Most forecasters expect third quarter real GDP growth to be positive, perhaps as much as 3%. This will be widely hailed as a sign that the nasty recession of 2008-2009 has come to an end. Indeed, the Fed’s statement today that “economic activity has picked up” seems to fuel the belief that the recovery has started.
But is the recession really over? Coincidentally, the Commission on the Measurement of Economic Performance and Social Progress, headed by Nobel Prize winners Joseph Stiglitz and Amyarta Sen, has come out with its new report, which pointed out substantial flaws in using GDP as a measure of well-being:
…the crisis is teaching us a very important lesson: those attempting to guide the economy and our societies are like pilots trying to steering a course without a reliable compass.
the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being….emphasising well-being is important because there appears to be an increasing gap between the information contained in aggregate GDP data and what counts for common people’s well-being.
Now, ‘well-being’ is a broad concept, which includes everything from household income and consumption to fuzzy measures of happiness. But the main point is that market production—which is what GDP purports to measure—may be less important than other aspects of the economy.
Stiglitz and Sen mainly stress the long-term problems of emphasizing GDP as the main measure of economic performance. But their criticism applies in the short-run as well.
In particular, as we try to figure out if the recession is coming to an end, we should look with skepticism at the reported growth rate of reported real GDP. Real GDP does not include all sorts of intangible investments, such as R&D, product development and training. So companies may be cutting back on long-term R&D and new product investments, but those negatives won’t show up in GDP growth.
Similarly, GDP does not do a good job of tracking many aspects of international trade, such as offshoring of domestically-produced goods and services. For example, if companies are using this downturn to offshore more of their production activities, that shift will be undercounted in the GDP calculations.
And finally, as jobs continue to disappear and unemployment rises, many Americans would not agree with the statement that the recession is over. Stiglitz and Sen are telling us that we need to take that sentiment seriously.
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