Violent hurricanes are good for the economy. So are cancer, divorce and war. Vegetable gardens are an obstacle to growth, along with stay-at-home parents, plump savings accounts and fuel-efficient cars.
The reason is that when America's politicians speak of the economy or its growth, they generally mean gross domestic product, which thrives on spending but not necessarily improvement. As the benchmark's architect, Russian-born economist Simon Kuznets, warned in a letter to Congress more than three-quarters of a century ago, "the welfare of a nation can scarcely be inferred from a measure of national income."
Therein lies the key to what many Americans saw this week as a growing contradiction. When the National Bureau of Economic Research said Wednesday that the nation’s long recession had ended in June 2009, based largely on a bottoming of GDP, many bristled at the idea that the economy has been improving even as they’ve been in a financial slog. In a taped interview that aired Thursday morning on CNBC, revered investor Warren Buffet disagreed: "I think we're in a recession until real per capita GDP gets back to where it was before."
These differing views might miss the point. More important than the turning points that define expansion and recession is that the thing that's becoming larger or smaller, and the thing we've been watching worriedly and trying to stimulate – GDP – might not fix our woes. It could even make some of them worse.
Consider just some of the measure's shortcomings:
- It treats all spending as economic gain. Hurricane Katrina in 2005 brought untold misery, but is believed to have added more than $100 billion to the economy in rebuilding costs. U.S. healthcare is unaffordable for many, but the amount paid by Americans, their government and their insurers beyond what rich nations with similar or better health outcomes pay is a $700 billion-a-year boon. The symbiosis that exists between junk food makers, advertisement sellers and diabetes doctors is an economic miracle, but pity the plump consumer caught in the crossfire.
- It says nothing about free work, like that done by parents. The decades-long migration of stay-at-home moms to the workplace – this year, female workers outnumbered males in the U.S. for the first time – has given the appearance of rising output, but only because the contribution of moms wasn't tallied to begin with. The cost of child care, meanwhile, has increased twice as fast as the median income of families with children since 2000, according to an August report by the National Association of Child Care Resource & Referral Agencies.
- It ignores income distribution. GDP growth averaged more than 6% a year from 1979 to 2007 – a remarkable boom. After taxes, the top one-fifth of earners got a 281% pay raise over that stretch. The bottom fifth got a 16% raise.
- It pretends resources are infinite. As the U.S. pulls its oil and coal from the ground, the national accounts show a gain from the sale of the asset, but no loss from its depletion. As political activist and former Senate aid Jonathan Rowe put it a March 2008 speech before Congress, "The result is like a car with a gas gauge that goes up as the fuel tank empties." The cost of pollution that results from economic activity is not subtracted from GDP, but added to it. Spending is spending. - It ignores changes in leisure time. (Too busy to elaborate.)
- It treats all spending as paid-for. No matter that America's last housing boom was mostly a borrowing boom, or that the bill hasn't yet come due for the $750 billion economic expansion known as the Iraq War.
The problems with GDP are well-known. Last year, economists including Nobel winners Joseph Stiglitz and Amartya Sen published a 292-page report outlining faults and recommending changes. Among the recommendations: focus on household income, consumption and wealth, rather than on aggregate production; consider changes to equality; factor in non-market activities (like raising children); and create indicators for quality-of-life and environmental pressures.
Don't expect a replacement for GDP soon. The report authors make clear that they are "opening rather than closing a discussion." The recommendations discuss a "dashboard" of measures rather than a single one. Some of the recommendations are straightforward and non-controversial; wealth matters as much as income and spending in determining whether we're becoming better-off. Others, however, are slippery to measure, like economic insecurity. Still more are too easy to politicize.
This last snag might be the biggest barrier to dethroning GDP. If the measure flatters America, obsessing as it does on the frantic flow of money, it's too easy to create one which would, say, puff up Europe by emphasizing the well-being provided by vacations and universal healthcare. To measure a nation's progress you must first define it, and the very existence of various nations suggests not all will agree on the goals.
Is economic growth good? Surely, but rising GDP is not the same thing. Cheap, lasting fixes for a few of America's challenges – health care, terrorism, energy dependence – could easily result in something the record-keepers would call a sharp downturn. If GDP recovers, fine, but I'll call the recession over when jobs are plentiful and the average worker says his lot has improved.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
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