Beyond GDP

French economist Thomas Piketty in his book Capital in the Twenty-First Century shows that the rate of capital return is persistently greater than the rate of economic growth, and that this has led to wealth inequality to increase. To address this problem, Piketty proposes redistribution through a progressive global tax on wealth.

And indeed, finance ministers from wealthy G7 nations on Saturday endorsed in London a global minimum corporate tax rate of at least 15 percent, rallying behind a US-backed plan targeting tech giants and other multinationals accused of not paying enough. US Treasury Secretary Janet Yellen hailed the “unprecedented commitment”, saying in a statement that a global minimum tax “would end the race to the bottom in corporate taxation”.

Meanwhile, Austin Clemens, Manager, Washington Center for Equitable Growth (GDP is outdated, here are the alternatives, published on 10 Feb. 2020) says that due to the limitations of GDP, one must use other more inclusive wealth metrics. Economists are said to increasingly believe it is important to do more to measure the economic well-being of the families who make up the economy and to deemphasize Gross Domestic Product growth, the one-number-fits-all measure of economic progress that currently dominates popular discourse.

The ongoing rancorous and largely facile debate that had ensued in Pakistan, especially between the opposition and the government functionaries following the announcement of official growth rate projections for the outgoing year makes one recall the proverb: lies, damn lies and statistics. And of course, the bikini example—what it reveals is interesting but what it hides is vital.

Many years ago, at the height of the ‘India Shining’ political slogan, Indian editor and commentator M.J. Akbar wrote: a “7% growth (rate) for the 7%”, highlighting the skewed nature of the benefits. Warren Buffet has described it differently, as a “tide that has lifted all the yachts”.

A panel discussion titled “Beyond GDP” held at the annual (2020) conference of the American Economic Association, attended by high profile economists including Nobel Laureate Angus Deaton concluded that new metrics of well-being are long overdue. But the panel also highlighted the difficulty of communicating the deficiencies of GDP and the value of new measures to non-economists. While virtually all of the panelists agreed that GDP is not a very useful gauge of economic success, most also said they would leave the US GDP report untouched and focus instead on creating new “satellite accounts” at the US Bureau of Economic Analysis. Satellite accounts are said to be separate publications, distinct from the monthly GDP release.

Economists on the panel proposed a number of excellent ideas for extending the current national accounts, among them putting a value on housework, making better estimates of quality improvements in healthcare, and measuring subjective well-being. Each of these could make the national accounts more useful for understanding the economy and improve economic policy discussions. But the way these statistics are delivered matters. To make an impact, they should be released on a regular schedule, in a significant agency release, with similar billing to the more established metrics, such as GDP itself.

Despite widespread hesitancy to include changes to GDP in the existing accounts, the panel underscored that there is broad consensus that significant improvements can be made to GDP. The most frequently mentioned area for improvement was adding a distributional component to the national metrics. Though opinions about the exact method may vary, these calls mirror Equitable Growth’s own campaign for a GDP 2.0, which proposes that the Bureau of Economic Analysis (BEA) break out economic growth by income so one can observe who prospers when the economy grows. The BEA, which produces the American National Income and Product Accounts, recently announced that it expects to publish soon statistics distributing the growth in personal income.

“Angus Deaton suggested that US statistical agencies should also take up measurement of subjective well-being. This means conducting a survey to ask people how happy they are. Deaton noted that collecting this information on a regular basis could be a useful way to evaluate whether gains that are perceived as important to a family’s welfare do, in fact, result in increased well-being. Dale Jorgenson of Harvard University and Dan Sichel of Wellesley College argued in favour of better measures of consumption by households, which they believe better approximates individual welfare.

“Panels such as this one reflect the broad consensus among many different types of economists that policymakers can and should do a better job of measuring the well-being of Americans in national economic statistics. The BEA is committed to pursuing at least some of these options. In fact, economists, politicians, and other observers have been writing about and talking about the deficiencies in GDP for decades. It is promising that action appears to be close at hand.

“Simon Kuznets, the economist most responsible for the creation of GDP as a metric, knew the folly of this tactic well. The welfare of a nation, he noted in a report to Congress, can scarcely be inferred from a measure of national income.”

Insisting that GDP is no longer an accurate measure of growth, Andrea Willige, senior writer, formative content of World Economic Forum (GDP is no longer an accurate measure of growth. So what can take its place? Published on 27 May 2021) said one needed a new method that considers welfare, the environment and people to measure economic growth.

The World Economic Forum has created a holistic scorecard to guide policy-makers and government through the post-pandemic recovery.

“Prosperity, the planet, people and the role of institutions need to be balanced. And trade-offs will be necessary as these metrics are intricately linked.

“Why, in the 21st century, are we still measuring our economic growth with the Gross Domestic Product (GDP) – a metric created in the early 20th century?

“And how can we define a more comprehensive, multidimensional metric that adequately reflects the complexities of the world we live in and that can guide our post-pandemic recovery? A metric that looks beyond a nation’s income and considers welfare, the environment and people, too?”

The World Economic Forum has attempted just that with its report, Dashboard for a New Economy Towards a New Compass for the Post-Covid Recovery, which outlines a framework for macroeconomic metrics that could fill the gaps currently left by GDP.

The weaknesses of GDP as a metric are said to be not just a reflection of the rapid transformation the world economy has seen in this century in the wake of the Fourth Industrial Revolution, the climate crisis and COVID-19. GDP’s blanket use for gauging a nation’s welfare has been questioned on many occasions.

In its new report, the Forum has proposed a scorecard made up of four dimensions that need to be brought into balance: prosperity, the planet, people and the role of institutions.

Prosperity vs economic growth

The Forum’s ‘Prosperity’ metric includes aspects such as social mobility, income or wealth inequality and financial resilience. GDP still features within the Prosperity dimension, but updated to reflect different dynamics within the world economy.

“In high-income economies, it has to track the slowing economic growth, its impact on standards of living and an increasingly unequal income distribution with a view to facilitating effective policy countermeasures.

“In emerging markets, the metric needs to account for those countries’ more evenly spread growth, which has contributed to ending poverty for millions to date. There is still a strong case for boosting economic growth in these economies, the report states. One example of this could be stimuli to boost the growth of clean energy over fossil fuels.”

Getting it right for people and the planet

The ‘Planet’ metric weaves together the evolving energy mix and, by association, the development of greenhouse gas emissions. It also accounts for the cost of climate change and its mitigation – for example, through carbon taxes.

“Human capital is the key determinator for the dashboard’s ‘People’ dimension. It incorporates metrics for tracking education and re-skilling to guide government spending toward transforming workforce skill-sets and avoiding job losses as the economy’s structural transformation continues to unfold.

“The final dimension is ‘Institutions’, with the Forum pointing to a decline in institutional quality, as evidenced by negative trends around press freedom, judicial independence and budget transparency, for example.”

While each of these four dimensions already carries inherent complexity, their interconnectedness creates further difficulties, and trade-offs will need to be made to ensure adequate balance.

While governments may introduce a carbon tax to help abate climate change, they need to consider the impact this may have on jobs, economic and social polarization, for example.

Andrea Willige: “Finding a new globally acceptable tool to measure the ups and downs of our economic activity will remain a challenge – but one that must be tackled urgently to ensure the world’s economic recovery is on the right course.”

Copyright Business Recorder, 2021