Thursday, 16 November 2017

UK GDP - The measurement that holds economic statistics back from reality

Diane Coyle in The FT

It is faintly surprising that one of the liveliest areas of economics these days is the question of measurement, and what relation published statistics bear to what is happening in the economy. Statistics do not usually inspire excitement. 

This attention reflects the convergence of two strands of scepticism about the existing statistics, and in particular gross domestic product. One is the “productivity puzzle” and to what extent the mis-measurement of digital phenomena helps explain the slow rate of productivity growth. The other is the longstanding critique of GDP as a meaningful measure of progress, for reasons of environmental sustainability or other contributors to society’s wellbeing. 

The two converge on the distinction between the aggregate amount of marketed economic activity and total economic welfare. The conventional statement about GDP is that it is only meant to count the former, not the latter. GDP does not capture environmental factors or consider income distribution. But as long as that gap has been roughly constant, GDP growth has been a good enough measure of improvement in economic welfare. 

Perhaps the wedge between total marketed economic activity and welfare is increasing because of the pace of technological change, but statistics have never captured the human gains from advances in periods of innovation, whether in medicines or the internet. 

This case for the defence of GDP is fundamentally weak, however. It in fact includes many non-marketed activities, yet excludes other productive activity. Business and government count as “the economy” but voluntary and household activities do not. 

Postwar social changes — a rising proportion of women working outside the home, and the increased purchases of prepared foods, professional childcare, domestic appliances and so on — have flattered the official productivity statistics for decades. 

More subtly, the statistics blur the distinction between marketed economic activity and increases in economic welfare that cannot be priced by converting nominal GDP into “real” terms. 

Economists and statisticians are beginning to accept that our framework for economic statistics needs to change. Some argue for developing better “satellite” accounts, where all the interesting data about the environment or the household are collated. But why should all the pressing questions be satellites? 

GDP could certainly be improved. In one of the joint winners of the Indigo Prize essay competition, a team led by Carol Corrado and Jonathan Haskel, proposed better measurement of services and intangibles, and direct measurement of the economic welfare being created by digital goods. The other winning essay — which I co-authored with Benjamin Mitra-Kahn — proposed similar incremental changes as an interim step. 

We opted for better measurement of intangibles, adjusting for the distribution of income, and removing unproductive financial activity. The long-term recommendation was more radical: ditching GDP as the metric of progress in favour of measures of access to different kinds of assets, including financial wealth but also natural capital, intangible assets, infrastructure and human and social capital. 

This was inspired by Amartya Sen’s idea that prosperity consists in people having the capabilities needed to lead the life they would find meaningful; and by the need to get away from measuring economic progress only through the short-term flow of activity. There is no sustainability without a balance sheet. 

Perhaps neither the incremental nor the radical is the right approach. Reform will take time because there needs to be consensus about how to change; statistical standards are like technical standards. But I am now confident that in another 10 or 20 years GDP will have been dethroned.

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