When will the recession end ? Part 51 What if our economic indicators and metrics, such as GDP are wrong and deceptive?

That's an interesting question to ask. A recession is a good time to go back and challenge and rethink some of our cherished traditional institutions and assumptions, like the GDP.

There is beneficial economic activity and detrimental economic activity, but it's all counted neutrally and lumped together into GDP. Take China, for example,  which has spent $586 Billion (US) as part of its government stimulus package, much of which has gone into speculative real estate investments. The newly built city of Ordos, located in China's coal-rich province of Inner Mongolia, has spanking new shiny apartment buildings,gleaming office towers, modern schools and stores, fresh roads and highways, but sits practically empty of residence, because middle class Chinese can't afford to buy the properties from speculators, who now own them.  Eventually speculators will need to pay back the loans and property taxes.So is all of this leading to a white elephant city?

Should all of that speculative acivity  be counted as a drain or a benefit to the economy and the GDP? Even the mayor of Ordos, Yun Guangzhong is critical saying: "GDP alone cannot represent the people's aspirations or the raising of their income. Fixed asset investment does not mean industrialization and urbanization has improved." That's quite a public statement of condemnation, coming from a mayor in a communist country.

(source: The Globe and Mail, pg B1, Feb 23, 2010)

[The same goes for CPI the consumer price index-Have you noticed that while the prices of goods in the basket have stayed the same, the packages weights have mostly dropped. We are all paying the same price for less and less in this recession--That's how companies have saved their bottom lines. Walter Derzko]

One US researcher is also critical of GDP measures and offers more proof.

Traditional gauges of economic activity (such as GDP) severely overstate the standard of living as experienced on Main Street, say University of Maryland researchers, who have worked with their state officials to apply a more accurate and greener index.

Maryland recently became the fourth U.S. state to adopt the Genuine Progress Indicator (GPI) as a supplement to the traditional state-level economic index, the Gross State Product (GSP).

"This is not merely a question of dueling statistics - the difference in the two figures can be startling and represents very different pictures of our standard of living," says Matthias Ruth, director of the University of Maryland's Center for Integrative Environmental Research (CIER), which calculated the GPI for the state.

"In 2000, the classic economic measure showed Marylandmore than 50 percent wealthier than we actually were, as measured by the GPI." Ruth explains.

"The traditional measure is inflated by costs that are counted as if they were benefits, such as the conversion of agricultural lands and coastal areas to strip malls and developments," Ruth adds. "It failed to capture many aspects of life we value - from environmental quality to livable communities."

To account for the costs and benefits excluded by the GPS, the GPI formula measures 26 economic, social and environmental factors.

"This tool allows us to account for the environmental and social costs of problems like air pollution, crime and income inequality, as well as the values of benefits like clean water, education and volunteerism," says Maryland Governor Martin O'Malley.

Armed with the more comprehensive GPI data, officials will have a more meaningful guide to policy, Ruth concludes.  He adds that this data might have made a difference had it been available back in 2000.

"We might have moved more rapidly towards sustainable practices - may have invested more in communities that hold together, rather than roads that spread us apart, invested more in local jobs rather than an economy that moves them to far-flung places on this globe, may have invested more in energy technology that harnesses local, renewable resources like wind and solar, instead of burning more nonrenewable fossil fuels," Ruth says.

GPI FINDINGS AND FORECASTS

Into the 1970s, the difference between the GPI and the Gross State Product was relatively small.  But by 2000, the GSP was more than 50 percent greater than the GPI, Ruth found.  "A goal now should be to identify and reverse those drivers that made the two diverge," he concludes.

Ruth also developed a unique dynamic modeling tool that enables policymakers and the public to forecast how environmental, social and economic policies and investments will affect prosperity in 2060.

The CIER modeling shows that by 2060, maximizing efforts to create green jobs, clean energy savings and smart growth could each double the GPI.  While several nations and three U.S. states (Vermont, Minnesota and Ohio) have calculated their GPI, no other jurisdiction has developed a publicly accessible modeling tool.

Walter Derzko, Smart Economy, Toronto

Author of the soon-to-be published book- Opportunity 45 Scenarios to Drive Your Business in Challenging Times,  published by J. Wiley and Sons

ISBN13: 978-0-470-73761-3

ISBN10: 0-470-73761-1

Contact usabout the Opportunity Clinic workshop and to invite Walter Derzko as a keynote speaker at your next event 

Comments

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Of course, a recession is a great time for thinkers to challenge the canon of economic assumptions and standard practices. Include regulation, tax policy, GAAP, and the social costs of debt maintenance among them. The US examples are based on 3 states, which could be the leading edge of a long-term trend, but are also reflections of progressive administrations, not legislation.

During recessions we think we can all afford to risk rethinking our measurement and control systems based on these assumptions by promoting a better-reasoned set of principles. But two observations of mine based on watching my home country (US) closely in several recessions:

1) What recession? ;) Officials and pundits start declaring the recession as “over” as soon as politically feasible. It will take an undeniable depression in order to force sufficient awareness into the punditariat to enable any systemic rethink.
2) All the major players in the current economy – large corporations, media companies, banks, politicians – have learned to game the language of the existing canon. They have no incentive to change principles and practices, and unless the economic climate in 1930’s dire, politicians will not take bold risks during a shaky time of extended unemployment. The political will is absent during recessions – the status quo is all working overtime to recover the status quo.

We sometimes think our new technologically-powered economy can help us launch a new set of measures and indicators based on better views of normalized data and trends. But in many ways, the internetworked global economy has merely embedded the old assumptions deeper into the code, making it even harder to propose new services and systems. Perhaps if the new measures made the old players look even better once “growth” returned?

Changing this system truly is a wicked problem Walter.