Has GDP Measure Lost Its Practicality?

While no one knows whether GDP will remain the primary economic measure for the long term, there's nothing yet on the horizon which could reasonably be expected to take its place. In a recent Project Syndicate article, Diane Coyle notes "the widespread consensus that GDP is no longer a useful measure of economic progress". However Coyle is refreshingly realistic as to what this actually means:

Official statistics are similar to a technical standard. It's hard for anyone to move from one framework to another without a lot of other people doing so at the same time.

She continues:

Dissatisfaction with the prevailing GDP approach is therefore insufficient: a sufficiently large coalition has to agree on an alternative framework. Any successor to GDP also must be easily implementable because statisticians will have to set out detailed definitions and methods, and collect the data.

Even if GDP is discontinued or at least discounted as a primary measure of progress, much of the data and statistics it provides remain a valid and vital component of economic measure. After all, these figures bear the responsibility of capturing the most current economic activity taking place - regardless of what occurs which ends up defined as non economic. While today's methodology is far from perfect, it's still the best approximation we have to determine the amount of monetary representation a nation needs in any given year.

One issue in all this, is the fact monetary representation is only a partial approximation of economic progress. And while output is determined by supply side activity in the real economy, the rise in intangible factors has created problems for output measure as well. Might that mean we need to create separate tangible and intangible measures - all the while tracking how wealth creation potential is affected since intangibles can impact aggregate demand? Perhaps.

As to other approaches, multiple perspectives are presently being debated. Nevertheless, practicality and utility are important to the outcome. Both are not only important for productivity considerations, but also to provide clarity regarding disagreements over what recent growth capacity actually consists of. Scott Sumner in a recent Econlog post highlights what I believe to be important considerations in this regard, especially insofar as how progress, productivity and long term growth potential, tend to be perceived.

To most people, actual economic growth is something tangible and positional, like a better house and car. New products like iPhones and HDTVs are just "how we live today". If boomer's kids have to downsize from their parent's 5 bedroom 3000 sq. foot home to a small three bedroom ranch that's perceived as going backwards even if the smaller home is full of gadgets that they could only dream of back in the 1960s. And I'd say the same is true of lots of other changes.

How much is progress, and how much is simply a hedonic treadmill?

Growth is getting increasingly hard to measure as we move from an economy of stuff (commodities) to an economy of intangibles. If we can no longer measure growth in terms of quantity of "widgets" being produced, we need some measure of the value provided by economic output. You could use money, but the value of money itself changes over time, so that won't work.

Economists typically speak in terms of "utility". But as far as I know there is not a shred of evidence that we have more utility than we had 60 years ago.

Like Scott Sumner I have my own utilitarian tendencies. That said, I can't help but believe that growing income variance is making it increasingly difficult for citizens of large nations to create government policies capable of benefiting clear majorities. In particular, attempting to do so is burdensome because time aggregates have partially uncoupled from other forms of resource capacity. Consequently, time based services decentralization (along with local infrastructure definition), may be better suited for small limited income groups to promote the success and prosperity of their own "largest number". Indeed: Small houses are still "tangible and positional" for individuals who otherwise may not own a house at all. These groups would also need to generate statistics and data (for time based activity) in a new framework - such as Diane Coyle stressed - so their ongoing personal efforts are recorded and can be preserved for society as a whole.

What's particularly important for GDP, is that money remains a well suited measure for all the economic activity which occurs in a given year. Even though GDP is far from perfect, it's the closest proximate we have which (hopefully) ensures sufficient monetary representation for public demand. Perhaps since GDP measures the good and the bad (regardless of its societal "value"), a more definitive name may be in order. In all of this, activity and output are represented, as are total wages and income. Add to this any inflation (or deflation), which then provides the nominal representation which is a reasonably accurate estimate of monetary demand. As it turns out, monetary demand is not always the same as other forms of demand.

Just because GDP may be eventually demoted in importance, doesn't mean we no longer need a monetary gauge for economic activity. How might our perception of this measure change? Should it be framed as a nominal economic activity index? Meanwhile, intangibles will make it difficult to measure output, plus both need to contribute to a stronger utility base if progress is to continue. Should we know how many intangible forms of economic activity exist in contrast with those which are tangible, and track their measurement accordingly?

Another statistic utilitarians may find useful, is what percentage of a nation's citizens have sufficient economic connections to routinely take part in their own environments. For instance: How have the costs of individuals with too few connections been shifted onto taxpayers? Measures of poverty don't really get at these issues, in that costs are blurred with multiple layers of state and national assistance for select groups. Nevertheless: One of the most important ways to determine base level utility, is whether individual and family units actually have a reliable roof over their heads.

GDP measure still has practical features, even if its emphasis becomes changed in certain respects. Meanwhile, I continue to believe that time units would be one of the most useful new measures. Time units as a formal economic measure, would not only have potential to capture aspects of well being, but also ongoing gains in knowledge and skill utilization over time. It's not hard to imagine how per capita applied knowledge gains per time unit, could provide what would in some respects become non monetary representation for ongoing production gains, as well.