Is GDP all it's cracked up to be?
Filed under: Economy, Investing
It seems we live and die by the latest reading on gross domestic product, purported to be the final market value of all the goods and services produced within our borders over a certain period of time. When GDP came in at an annualized rate of 3.5 percent last week -- the first rise in a year and ahead of economists' expectations -- the Dow Jones Industrial Average ($INDU) soared 200 points on the news.Then, the next day, the nay-saying, nitpicking and deconstruction of the data commenced, helping the Dow cough up 250 points in a session.
It's no secret that the way GDP is calculated is flawed. Economists have taken issue with the various cogs, springs, levers, slides and chutes that comprise this most Rube Golbergian of measures pretty much since its inception.
Lately the mainstream press has gotten in on the act, offering some cogent and credible illustrations of the limitations of GDP. In this month's The Atlantic magazine, Megan McArdle story's "Misleading Indicator" shows that GDP and economic well-being are hardly the same thing. Meanwhile, Michael Mandel writes in BusinessWeek that GDP, as currently constructed, is not up to the task of measuring a 21st century economy -- and greatly overstates its current strength.
McArdle's main criticism of GDP is that is doesn't measure quality of life. For example, if a stay-at-home mom goes back to work, that adds to GDP, even if it causes a decrease in overall satisfaction (because of commuting costs, child care, prepared foods for dinner versus home-made meals, that sort of thing.)
Fair enough. We're all for something that measures well being, but as Robert Brusca, chief economist of Fact & Opinion Economics in New York, says, GDP was never designed to measure such things. Blaming GDP for failing to capture happiness is like criticizing a thermometer for not being able to guess your weight.
As for Mandel, he's got a beef with the way GDP fails to pick up cutbacks in "intangible investments," such as business spending on research and development, product design, and worker training.
"There's ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation," Mandel writes. "Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy. Yet you won't see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction."
Okay, fine. But Brusca's says he doesn't know how economists would even begin to measure that. "That's pretty flaky," he says. "An intangible is an intangible. You don't value it on the way up and you don't value it on the way down. If you have R&D spending, it gets capitalized when it comes to fruition. And if you put a lot of money into R&D and you never get anything for it, then arguably you did waste that money."
No doubt GDP has its weaknesses, but Brusca thinks economists, market participants and the media have become unreasonably cynical about the metric. It does reasonably good job of measuring what it's supposed to -- with the best information economists have at the time, he says.
"GDP is like any number you measure," Brusca says. "The most important number is always your most recent observation. And your least reliable number is always your most recent observation."
That's why these things get revised, he says. There are too many missing variables that need to be estimated or left out entirely.
"You'll have firms no longer reporting because they went out of business," Brusca says, "That's a hit. But then there are new firms coming into existence that don't get reported because we don't know about them yet."
Most important is to look at the totality of data available to us, Brusca says. GDP isn't all that useful interpreted in a vacuum. After all, there's a reason economists -- and the market -- pour over the seemingly constant stream of data, from housing to manufacturing to unemployment to ad nauseum.
"I'm not defending everything about the way GDP is measured," Brusca says. "There are a lot of nuances, but there is nothing intrinsically wrong with it."
Why is Oprah going to cable? Hint: It's nothing to get teary about
Kisses from Hershey: Candymaker may court Cadbury with $17 billion bid
D-Day for Harry Reid: Can he wrangle 60 votes for Senate health reform bill?
Reader Comments (Page 1 of 1)
11-03-2009 @ 4:31PM
Eddie Hilton said...
this has to be one of the most liberal pieces of crap i have read. only a socialist would consider quality of life to be part of gdp. if quality of life was considered, it would be bad news everyday, not the recovery spin we read about. you can't have a recovery without private sector jobs.
Reply
11-03-2009 @ 4:59PM
Peter Hanson said...
Eddie you have to measure Quality of Life, and that is part of consumer spending which indicates Consumer Confidence.
QOL+CS=CC
If you get indications that QOL life is taking a dip in the night soil pot, consumer spending will change in different directions and Consumer Confidence drop precipitously to levels experienced long ago. Right now, we're back in the 80's, it could go further.
Conservative Economist
Reply
11-03-2009 @ 5:29PM
Don said...
All of these government statistics are B.S. used to spin whatever and whenever needed. If anyone pays attention, almost always, whatever number is put out
is then revised the following month to be something less than reported.
Reply
11-03-2009 @ 5:40PM
Alexander Treutler said...
Eddie is a dumb turd but Don got it right. By the way, I am a liberal and proud of it – I don’t see what is wrong with our Statue of Liberty. If you don’t like liberty, move.
Even as a liberal I think that GDP is total crap. If the Treasury prints money, it adds to GDP. When Bush started an illegal war, it added to GDP. If the government builds a building and knocks it down, and does it 10 times, it adds to GDP. So what? Hurricanes add to GDP. That’s because GDP measures activity, not wealth creation. Ignore GDP.
Reply
11-03-2009 @ 5:43PM
Steve in DC said...
Of course the GDP is not accurate. Most of the activity in this phoney baloney "GDP" is now simply the re-shuffling of money and goods already in circulation. We need a clear and honest listing of PRODUCTION... be it foods, mined materials, forest products or manufactured goods.... Services should be a separate listing. AND consumer spending (basically swapping goods and services) should be a third listing.
Reply
11-03-2009 @ 5:44PM
Mike said...
ALL of these numbers out of the snake pit we call the capital are BS. The time NOW for a changing of the gaurd. ENOUGH
Reply
11-03-2009 @ 6:40PM
BOOWAH said...
What happened to the WPA? Obama promised health reform and failed to give us Socialized Medicine. Then he promised full employment and he failed to give us WPA? What's he afraid of? Stepping on those greeedy rich toes?
Reply
11-04-2009 @ 12:05AM
Lord Enki said...
What recovery Please don't try to B.S. me in to believing that things are getting better if you buy that the I'll bet you believe in the tooth fairy.
Reply
11-04-2009 @ 1:08AM
rey said...
EDDIE HILTON THIS "PHONY" RECOVERY PROPAGANDA ( I AGREE IT'S BULL) HAS NOTHING TO DO WITH LIBERAL OR SOCIALISM, THE CORPORATE ESTABLISHMENT, ESPECIALLY OUR FEDERAL RESERVE, CREATED THE CRISIS, THEY MANIPULATE BOTH SIDES, THE OLD BATLE REP VERSUS DEMO IS AS "PASSE" AS THE DINOSAURS IT IS JUST TO KEEP YOUR MIND OCCUPIED AND FIGHTING OVER QUESTIONS OF NO IMPORTANCE WHILE MISSING THE REAL ISSUE :
OUR NATIONAL DEBT IS 350 TIMES OUR GDP, THIS DEBT BUILT OVER DECADES WAS NOT CREATED BY "LIBERALS" OR "CONSERVATIVES" BUT BY THE FEDERAL RESERVE SYSTEM AND ITS COZY RELATIONSHIPS WITH THE BANKING,CORPORATE, FINANCIAL INSTITUTIONS.
THE ARBITRARY POWER TO CREATE MONEY AND CREDIT OUT OF THIN AIR BEHIND CLOSED DOORS FOR THE BENEFIT OF SPECIAL INTEREST (REGARDLESS OF THEIR POLITICAL AFFILIATION)
MUST BE BROUGHT TO AN END,
THERE SHOULD BE NO BAIL OUTS OF CORPORATIONS AND NO CORPORATE SUBSIDIES.
BLAMING OBAMA FOR THIS IS A JOKE HE IS JUST CONTINUING WHAT BUSH WAS DOING FOR THE VERY SIMPLE REASON THAT PRESIDENTS ARE JUST FRONT MEN FOR THE REAL POWER TO BE.
WHO EVER HAS THE POWER OF ISSUING THE CURRENCY REALLY CONTROL THE COUNTRY NO MATTER WHO IS ELECTED..
WE WILL NEVER CHANGE AND IMPROVE AS LONG AS THE FEDERAL RESERVE SYSTEM SCHEME WILL STAY IN PLACE, WE MUST PUT AN END TO IT.
AND THIS IS NEITHER A LIBERAL OR A CONSERVATIVE ISSUE , IT IS SIMPLY IN THE INTEREST OF THE COUNTRY AS WHOLE.
Reply
11-04-2009 @ 12:36AM
Tech said...
The "government" numbers are lies go to Shadow Government Statisitics to see the real numbers. We're in a depression and it's going to get worse. What really happened was a junta in 2000 that installed the unelected Bush/Cheney monkees who dropped interest rates to nothing after taking out every law put in after the Great Depression. After the fraud 911 "attack" they invaded Iraistan to control the Iraqi oil and Caspian gas but that oil went to China, Japan, and BP mostly and the Caspian will be piped to India. The housing bubble burst and they took out rivals on Wall St and numerous banks and the entire economy in the west then forced the graft sucking bums in Congress to hand over the US Treasury. It was a coup and America is gone except in name. They are globalist banksters and already with the Lisbon Treaty control all 27 European Countries and in December with the Copenhagen Treaty will merge us under a global enforcement scheme too. Both parties are a fraud, paid off by the 34,000 "lobbyists" and so is the endless "war on terror", the Patriot Act, the NSA spying on us, the Federalized police, the anthrax from their CIA lab, and this recent rise in the stock market. stocks are projected to decline after December when they cash their bonuses but unemployment will rise to unheard of levels as they finish us off. Our non-producing economy collapsed last fall and the green shoots went into the markets not main street. Now, it'soff to Walmart to check out the latest Communist Chinese made goodies!(banksters love prison/slave labor)
Reply
11-04-2009 @ 7:40AM
kern said...
GDP WHAT BULL$HIT THIS HAS TO CHANGE STOP BAILING AND PLUG THE LEAKS FROM THE THIEVES SHYSTERS.PUT AMERICA AND IT`S CITIZENS FIRST
NOT EVERY COUNTRY AND" FELON " ILLEGAL
IMMIGRANTS JUST FOR PARTY VOTES.. WELL AMERICAN VOTERS CAN CHANGE AND SHOULD
DO AWAY WITH THESE ELITE CRUD WHO COULD NOT RUN A HAMBURG JOINT SUCCESSFULLY IF THEY WERE THE ONLY ONE IN THE UNITED STATES AND THEY ARE RUINING THIS GREAT NATION BY TAKING "BRIBES" FROM LOBBYISTS AND OTHERS TO
MAKE THIS COUNTRY A WELFARE
Reply
11-04-2009 @ 8:01AM
MADDAT52 said...
"Is GDP all it's cracked up to be?" Not a chance in hell!
Reply
11-04-2009 @ 8:06AM
MADDAT52 said...
April 15th 2010 will be the turning point in American politics and economics. This is the lat year that we have to profit without being robbed by the socialists in the white house and that will send money back into hiding. Don't bet on 2010 or you will be broke!
Reply
11-04-2009 @ 8:52AM
Garry Todd said...
The GOP nor the DEMS care about the economy. They all have their big life styles guaranteed by us. They have no real value to
America anymore as foreign interest now control the show.
Reply
11-04-2009 @ 9:33AM
sgentilejr said...
The reason why the GPD numbers are completely bogus is because all of the major American Companies are reporting lower GROSS SALES. It is 100% impossible for GDP to be up while one major American company after another are reporting their sales are down between 10 and 15%. DuPont to GE, J&J to Microsoft, Exxon to Delta, Federal Express to US Post Office___they are all reporting Gross Sales are DOWN.
Face reality__our government and our politicians lie and they make the numbers what ever they want the numbers to be to fit their agenda..
Reply
11-04-2009 @ 10:06AM
fastlad1990 said...
The dollar would rebound right now if 3 things happened
1. Health care bill failed.
2. Cap and trade failed.
3. Put the stimulus money that has not been spent (80% of it) back into the tresury. (pay down the national dept. Republicans STAND FOR SOMTHING CONSERVITIVE AND THE COUNTRY WILL FOLLOW YOU!!
Reply
11-05-2009 @ 9:53AM
bemedina said...
Do you neuphites really believe that the politicians are in charge of anything? wake up!, the same greedy bankers that got us into this mess are still calling the shots by proxy,via lobbyists. When Keynes saved capitalism butt in the 30's, the gross national product was the measurement of an economy. Now that we have a hyper balance of payment deficit,added to a debt to foreigners that will make your head spin; gdp is the measure in order to hide the balance choke. So people get smart and read and research, instead of rendering snide comments which serve no purpose
d
Reply
11-04-2009 @ 10:36AM
Ed said...
GDP = private consumption + gross investment + government spending + (exports − imports), or
Gov spending, way,way up! Exports-imports, no one is buying anything so we are not running are usal deficit. Of course the GDP is up! The article is a red herring, meant to decieve the layman. The fact is, the rise in GDP has been artificially exagerated.
Reply