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Saturday, Jan. 30, 2010
Is GDP An Obsolete Measure of Progress?
By Judith D. Schwartz
Since last summer the nation's Gross Domestic Product (GDP) has gone up — indeed, it
grew at a surprising 5.7% rate in the 4th quarter — seeming to confirm what we've been
hearing: the recession is officially over. But wait — foreclosure and unemployment rates
remain high, and food banks are seeing record demand. Could it be that the GDP, that
gold standard of economic data, might not be the best way to gauge a nation's relative
prosperity?
Since it became the prime economic indicator during the Second World War (to monitor
war production) many have criticized policy-makers' reliance on the GDP — and
proposed substitute measures. For example, there is the Human Development Index
(HDI), used by the UN's Development Programme, which considers life expectancy and
literacy as well as standard of living as determined by GDP. And the Genuine Progress
Indicator, which incorporates aspects of social welfare such as income equity, pollution,
and access to health care. In the international community, perhaps the biggest nudge has
come from French President Nicolas Sarkozy, who commissioned a report by marqueename economists, including Nobel laureates Joseph Stiglitz and Amartya Sen, to find
alternatives to what he calls "GDP fetishism". (See the best business deals of 2009.)
What exactly have we been fetishizing? Basically, market activity and growth. The GDP,
generally expressed as a per-capita figure and often adjusted to reflect purchasing power,
represents the market value of good and services produced within a nation's boundaries.
Sounds reasonable. Until we consider what it doesn't measure: the general progress in
health and education, the condition of public infrastructure, fuel efficiency, community
and leisure.
"It's a narrow calculation of cash flow," says Hazel Henderson, President of Ethical
Markets Media (USA and Brazil) and who co-developed the Calvert-Henderson Quality
of Life Indicators, which unbundles, rather than averages, 12 indicators. "Because it's
averaged, the GDP mystifies and masks the gap between rich and poor. I don't think
there's ever been such a large disconnect between the GDP and what ordinary people are
experiencing." (See TIME's 2009 Person of the Year: Federal Reserve Chairman Ben
Bernanke.)
As an example of how what's good for the GDP is not always good for the individual,
take health care: rising costs may be tough on families, but it boosts the GDP.
"The GDP is a truly terrible measure of things that really matter," says James Gustave
(Gus) Speth, Distinguished Senior Fellow at Demos, a public policy research and
advocacy organization based in New York. "Finally, there's a broad consensus on this
point. For the first time there's a chance that this concern will move out of academic and
research circles and become a real policy question."
Speth notes the seemingly paradoxical relationship between the growth rate (GDP) and
decline in employment. "It takes enormous GDP growth to get jobs," he says. "It focuses
us as a nation on a fool's errand."
One new calculation that's been attracting attention is the Happy Planet Index (HPI),
which combines economic metrics with indicators of well-being, including subjective
measures of life satisfaction, which have become quite sophisticated (HPI uses data from
Gallup, World Values Survey, and Ecological Footprint). The HPI assesses social and
economic well-being in the context of resources used, looking at the degree of human
happiness generated per quantity of environment consumed. The HPI metric was driven
in part by the recognition that the environmental costs of economic growth must be
figured into standard-of-living reports. (See the worst business deals of 2009.)
"The GDP suited a different era and now we need a metric for our times," says Nic
Marks, a Fellow at the London-based New Economics Foundation, and founder of its
Centre for Well-Being. "During World War II production was important. After the war
was the need for rebuilding. We're way past that. We need to account for our ecological
footprint and see how we're operating on the planet. The GDP is often precisely wrong in
that it's not measuring progress, just the making of stuff. The HPI is striving to measure a
better future." One appeal of the GDP, says Marks, has been that it presents a simple
message: up is "good"; down is "bad." "HPI is trying to mirror that simplicity, using one
number as a headline indicator."
In terms of what the world wants measured, it seems the HDI and HPI have it over the
GDP. For its report "International Public Opinion on Measuring National Progress: 2007"
GlobeScan, a research firm based in Canada and London, surveyed 1,000 people in each
of 10 countries not including the U.S.. When asked whether health, social and
environmental status should figure into measures of national progress as much as
economic data, between 70% (Russia) and 86% (France) agreed. "It's common sense and
matches their experience," says Hazel Henderson, whose firm commissioned the study.
"People know there is much valuable in their lives besides what can be expressed in
monetary terms."
The matter of how a nation measures performance is far from trivial, says Gus Speth,
particularly at a time when environment sustainability is on many people's minds. He
observes: "You tend to get what you measure, so we'd better measure what we want." In
other words, to a certain extent we are what we count. (See pictures of the stock market
crash of 1929.)
For Nic Marks, the key shift introduced by the HPI is its "move away from measuring
production and toward measuring consumption. The HPI serves as a signpost pointing
more toward a society we want to live in — the delivery of good lives rather than the
delivery of more goods."
So how does the U.S. fare in HPI terms? Not so good. It sits pretty far down the list at
114. The U.K. is 74, behind Germany, Italy and France. Topping the chart is Costa Rica,
which has long life expectancy, high life satisfaction, and a per capita ecological footprint
one-fourth the size of the U.S.
As Gus Speth explains it: "We [in the U.S. are] chewing up a lot of environment for not
much happiness."
March 5, 2008
Economic Scene
Unemployed, and Skewing the Picture
By DAVID LEONHARDT
(UPDATED March 7, 9:55 a.m.) This month's jobs report is a great example of how
misleading the unemployment rate can be. In February, the economy shed 63,000 jobs,
which is a strong indication a recession may be at hand. But the unemployment rate
actually fell, to 4.8 percent from 4.9 percent.
How could this be?
The government's definition of the unemployed includes only those people actively
looking for work. And last month, the number of people in that category fell
significantly. It seems that more of the jobless gave up looking for work. So the
unofficial number of unemployed fell, even as the labor market worsened.
My column this week, which appears below, explains the history behind the
government's definition of unemployment.
In 1878, Carroll D. Wright set out to do something that nobody in the United States had
apparently ever done before. He tried to count the number of unemployed.
As is the case today, the 1870s were a time of economic anxiety, with a financial crisis —
the panic of 1873 — having spread into the broader economy. But Wright, then the chief
of the Massachusetts Bureau of the Statistics of Labor, thought there weren’t nearly as
many people out of work as commonly believed. He lamented the “industrial
hypochondria” then making the rounds, and to combat it, he created the first survey of
unemployment.
The survey asked town assessors to estimate the number of local people out of work.
Wright, however, added a crucial qualification. He wanted the assessors to count only
adult men who “really want employment,” according to the historian Alexander Keyssar.
By doing this, Wright said he understood that he was excluding a large number of men
who would have liked to work if they could have found a job that paid as much as they
had been earning before.
Just as Wright hoped, his results were encouraging. Officially, there were only 22,000
unemployed in Massachusetts, less than one-tenth as many as one widely circulated (and
patently wrong) guess had suggested. Wright announced that his “intelligent canvas” had
proven the “croakers” wrong.
From Massachusetts, he went to Washington, where he served as the inaugural director of
the federal government’s Bureau of Labor Statistics and later as the head of the United
States Census. His method for counting — and not counting — the unemployed became
the basis for Census tallies of the jobless and, eventually, for the monthly employment
report put out by the Bureau of Labor Statistics. Wright is the father of the modern
unemployment rate.
This Friday, the government will release the latest employment report, which will help
clarify whether the economy is slipping into a recession. Wall Street forecasters are
predicting that the February unemployment rate will have inched up to 5 percent, from
4.9 percent in January.
Whatever the survey ends up showing, however, you can be sure of one thing: Politicians
will be quick to point out that joblessness remains low by historical standards. “Five
percent is still a low unemployment rate,” Ed Lazear, the chairman of President Bush’s
Council of Economic Advisers, said recently. “It’s below the average for the last three
decades.”
The president and Senator John McCain also recently noted that unemployment remained
low. Senators Judd Gregg of New Hampshire and Johnny Isakson of Georgia, both
Republicans, have said the economy continues to be at “full employment.” Two
Democratic governors, Christine Gregoire of Washington and Joe Manchin III of West
Virginia, have bragged that their states recently recorded their lowest unemployment
rates in history.
Statistically, all this is true enough. But it’s also deeply misleading.
Over the last few decades, there has been an enormous increase in the number of people
who fall into the no man’s land of the labor market that Carroll Wright created 130 years
ago. These people are not employed, but they also don’t fit the government’s definition of
the unemployed — those who “do not have a job, have actively looked for work in the
prior four weeks, and are currently available for work.”
Consider this: the average unemployment rate in this decade, just above 5 percent, has
been lower than in any decade since the 1960s. Yet the percentage of prime-age men
(those 25 to 54 years old) who are not working has been higher than in any decade since
World War II. In January, almost 13 percent of prime-age men did not hold a job, up
from 11 percent in 1998, 11 percent in 1988, 9 percent in 1978 and just 6 percent in 1968.
Even prime-age women, who flooded into the work force in the 1970s and 1980s, aren’t
working at quite the same rate they were when this decade began. About 27 percent of
them don’t hold a job today, up from 25 percent in early 2000.
There are only two possible explanations for this bizarre combination of a falling
employment rate and a falling unemployment rate. The first is that there has been a big
increase in the number of people not working purely by their own choice. You can think
of them as the self-unemployed. They include retirees, as well as stay-at-home parents,
people caring for aging parents and others doing unpaid work.
If growth in this group were the reason for the confusing statistics, we wouldn’t need to
worry. It would be perfectly fair to say that unemployment was historically low.
The second possible explanation — a jump in the number of people who aren’t working,
who aren’t actively looking but who would, in fact, like to find a good job — is less
comforting. It also appears to be the more accurate explanation.
Various studies have shown that the new nonemployed are not mainly dot-com
millionaires or stay-at-home dads. (Men who have dropped out of the labor force actually
do less housework on average than working women, according to Harley Frazis and Jay
Stewart of the Bureau of Labor Statistics.)
Instead, these nonemployed workers tend to be those who have been left behind by the
economic changes of the last generation. Their jobs have been replaced by technology or
have gone overseas, and they can no longer find work that pays as well. West Virginia, a
mining state, is a great example. It may have a record-low unemployment rate, but it has
also had an enormous rise in the number of out-of-work men.
These nonemployed remain a distinct minority of the population. But the growth in their
numbers is one reason that overall wage growth has been so weak lately. With such a
large pool of people who aren’t employed — but willing to work for the right price —
those who do have jobs find themselves with less bargaining power. Since 2003, total
compensation, including the value of health insurance and other benefits, has failed to
keep pace with inflation for most workers, according to Jared Bernstein of the Economic
Policy Institute.
I’m not suggesting that the government change its definition of the unemployment rate
after all these years. (The government has tried to come up with various alternate
measures of joblessness, which are broader but not especially useful.) I’m also not
suggesting that the Bureau of Labor Statistics somehow cooks the books. Both
Republican and Democratic economists praise the bureau as a model of professional
nonpartisanship.
Yet there is no doubt that the unemployment rate is a less telling measure than it once
was. It’s simply no longer the best barometer of the country’s economic health. A truer
picture can be found elsewhere, by looking at compensation growth, for instance, or to
changes in the percentage of the employed.
No less than Tom Nardone — who, as the economist overseeing the unemployment
survey, might reasonably be considered the Carroll Wright of today — made a similar
point to me the other day.
“Just saying the unemployment rate is 5 percent, without any other context, really doesn’t
tell you much,” Mr. Nardone said. “It’s far more complicated than that.”
Why You Can't Trust the Inflation
Numbers

By BRETT ARENDS
A surprising number of people on Wall Street will tell you not to worry too much about
inflation.
After all, they'll say, just look at the numbers. The inflation picture is incredibly benign.
In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low
rate. And when you strip out volatile food and energy costs, they'll say, it's even lower—a
meager 0.8%.
It doesn't stop there. Many economists will point out that wages are also rising by less
than 2% a year. With so many people still out of work, goes the line, labor costs are
going to stay low for a long time too. So what's the worry?
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Associated Press
With oil back near $90 a barrel, get ready for higher gasoline prices at the pump.
Clearly, a lot of investors agree. Inflation-protected government bonds, which people
would buy to protect themselves if they were worried, have fallen in price in the past
couple of months. Gold, another inflation hedge, is down. Ten-year Treasury bonds yield
less—3.3%—than they did when President Eisenhower left office.
It's crazy. There is plenty to worry about. As you battle to manage your family's finances,
be aware that there are three reasons why inflation needs to be on your radar screen.
• First, the official inflation numbers should be taken with a fistful of salt.
Over the past 30 years, the federal government has made a lot of changes to the way it
calculates inflation. It's taken place under presidents of both parties. Each change in
methodology has come with plausible-sounding justifications. But, as if by magic, each
change has had the effect of flattering the numbers. Funny, that.
There are a few reasons investors might be wary of the Treasury market, says Brett
Arends. Yet investment strategist Richard Bernstein explains why he's bullish on the
dollar. And, advisers can help clients take emotions out of their investment decisions.
Dow Jones Wealth Adviser's Veronica Dagher reports.
According to one rogue economist, John Williams at Shadow Government Statistics, if
we still calculated inflation the way we did when Jimmy Carter was president, the official
inflation figures would look about as bad as they did when ... Jimmy Carter was
president. According to Mr. Williams's calculations, if we counted inflation under the old
system the official rate wouldn't be 1.5%. It would be closer to 10%.
Mr. Williams is just one voice. But it makes sense to treat the government numbers with
skepticism.
Under the official calculations, if steak prices boom, the government just assumes you
buy cheaper hamburger instead. Presto—no inflation!
Or consider the case of Apple computers. We all know Macs are expensive. And we
know Apple doesn't discount. The cheapest Mac laptop today costs $999. A few years
ago, it also cost $999. So the price is the same, right?
Ha. Not according Uncle Sam. Using a piece of chicanery called "hedonics," Uncle Sam
calls this a price cut. His reasoning? You're getting more for the money. Today's $999
Mac is lighter, fancier and faster than last year's $999 Mac. So the government calculates
that the "real" price has actually fallen.
How's that work in the real world? Try it. Go into your local Apple store and ask for 50%
off thanks to hedonics. (If you do, please, please video the exchange and put in YouTube.
We could all use a good laugh.)
Instead, the government is worrying about deflation, partly because of all the "cheap"
MacBooks out there.
• The second reason to treat the official inflation figures with some mistrust is that they
look backward. They register what just happened, not what's about to happen next.
OK, so the prices of many things haven't risen. Yet. But if the laws of economics mean
anything, they will have to. Why? Because costs are rising.
Economists need to stop focusing just on labor costs. The world has plenty of surplus
labor. But look at raw materials. Around the world prices are skyrocketing, from copper
to cocoa. The United Nations Food Price Index has just hit a new record high. Oil's back
near $90 a barrel. Wheat prices have nearly doubled since last summer.
Soaring food prices helped spark the revolution in Tunisia. According to Alex Bos,
commodities analyst at Macquarie Securities in London, other governments—especially
in North Africa—have responded with panic buying of foodstuffs.
Algeria alone, he says, has bought about 1.5 million tons of wheat this month—maybe
triple its usual amount. Saudi Arabia is rushing to build up grain supplies. Corn supplies
are as tight as they were back in the inflationary 1970s.
Sooner or later this is going to show up in your supermarket, or at the mall, in higher
prices.
Just ask McDonald's. Or paints and plastics giant DuPont. Or Kleenex and Huggies
maker Kimberly-Clark. Or 3M. Or Coach. These companies, and many others, have
warned in recent days that they're getting squeezed by rising costs. They'll either eat the
costs, which will hit the stock, or pass them on. How is this not inflation?
• The third reason to be mistrustful of the inflation picture? Simple. Economics.
We are flooding the world with extra dollars. The Fed simply invents as many as it likes.
In the past couple of years, to try to keep the economy out of a tailspin, it has more than
doubled the size of the so-called monetary base.
A dollar bill has no intrinsic value. Dollars are only "worth" something because you can
exchange them for a haircut, or a pair of shoes, or a book from Amazon.com. So if you
drastically increase the number of dollars without a commensurate increase in the number
of goods and services, each dollar must, by definition, be worth less. That's another way
of describing inflation.
So far, this inflation seems to have shown up in the unlikeliest of places. It's like WhacA-Mole. The price of vintage wines has skyrocketed 57% in the past year, according to
the Liv-ex Fine Wine 50 Index. Real estate prices across China are in a bubble. So long
as the Chinese tie themselves to the U.S. dollar, they are importing our inflation. But,
once again, one wonders how this can be called benign.
Is inflation certain? I'm wary of any predictions. Casey Stengel once said, "Never make
predictions, especially about the future." Mr. Stengel would have lasted three days as a
Wall Street analyst. But he won five World Series in a row, and he knew a thing or two.
Maybe inflation really will stay tame. But I'm not counting on it. I'm not buying the
conventional wisdom, and neither should you.