaces its conventional light bulbs with long-lasting LED bulbs and, as a result, spends less on lighting and electricity, the efficiency gains would detract from GDP. Yet few would argue that the pollution example represents a positive development or that the lighting example constitutes a negative one.
The simplistic assignment of "import" and "export" completely misses the reality of modern manufacture and trade, where parts come from multiple nations. As Karabell explains: 
If trade numbers more accurately accounted for how products are made, it is possible that the United States would not have any trade deficit at all with China. The problem, in short, is that trade figures are currently calculated based on the assumption that each product has a single country of origin and that the declared value of that product goes to that country. Thus, every time an iPhone or an iPad rolls off the factory floors of Foxconn (Apple’s main contractor in China) and travels to the port of Long Beach, California, it is counted as an import from China. 
A more reasonable standard, of course, would recognize that iPhones and iPads do not have a single country of origin. More than a dozen companies from at least five countries supply parts for them. Infineon Technologies, in Germany, makes the wireless chip; Toshiba, in Japan, manufactures the touchscreen; and Broadcom, in the United States, makes the Bluetooth chips that let the devices connect to wireless headsets or keyboards. 
Taking these facts into account would leave China, the supposed country of origin, with a paltry piece of the pie. Analysts estimate that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy, in the form of income paid directly to Foxconn or other contractors.
I have addressed this issue for years, for example: Trade War with China: Who Benefits? (April 11, 2007)

No single number, regardless of the inputs, can possibly reflect the real economy. Karabell concludes: 
How entrepreneurs run effective businesses; how individuals buy homes, pay for college, or retire -- none of those decisions should be based on the leading indicators of the last century. Old attachments to those indicators, and to the myth that there is something called “the economy” that affects all people equally, poses a major obstacle to progress.
Karabell also discusses what I call the propaganda value of GDP: 
These measurements were not invented to serve as absolute markers of national success or failure or to indicate whether some governments were visionary and others destructive. But the transformation of these numbers from statistics into markers of national success happened so quickly over the course of a few decades that no one quite noticed what was happening.
I tend to think political authorities knew exactly what was happening: they realized that their own credibility could be boosted by a rigged GDP number. Thus we have the central government of China issuing blatantly bogus claims of 7+% annual GDP, as anything less will severely erode their claim of managerial brilliance.

In our own propaganda-dependent state, GDP is almost always positive, much like corporate earnings always beat expectations by a penny.

But we should be paying attention to an even deeper critique of GDP: that prosperity no longer depends of the "growth" of consumption, financialization, etc. but on the Degrowth of narcissistic consumerism and more efficient use of resources and capital.

What if we used Bhutan's guiding national policy of Gross Domestic Happiness, as a metric for prosperity? 
A second-generation GNH concept, treating happiness as a socioeconomic development metric, was proposed in 2006 by Med Jones, the President of International Institute of Management. The metric measures socioeconomic development by tracking seven development areas including the nation's mental and emotional health. GNH value is proposed to be an index function of the total average per capita of the following measures: 
1. Economic Wellness: Indicated via direct survey and statistical measurement of economic metrics such as consumer debt, average income to consumer price index ratio and income distribution
2. Environmental Wellness: Indicated via direct survey and statistical measurement of environmental metrics such as pollution, noise and traffic
3. Physical Wellness: Indicated via statistical measurement of physical health metrics such as severe illnesses
4. Mental Wellness: Indicated via direct survey and statistical measurement of mental health metrics such as usage of antidepressants and rise or decline of psychotherapy patients
5. Workplace Wellness: Indicated via direct survey and statistical measurement of labor metrics such as jobless claims, job change, workplace complaints and lawsuits
6. Social Wellness: Indicated via direct survey and statistical measurement of social metrics such as discrimination, safety, divorce rates, complaints of domestic conflicts and family lawsuits, public lawsuits, crime rates
7. Political Wellness: Indicated via direct survey and statistical measurement of political metrics such as the quality of local democracy, individual freedom, and foreign conflicts.
Here in the U.S., we give lip-service to all these values, but ask yourself: where do we spend most of our time? Serving our masters in the State/crony-cartel economy, creating GDP.

Yes, we all still need to earn a livelihood, but imagine a society constructed around generating Gross Domestic Happiness instead of GDP. The power structure would collapse because none of these activities generate enough profits or taxes to keep the Machine operational.

It is a sad statement that we often only awaken to real value and meaning when we've run out of time to change the way we "invest" our time.

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