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It's Time To Retire Gross Domestic Product As A Measure of Prosperity

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

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)

Trade and "Trade War" with China: Who Benefits? (October 5, 2010)

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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Sat, 04/19/2014 - 18:39 | 4676188 LetThemEatRand
LetThemEatRand's picture

"What if we used Bhutan's guiding national policy of Gross Domestic Happiness, as a metric for prosperity?"

Because you can't fake it, and building F-22 Raptors and then bombing people doesn't make them happy (well, maybe some, but not most).  

Sat, 04/19/2014 - 18:51 | 4676203 I am Jobe
I am Jobe's picture

How about the number of IPHNOES, APPS to sum up the happiness index. Heck everyone keeps staring a the shit and nver look anymore. Ah the future of happiness is shackels bitchezz

Sat, 04/19/2014 - 19:07 | 4676229 knukles
knukles's picture

That would make Ren and Stimpy the happiest people in the whole world.

sigh 

 

http://www.youtube.com/watch?v=jfNajFYPljQ

Sat, 04/19/2014 - 19:27 | 4676274 kaiserhoff
kaiserhoff's picture

Happy happy, joy joy, as in what Wenchly does for Mr. Happy.

We should use Gross National income, which is GDP plus or minus payments for rents, royalties, interest, dividends, etc.

A more complete measure, which does have trade and exchange rate implications, and STRIP OUT ALL GOVERNMENT ACTIVITY.

Sat, 04/19/2014 - 19:41 | 4676302 economics9698
economics9698's picture

I like this one;

Y = C + I - G + NX

I could live with that. 

Sat, 04/19/2014 - 20:05 | 4676345 1stepcloser
1stepcloser's picture

Y = C + U + N -T

Sun, 04/20/2014 - 03:01 | 4676739 old naughty
old naughty's picture

but that's like we've reached peak Ps (purchasing, petro, prosperity, population...)

We only have woar left, no?

Sat, 04/19/2014 - 19:48 | 4676311 t0mmyBerg
t0mmyBerg's picture

Yes the fact that government counts as a plus in GDP disqualifies it as a valid statistic especially now that manipulating that part of it has caused all manner of mayhem.  "Well obviosuly if G is a plus we should just increase G until all is well"..  Reductio ad absurdem.  Of course people like Krugman dont get it.  In fact they make it their professional anthem.  Amazing really.

Sat, 04/19/2014 - 19:55 | 4676327 DonFromWyoming
DonFromWyoming's picture

Bingo.  Why do you think TARP and ARRA were passed?  Besides free money to bankers and community organizers with their hands out, the money went directly to the bottom line of GDP to mask the true size of the mini-depression that was in progress.

Sun, 04/20/2014 - 14:04 | 4677541 Monty Burns
Monty Burns's picture

If an earthquake destroys 1,000 houses there's no direct impact on GNP figures.  Yet the full cost of rebuilding those houses - i.e. reinstating the status quo - will add to GNP.

 

'Nuff said.

Sat, 04/19/2014 - 18:59 | 4676219 zerozulu
zerozulu's picture

our GDP is God Damn Printing.

Sat, 04/19/2014 - 21:29 | 4676454 Stoploss
Stoploss's picture

It's called GDD  Gross Domestic Debt.

Because that is what we manufacture here in America, DEBT.......

 

Debt is wealth bitchezzzzzzz, ask any politician..

Sun, 04/20/2014 - 10:41 | 4677138 A Nanny Moose
A Nanny Moose's picture

"We have to spend money to keep from going bankrupt" - "Shotgun" Joe Biden

Sat, 04/19/2014 - 18:58 | 4676217 Caveman93
Caveman93's picture

How about we measure it based on how much air is the bag versus the quantity of chips in the bag for starters.

Sat, 04/19/2014 - 19:41 | 4676301 infinity8
infinity8's picture

Very nice. I think I have a Crush on a Caveman!

Sat, 04/19/2014 - 19:01 | 4676220 Spirit of T.R.
Spirit of T.R.'s picture

Strange timing - I recently commented to Dennis Kneale (on his blog) that GDP is a bogus way to measure how well an economy is doing and perhaps a better measure of "economic wellness" (that's the term I used) would be the middle 90% of incomes (thus excluding the lowest and highest 5% as outliers) compared to prices, such that higher incomes and lower prices equate with the greatest wellness since the majority of THE PEOPLE are better off.

Hey Charles, are you e-stalking me???

SoTR

Sun, 04/20/2014 - 04:28 | 4676771 Stockmonger
Stockmonger's picture

Doubt that he would stoop to hanging out on Kneale's site.

Sat, 04/19/2014 - 19:02 | 4676223 buzzsaw99
buzzsaw99's picture

if they charged people for the air they breathe that would boost gdp

Sat, 04/19/2014 - 19:28 | 4676273 LetThemEatRand
LetThemEatRand's picture

China's got that covered.  http://www.dailymail.co.uk/travel/article-2588788/China-sells-BOTTLED-AI....

Now they just need to figure out how to sell it to the ghosts in the ghost-cities, and they will blow away Goldman's highest estimate.

Sat, 04/19/2014 - 20:16 | 4676360 kaiserhoff
kaiserhoff's picture

No, no, no Buzz.  The government would never do that.

   They'll just tax it.

Sat, 04/19/2014 - 21:47 | 4676472 nathan1234
nathan1234's picture

when taxed it is added to the GDP

Sat, 04/19/2014 - 19:19 | 4676261 Peter Pan
Peter Pan's picture

The problem with GDP is that it is a quantitative as opposed to a qualitative measure. A nation producing and consuming vodka and heroin will be much wealthier in numbers compared to the nation that drinks rain water but the results for the former are disastrous.

But even as a quantitative measure it is misleading because once you extract the GDP growth flowing to the top 10% (or should I say 10%) it is evident that GDP has most likely been negative for quite a while.

Sat, 04/19/2014 - 19:35 | 4676281 Duc888
Duc888's picture

I'm very happy.

I'm being poisoned from above as well as through what I eat and what comes out of the water faucet in my kitchen.

Thank you so much FEDGOV

I'm being taxed $670+ for two years to re-register a vehicle that is 14 years old and has 320,000 miles on it and rot up to the windshield, for the privilege of parking it in my driveway, since supposedly the gas tax covers road repairs...

Thank you so much FEDGOV and LOCOGOV.

Kids are made more phucking stupid every hour they spend in government mandated indoctrination centers, also known as free fire kill zones.

  So those SSRI popping zombies  will be my future "leaders" / assrapers.

Totally kewl.  Thank you Common Core.

I have my government looking up my anus, tracking my license plate on my hoopty truck, drones overhead.  Even busting through the air-gap in PC's to spy on me.  Hairy Reid is calling my fellow countrymen "Domestic Terrorists"...and YES, thank GAWD my little crap hole town of 5200 people has a LAV now. 

I can sleep soundly

Whew!  When Tommy down the street steals my nephews bicycle at the very least he'll get tazed and / or pepper sprayed or maybe my neighbors and I will get to watch a Government sponsored fireworks show then the LAV lights up Tommy's parents house.

Yayyyyyyyyy!

My sociopath leaders (Nobel Piece Prize winnerz and all that) bomb the fuck out of wedding parties in far away lands because evidently those miserable people hate me for my Free-Dums.

The Banksters ass-rape every single human being on the planet (LIBOR) who formally deals with them, Fraud Street is running the show. SEC guys have chapped dicks from watching so much pr0n and my own Fed AG is one of the biggest douchenozzles to ever hold that orfice.

So yea, I'm pretty happy.  Chalk me up on a "10" on the happy index please.

 

Happy Easter Everyone!

 

 

Sat, 04/19/2014 - 19:39 | 4676300 bonin006
bonin006's picture

Sir John James Cowperthwaite (25 April 1915 – 21 January 2006

He returned to Hong Kong in 1945 and continued to rise through the ranks. He was asked to find ways in which the government could boost post-war economic outlook but found the economy was recovering swiftly without any government intervention.[1] He took the lesson to heart and positive non-interventionism became the focus of his economic policy as Financial Secretary.[1] He refused to collect economic statistics to avoid officials meddling in the economy.[2]

https://en.wikipedia.org/wiki/John_James_Cowperthwaite

When I search for information on the history of Hong Kong the articles that come up don't mention Cowperthwaite. I wonder why.

 

 

 

 

 

 

 

Sat, 04/19/2014 - 19:56 | 4676330 Yen Cross
Yen Cross's picture

  I think it (GDP) should be appropriately renamed the (UEO) <> Useless Eaters Output - index.

 

Sun, 04/20/2014 - 10:48 | 4677154 A Nanny Moose
A Nanny Moose's picture

A measurement of shit? You could be onto something.

Sat, 04/19/2014 - 21:45 | 4676470 nathan1234
nathan1234's picture

 

The GDP lost it's meaning after being used to manipulate people, the economy  and markets.

Now it is a God Damn Ploy to mislead.

 

 

Sat, 04/19/2014 - 22:42 | 4676543 Stuck on Zero
Stuck on Zero's picture

Question for economists: My wife and I swapped personnal checks for $10 trillion.  She paid me for fixing the light switch and I paid her for dong the dishes.  Did that add $20 trillion to the economy?

 

Sat, 04/19/2014 - 22:57 | 4676563 nathan1234
nathan1234's picture

 

Well I ain't no economist

My only comment is Marriage works great when it's business like. Things get done. LOL

 

Sat, 04/19/2014 - 23:53 | 4676623 Kprime
Kprime's picture

No but the theives in DC will be doing fine as they will get 80%

Sat, 04/19/2014 - 22:52 | 4676556 Poor Grogman
Poor Grogman's picture

Grossly
Distorted
Propaganda

Sat, 04/19/2014 - 23:56 | 4676627 Kprime
Kprime's picture

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.

Precisely my approach.  I am very happy in my garden.  No debt, no payments needed.  Our community gives away their efforts, one to another.  Nothing to tax. We've gone back to the land.  I guess the Amish had it right all along.


Sun, 04/20/2014 - 03:23 | 4676745 Leraconteur
Leraconteur's picture

That's great FOR YOU.

However when you decide to force others to do and think and value as you do, problems arise...

Sun, 04/20/2014 - 01:33 | 4676711 Philalethian
Philalethian's picture

Got a huge pile of black Gold Cow doo-doo, some smooth aged Platinum Horse ca-ca, and some bigger piles of great Silver Llama Poops.

Does that count as prosperity?

Sun, 04/20/2014 - 03:29 | 4676748 Leraconteur
Leraconteur's picture

Q: How does changing to a model that measures conservation of energy or resources INCREASE my standard of living?

A: It doesn't. It only increases government, the number of laws, and control over people, and impoverishes all in the name of 'the greater good'.

Late-Pleistocene humanids conserved energy and resources quite well and efficiently used all around them.

Living as they did, all one million of them, is not an increased standard of living for anyone in 2014.

Sun, 04/20/2014 - 04:44 | 4676776 falak pema
falak pema's picture

For once CHS has a good topic to propose.

And who could refute the obvious unless he be miserly gold bugged or irredeemable neo-Friedmanian fiat worshipper.

Sun, 04/20/2014 - 07:21 | 4676837 Last of the Mid...
Last of the Middle Class's picture

Was listening to Fox and they actually said rising beef prices will not be factored into the cpi because people can easily convert to other forms of meat and maintain a healthy diet. WTF! If that is true we are so fucked. Get rid of that number if you don't like it, cuz.. . cuz. .  well. . . let them eat cake!

Mon, 04/21/2014 - 09:31 | 4679170 22winmag
22winmag's picture

GDP is largely a measure of planned obsolescence, industrial inefficiency, and general waste.

 

It's hardly the health of a people or nation.

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