#ANSWER: GDP, The Bell Tolls For Thee
GDP may be the most anticipated number of the year, but it‘s ill-suited to measure the emerging 21st century economy.
In response to #QUESTION: https://medium.com/hps-insight/question-gdp-the-best-way-to-measure-economic-health-63ea52d4ea18
The transformation of the world’s economy over the last half century clearly demonstrates massive success in terms of Gross Domestic Product. Globally, the average per capita income has tripled since the 1960s, and countries such as China and India have GDPs that have grown 118 and 25 times their starting size in the same period, respectively.
But will this growth remain a reliable reflection of economic output? With the economy’s tectonic plates shifting underneath our feet, it’s likely that GDP is an insufficient measurement for future economic value.
There are two big reasons for shifting from GDP to another, more holistic, way of measuring value in national economies:
The Meaning Of Consumption Is Changing.
GDP assigns value to products and services at the point of consumption. In the United States, this value takes the form of spending, emphasizing an economy of things that can be purchased rather than networks that assist with transactions and economic flows. In the 21st century, this could be a fatal flaw.
That’s because in the past, technological improvements fed into standard consumption patterns on a manageable economy of scale. When the train replaced the traditional horse-and-buggy, for example, prices for traveling from Point A to Point B dramatically decreased, saving time and energy in the process. The distance travelled, however, remained the same, so a lower price simply enabled the same type of consumption. The same goes for the music industry, with improvements from records to cassettes to CDs that lowered prices while mildly expanding access to music selection.
The emerging economy, dependent on the “cloud” and the Internet, has blown up this type of development. Consider this chart of recorded music sales, all of which would count toward GDP:
By the looks of it, music consumption collapsed at the start of the new millennium. We all know this isn’t really the case: instead, new abilities like music streaming redefined what it meant to purchase and listen to music. Before, it would cost $10 to buy a 12-song CD. Now, it costs $10 a month to own a Spotify account with near-unlimited access to songs — an indisputable increase in value for the consumer. But a person who buys 2 CDs a month, gaining only 24 songs in the process, will double the Spotify listener in his contribution to GDP.
That’s not an incremental technological change — it’s a redefinition of what it means to be a consumer. Since the Information Age prioritizes broad-based access over the purchasing of a single item, it’s likely GDP will decline in certain sectors that actually provide more value to the economy, not less. If you think about the changes in the encyclopedia and travel guide industries (now dominated by Wikipedia), communication (now challenged by free services such as Skype and Facebook), and news services (rendered near-obsolete on any platform that isn’t the Internet), you can see how GDP’s market-based calculations are likely to move further away from true value as the economy evolves.
The Economy Is Going Through Some Mood Swings.
While July 30th saw the requisite buzz over new GDP figures, it also witnessed the release of a report claiming the real average GDP growth for the United States from 2012 to 2014 was 2 percent, not 2.3 as previously thought.
Why does this seemingly small downward revision matter? It shows that, according to one MarketWatch article, GDP must be constantly revised and corrected for health care outlays, defense expenditure fluctuations, and changes in how certain social benefits are characterized. In other words, the post-recession economy can swing so wildly from one quarter to the next (on things like government shutdowns and sequestrations, no less!) that it makes perfect sense to doubt the veracity of any GDP figure when it is first released. Take a look at this discrepancy:
Imagine if the Bureau of Economic Analysis’ findings post-2014 had been what was originally reported. Businesses and policymakers would have felt much shakier about 2012's third quarter, while 2014's first quarter worries about the weather, seasonal productivity, and investment would have seemed less pronounced. No wonder so many Wall Street economists say that investors should take GDP statistics with a grain of salt.
The problem is that the economy’s recent pattern of retooled social benefits, investments, and government spending is likely to continue for quite some time, possibly becoming the “new normal.” This means GDP has to constantly adjust to new fluctuations, or else run the risk of irrelevance to Wall Street traders and Washington politicos alike.
So… Any Quick Fixes?
Yes, assuming GDP stays a sacred number in business and policymaking circles. The first issue — changing characteristics of consumption — means that spending may not be the best metric to judge contributions to GDP. Why not use a modified Value Added method? Gross output from all sectors could be combined with intermediate consumption such as supplies, product additions, and improvements in the economy of scale to produce a reliable number. The method wouldn’t be perfect, but it could do a better job at anticipating the value assigned to Information Age consumption trends along a network of goods and services.
The second issue — a trend toward market fluctuation — can be stabilized by creating a new tool to derive meaning from any peaks and troughs. Since what the economy produces should match the income it creates over time, combining GDP with GDI, or Gross Domestic Income, might provide policymakers a better understanding of economic health. Taking the average of the two indicators is a viable option and has even been proposed by the BEA as a way to account for measurement flukes over short-term periods.
These two adjustments are just stop-gap measures for a method that still applies 20th century evaluations to our current economy. Without substantial change, GDP’s lack of coherence with today’s trends may translate into a lack of economic merit in the near future.
