Searching for the economic holy grail

Posted on December 16, 2016

Tom Healy, Director NERI
Tom Healy, Director NERI

What’s wrong with GDP?  GDP, or Gross Domestic Product, is in the news every day.  Analysts, commentators, politicians, journalists and others parse GDP to the first decimal place and grant due reverence to this most solemn of indicators.  Then, in recent years the spurious accuracy shown by the forecasting industry took a serious battering.  You should be careful about what can happen over a weekend especially a Sunday. How could the total value of GDP double over Saturday night?  On Sunday afternoon, 6th April, 2014  the GDP of Nigeria went from 42.4 trillion naira to 80.2 trillion naira.  The ‘average’ Nigerian was at $1,500 per annum on Saturday and was on $2,688 on Sunday [How Nigeria’s economy grew by 89% overnight].  A large-scale and retrospective statistical revision was underway. This could only happen in a less economically developed part of the world? Not so.

Along with terms like ‘post-truth’ a new word entered the English language in 2016 – leprechaun economics (or, geilleagar leipreachánach if you prefer) [‘Irish tell a tale of 26.3% growth spurt’].

One sunny Tuesday morning in July when many thought that holidays beckoned and the Irish political world was preparing to wind down the Central Statistics Office, in Dublin, reported that GDP had grown by 26.3% in 2015 (thus radically revising all previous preliminary estimates of GDP for 2015). [National Income and Expenditure Annual Results]. For many years some of us had laboured to defend GDP as the best and most meaningful measure against which to measure government spending, revenue, etc. for the purposes of international comparisons. The standard establishment response from the usual sources was to say that GDP was no proper guide to true Irish economic activity. Well, we got news that Tuesday morning in July – Gross National Product (GNP) was estimated to have grown by 18.7% in real terms in 2015. The contamination has spread and reportedly ‘Irish’ HQ’d enterprises were in the mix as ‘tax inversion’ has arrived to our shores in recent years (this had previously been picked up by John FitzGerald of the ESRI – see for example ‘Problems interpreting National Accounts in a Globalised Economy – Ireland’).

And Ireland is not a tax haven?

It is beyond dispute that these extraordinary figures which were based on ‘real Irish economic activity’ diligently, accurately, scrupulously and meticulously compiled according to the international rule book for national accounts statisticians reflected some very strange activities by ‘Irish’ companies in the world.  Let’s put it this way, it is not inconceivable that an ‘Irish’ company in, say, China manufacturing tablets could relocate some branch activity to India and because India has different laws about incorporation and subsidiary ownership, the economy of the Republic of Ireland could see a sharp contraction in GDP.  An astute and early observer of these potentially weird trends is Michael Hennigan over on Finfacts who has a habit of speaking plainly [Irish overseas 'contract manufacturing' mainly tax avoidance] and pointed out something odd way back in February 2015. ‘Contract manufacturing’ is only one type of weird phenomenon. Others might include aircraft leasing, tax ‘inversions’ and re-domiciling of companies to Ireland (including also cases of erecting a brass plate outside a building that is now ‘headquartered’ in Dublin). We can expect a lot more weird activity in the coming months and years as a likely Brexit will encourage financial and non-financial corporations to relocate to Dublin (it’s usually Dublin) if only to jump possible/likely future tariff barriers as well as anticipate changes in regulatory and single market space.

So, is GDP useless and should we place an obituary in the newspaper? Should a national Day of Mourning be declared to allow the people to grieve and pass through the stages of bereavement from denial to anger to acceptance?  No it is much too early for that, I suggest. The problem with GDP is not primarily with what it measures. What it measures is governed by rules and interpretations (which evolve but not that dramatically). The problem is that GDP was developed as a concept and measure during the Great Depression of the 1930s and, especially, during the years of World War II. This period was the high point of the Nation State.  While trade was very important especially in the decades following World War II, statisticians, economists and others had no idea of how our world, today, would look like. Trade happens in nanoseconds on a keyboard somewhere in the world. Vast sums of financial capital cross national boundaries just as quickly. The production of a material product might involve complex supply chains across the globe.  The ‘booking’ of profits, royalties, interest payments is a mystery to national governments let alone statistical offices (although it is less of a mystery than the former might claim).

Welcome to the new world of make-believe economic activities and unregulated and uncontested global finance and investment.  GDP was fit for purpose in terms of what Governments needed to measure and value during the period of rapidly emerging new global capitalism.  New technology and the triumph of ‘neo-liberal’ politics in the 1980-2016 period buried the nation state. Or, did it?  Perhaps we will see a partial resuscitation of the nation stage? That is a blog for another Monday.  GDP is a casualty of a world that no longer fits the normal and measurable rules of economic engagement and counting.

The problem with GDP is not only that it doesn’t fit this new phase of capitalism but it never measured total economic human well-being anyway. This point was ably covered by Professor Diane Coyle in our recent Annual Donal Nevin lecture in Belfast (click on the 57 minute audio-clip here).  Gross Domestic Product measures only some forms of economic activity and ignores much else (including the very real and productive work of caring for others and serving in the community). Moreover, GDP includes activities such as drug-trafficking and prostitution (at least in some countries that take the rules very seriously and have means of estimating these activities) that add nothing to human well-being. Put another way, if people have more hospital-related spending associated with road accidents, legal costs associated with divorces and military spending on wars then total GDP is higher but human well-being is certainly not (although it may be contended that were not for legal, military or medical interventions well-being would be all the lower). GDP measures some things and not others.

To measure human well-being we need to take account of many factors including:

  • The very real economic value of unpaid work undertaken to care for, nurture and educate others in family, community and other settings.
  • The ways in which current (measurable) economic activity enhances or destroys the natural, social and human environments. Such impacts may be difficult to measure and not measured according to current statistical rules.
  • The ways in which current (measurable) economic activity affects the distribution of wealth, income and associated opportunities for human well-being.

On the latter point a society that is 10% wealthier in total and on average may be morally and economically poorer if a majority of its citizens are less secure and materially worse off while a minority enjoy ever larger absolute and relative income.

A thorough critique of GDP is not new. Indeed, many of the thinkers and innovators behind national statistical accounts in the 1930s and 1940s were only too well aware of the reservations expressed above. The major challenge today, especially in Ireland following the recent very strange GDP figures, begs the question:

What alternative monetary measure or measures are available to compare and track economic activity in a small, open and increasingly complex and imbalanced economy such as that of the Republic of Ireland? The reality is that there are many possible candidates but none that comes anywhere near GDP as a single and all-embracing monetary measure. Total personal consumption, total retail sales, total income of households, total employment, government consumption, total wages or employee compensation are, arguably, meaningful measures of overall trends especially when they are combined on a single ‘dashboard’. However, they only go so far.  Investment, which is also important, is compromised by the activities of particular multinational or native owned enterprises. Stripping out multinational enterprises which account for over 50% of gross value added is no solution either because they account for such a large part of economic activity and are embedded to some extent in the local domestic scene.

The search for a single, universally acceptable and statistically robust measure of total economic activity remains as elusive as ever.

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