#Answer: I ❤ GDP
GDP is the pulse of the economy
This question is in response to HPS Insight’s #Question: GDP — The best way to measure economic health?
Monitoring your heart rate is a lot like monitoring GDP.
For good health, a heart rate should frequently be higher than resting. If too low for too long, a body’s ability to process what it takes in slows down. At their extremes, a really high or really low rate can lead to heart failure; thus needing resuscitation. Call the Fed.
In assessing health, a doctor goes beyond measuring a patient’s pulse.
In a physical examination, doctors first check vital signs: temperature, respiratory rate, blood pressure….and…pulse! The first three all impact the the fourth — the heart — but they are not indicators for the heart itself.
Health assessments measure a variety of metrics. They are also preventative in nature. GDP is not the only economic indicator. The Fed also examines a variety. In fact, it has a dual mandate to maximize employment and stabilize prices (inflation). Nothing in its mandate, however, says anything about GDP growth.
Increasingly, the Fed is monitoring wage growth, but not because the others aren’t important, but because — at their most basic level — the unemployment rate and rate of inflation aren’t enough to assess the overall health of the economy.
Assessing a variety of economic indicators at the same time is also preventative.
And that’s why GDP growth (the change), the change in the tally of all transactions in the economy, is looked at on a recurring basis. Several others are looked at too, and not just by the Fed. The market sets its prices based on several leading indicators. GDP and a host of others are identified as “marketing moving.”
For Emergencies, Call A Doctor.
The Fed is employed not by doctors of health, but of economics. In fact, it’s employed by more of them now than ever before. As you read this, these PhDs are meticulously studying the health of the economy to determine when to raise interest rates; something they haven’t done since 2006.
So is GDP the best measurement of health?
I think so, but like all measurements, they can be improved. Currently, some argue that it’s not capturing what it’s intended to and could improve. They have a point, and it’s currently hotly debated in economic circles. Right now, two of the most influential economists on Wall Street disgaree.
Others say that it’s not the indicator that’s the problem, it’s how it’s used in decision making. Should politicians aim for a specific level of GDP growth, as Jeb Bush did in his announcement speech?
Hillary Clinton certainly doesn’t think GDP is the best measurement of health.
“The measure of our success must be how much incomes rise for hardworking families, not just for successful CEOs and money managers and not some just arbitrary growth targets untethered to people’s lives and livelihoods.”
However, you feel about it, GDP is a pretty good indicator of health. It’s not the only one that matters, and it might be misused from time to time. But, at the heart of this conversation, it just might be the best one. Perhaps even, we couldn’t live without it…well, that’s a bit much.
