Mismeasuring Our Economy: Why the GDP is Not Useful 1


The Real News Network has the video and transcript Mismeasuring Our Economy: Why the GDP is Not Useful.


The GDP is the most commonly cited economic metric but it doesn’t tell us what we need to know

I kept wondering when James K. Boyce would mention an important factor that gets measured in GDP, but does not produce any lasting economic value. That is the increase in value of imaginary assets like financial derivatives. During the bubble that preceded the crash, people were bidding up the value of derivatives, people were being paid for creating these derivative, and real assets were bought with the “profits”. However, as soon as people lost confidence in the imaginary assets, trillions of dollars of wealth disappeared in a very short amount of time. Yet, during the buildup, the increase in GDP due to the bubble were used to tell the voters that the economy was doing just fine. The Republicans could ignore the suffering of people from real economic decline be pretending that the rise in GDP was real and the suffering was imaginary.

The report mentioned in the video is Report by the Commission on the Measurement of Economic Performance and Social Progress, by Professor Joseph E. Stiglitz, Chair, Columbia University; Professor Amartya Sen, Chair Adviser, Harvard University; Professor Jean-Paul Fitoussi, Coordinator of the Commission, IEP

My concern about the video is reflected in the Report by the Commission on the Measurement of Economic Performance and Social Progress.

But some members of the Commission believe that the crisis provides heightened urgency to these reforms. They believe that one of the reasons why the crisis took many by surprise is that our measurement system failed us and/or market participants and government officials were not focusing on the right set of statistical indicators. In their view, neither the private nor the public accounting systems were able to deliver an early warning, and did not alert us that the seemingly bright growth performance of the world economy between 2004 and 2007 may have been achieved at the expense of future growth. It is also clear that some of the performance was a “mirage”, profits that were based on prices that had been inflated by a bubble.


                                                                                

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One thought on “Mismeasuring Our Economy: Why the GDP is Not Useful

  • SteveG Post author

    Reader RichardH points out that “the increase in value of imaginary assets like financial derivatives” is not directly counted in GDP.

    However, the people whose wealth increased by trillions of dollars from these imaginary assets must have bought a few dollars of real goods with their profits. Real estate was overbuilt because of the financial derivatives making it possible for people with no income to buy homes. Since depreciation is not counted in GDP, the complete loss of value of some of this built real-estate does not appear as a negative factor in GDP.

    I still think that accounting rules that make perfect sense in normal times can have major distorting effects in abnormal times.