Headlines 2015

GDP has flaws, and needs to be modernized

2015-05-07

Diane Coyle. Photo: Kajsa Kax.

GDP is problematic as a measure of growth, but this does not mean that GDP is useless, explained Professor Diane Coyle, University of Manchester, in a seminar organized by IFN May 7. Coyle said that GDP is insufficient as a measure and what is probably needed is a dashboard of indicators. At the seminar, she mentioned a number of existing alternative measures, including Social Progress Index, which was created in 2014.

Diane Coyle, visiting professor at the University of Manchester with a PhD in economics from Harvard, is one of the internationally renowned scholars in the debate on how we best define and measure national economies. She has authored a number of books, the latest one titled GDP: A Brief but Affectionate History (Princeton University Press). The book explains why even small changes in GDP can influence major political decisions and determine whether countries can keep borrowing or be thrown into recession.

At the seminar in Stockholm Coyle gave a lecture about GDP and how we in today’s globalized world must make sure that we get a more truthful picture of long-term economic prospects.

 

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A It was a renowned and large audience that came to the Armémuseum to listen to a discussion of the GDP as a measurement of growth. Photo: Kajsa Kax.

 

"Through history we understand that there is no natural concept of the economy. The way we think about the economy has changed a lot over the centuries and has always reflected the political and state imperatives at the time. It’s not a real thing, it’s an idea. And it’s a very complicated idea. Actually very few people know the details how the figures are constructed," explained Diane Coyle.

She pointed out that GDP is based on thousands of data series and
from thousand of data series, and there are all kinds of potential errors in these series. There is lots of adjustment that get made for example seasonality in certain businesses.

 

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From left, Martin Flodén, Diane Coyle, Karolina Ekholm and Magnus Henrekson. Photo: Kajsa Kax.

 

"We also have the problem of measuring sustainability. GDP goes up when there is a natural disaster because of the rebuilding, but the destruction of assets is not immediately counted in the same way. A lot of innovative activities are not well captured by GDP, for example innovations that have reduced the price of activities: in communications, new materials, these innovations are not well captured by GDP" said Coyle.

 

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Diane Coyle is the author of the best-seller GDP: A Brief but Affectionate History (Princeton University Press). In the background is seen Karoline Ekholm and Magnus Henrekson. Photo: Kajsa Kax.

 

There has been a long history of trying to find alternatives to GDP.  One of the most popular is to measure happiness. "People say that money doesn’t buy happiness. And if you look at GDP over time the level of reported happiness or wellbeing in countries it stops increasing while GDP increases. I think this is a kind of flawed statement partly because happiness and GDP growth are pretty strong correlated", said Coyle posing a question:  "What about people in Bangladesh that are almost as happy as people are in richer countries – should we stop trying to tackle poverty? I don’t like that conclusion at all. But if you should not go for single indexes because they all have flaws, what are you going to do?"

Today the most popular method seems to be a dashboard approach. Coyle argued that as there are lots of things that we care about, why not look at it all in a dashboard. "The OECD has taken this very seriously. I quite like this because it gets you to do trade-offs between things that we care about. This is a very promising approach."

 

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Karolina Ekholm. Photo: Kajsa Kax.

 

She concluded the presentation with a summary of how we might be measuring in the future: "There are three different things we want to do with measuring the economy: measure the activity so that the treasury and the central bank know what the state of the economy is at the given moment (the GDP is probably still a good measure, even if complicated). But we also need to measure a wider concept of social welfare. I like the dashboard, some people argue for a single index. And we need something to assess sustainability which is harder as you are trying to say things about the future, making all kinds of assumptions. We can probably put that on a dashboard as well, but it is a separate concept from activity."

"So we need to keep these things separate in our minds. And it is important is to understand that there is nothing natural about GDP and we need a measure of the economy that suites our purposes. We are at a point now, in all western countries, where this is a really important conversation."

 

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Magnus Henrekson. Photo: Kajsa Kax.

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Martin Flodén. Photo: Kajsa Kax.

 

The presentation was followed by a panel discussion. In addition to Diane Coyle’s the participants were: Martin Flodén, Deputy Governor at Riksbanken, Karolina Ekholm, State Secretary at the Ministry of Finance and Magnus Henrekson, Professor and managing director of IFN. Johanna Lybeck Lilja, former State Secretary at the Ministry of Finance, moderated the discussion.

 

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Among the approximately 100 renowned participants was Professor Robert Erikson, Stockholm University that by the Government has been appointed to identify, analyze and propose additional measures to GDP. The idea is to develop metrics to broader illustrate quality of life. The study will be presented early this summer. Photo: Kajsa Kax.

 

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