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COMMENTARY

How we measure the economy hides true picture of how it's doing

EVERY quarter, we look to the federal Bureau of Economic Analysis for new data on the total income and output of the economy. The nation's topline indicator of economic performance is gross domestic product or GDP - the sum total of all that's produced in the economy.

But if you pay attention to that indicator only, it would certainly seem like we're now in the best of times: GDP has grown for 124 straight months, and we are now officially in the longest economic expansion in recorded American history.

Leaders manage by setting objectives, which is exactly what policymakers do when they point to rising GDP as a measure of economic success. As Jack Welch, the former chief executive of General Electric famously put it: "What you measure is what you get."

But if you manage by the wrong measurement, it's worse than having no metrics at all. Mr Welch, who understood this, also asked: "Are we measuring and rewarding the specific behaviour we want?"

While GDP has always had flaws, it used to be a measurement that captured income gains across the economy. Today, when policymakers look to it as a measure of their success, they are not seeing the whole picture. It is no longer good enough for what we need it to do.

The economist Simon Kuznets developed the first estimates of aggregate national income in the early 1930s at the request of the Commerce Department. In 1934, he and his team of researchers presented their findings to the Senate in a 300-page report. The data from that report provided Congress and the president with the first comprehensive snapshot of economic activity and led to the introduction of national income statistics in 1942.

Nearly 30 years later, Kuznets received the Nobel Prize in economics "for his empirically founded interpretation of economic growth". In the decades following World War II, national accounts provided a measure that reflected economic progress throughout the country. From 1963 to 1979, as the economy grew, people at all levels - rich, poor, middle class - saw their income grow at about the same rate. Over that period, the economy grew at an average of 1.7 per cent annually, and most Americans' income growth stayed close to the average; in fact, the incomes of the poorest rose much faster than the average, and the richest saw their incomes rise much more slowly. Incomes among the bottom half rose by 2.6 per cent a year, while that of the top 1 per cent went up by 1 per cent.

Kuznets never intended for his national account scheme to become the country's most-relied-upon measure of economic progress. In his original report to Congress, he wrote: "The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income." He understood that the tools he gave policymakers were limited. They didn't take into account all the aspects a true measure of economic well-being would. By definition, national accounts tabulate only goods with a price tag, leaving out all the things we do for each other, like the unpaid time that parents spend caring for their children, or the unpaid time adult children spend caring for their ageing parents.

There are other problems as well. When a factory spews toxic fumes into the surrounding air, this doesn't get subtracted from national income, and we don't count the negative effect on the lungs of all the people nearby. Worse yet, the money that is spent to clean up the air - and the money that is spent to care for the rise in asthma for the local population - gets counted as an increase in output.

RISING ECONOMIC INEQUALITY

Rising economic inequality since Kuznets' era has made GDP even less informative. Back then, an upward shift meant that incomes grew across the nation; today a rise is more likely to indicate sharp spikes in income for a relative few at the top.

The economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman have done groundbreaking work to disaggregate the national accounts data to show how those at all income levels were faring year to year and over a longer span of time. Their data shows that in the decades since 1980 (ending in 2016, the most recent year for which data are available), the aggregate measure of national income grew at an average of 1.3 per cent annually - but this aggregate income growth went disproportionately to those at the top of the income ladder. Those in the top 10 per cent saw their incomes rise by 2 per cent; the top 1 per cent enjoyed a whopping 2.9 per cent rise in annual income. The income of the bottom 90 per cent went up by 1 per cent.

What their analysis tells us is that GDP data obscures what is really going on in America.

To change that, we need the Bureau of Economic Analysis to modify how it reports the data on national income. The research done by Piketty, Saez and Zucman lays down the groundwork for this, and the bureau's statisticians and economists have been working with them and other scholars to identify how they could deploy new empirical techniques to show who actually gains when the economy grows.

A few countries, like Australia, are already doing this, and the Organization for Economic Cooperation and Development (OECD) has formed an expert group to study how best to standardise the technique.

Recently, the Senate Appropriations Committee allotted US$1 million to the Bureau of Economic Analysis to develop indicators that will show how people's incomes grow in each 10 per cent swath, and not just in the aggregate, which is good news.

But for the most reliable income statistics, Congress also needs to allow the bureau to access tax-return data from the Internal Revenue Service. Economists can use this data under special agreements with the Treasury Department, but the Bureau of Economic Analysis has access only to corporate tax returns, not those of individuals.

Most important, we need Congress to require quarterly reporting of these estimates alongside gross domestic product. This will give us a full accounting of national income, which should focus the attention of policymakers, financial markets and the media on the need to produce broad-based economic growth. Fixing the way we measure economic success will allow us to demand policies that lead to an economy where growth is strong, stable and more widely shared.

Instead of enacting policies that primarily benefit those at the top and calling it a success every quarter when the aggregate national income rises, we would have a more complete picture of what - if anything - trickles down to the rest of us. NYTIMES

  • The writer is president and CEO of the Washington Center for Equitable Growth, and author of Unbound: How Inequality Constricts Our Economy and What We Can Do About It

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