Trashing the granddaddy of economic indicators

SEATTLE, Wash., 08 Oct 2003

And what, many of you are no doubt asking yourselves, is an indicator? Why, it's simple: An indicator tells you something important about people, or the economy, or nature, or anything else, that you wouldn't necessarily know -- or, at least, know with precision -- just by looking out the window.

In America, the most influential indicators all measure different facets of the economy. The daily tics of the stock market; the monthly updates of consumer confidence and consumer sentiment (they're not the same thing, I've learned); the purchasing activity of big businesses; the most recent unemployment figures: they're all covered relentlessly, even droningly, by the press. It seems as if I can't even go to the corner coffee shop without some newspaper headline or TV show (sadly, my corner coffee shop has a TV) blaring news on the latest hiccup in the Dow Jones or Nasdaq.

Gross Domestic Product -- GDP -- is the granddaddy of all of these economic weathervanes. The GDP figure represents the dollar value of the final economic output in a country in a given time period. GDP is the fundamental determinant of recession and recovery, of boom and bust: When economists say that the economy grew or shrank by such and such amount, they're talking about GDP.

But GDP isn't a tangible thing. It's really just an accounting convention -- a fiction, if you like. Government statisticians collect data on spending, investing, prices, you name it, throughout the U.S. Then they pour those raw ingredients into a black box -- really, statistical models of near-mystical complexity -- that spits out a single number that, allegedly, captures the essence of an entire country's economy.

Now, I won't say that GDP accounting is crooked. But the GDP methods certainly have quirks. An example is the treatment of software. Prior to the late 1990s, spending on software was considered "consumption." When businesses bought software, this "consumption" was subtracted from final GDP. But in 1998, government economists started treating software as "investment" -- meaning, in effect, that it could be written off over time, rather than all in one chunk. And this one accounting change has increased, slightly but measurably, the growth rate of GDP.

So maybe the change was valid; maybe software really should be treated as investment. But my point is simply that GDP -- our society's most important and influential gauge --was measurably influenced by a mere accounting change. Deep in the bowels of the government's statistical apparatus, a few people made an unheralded decision to change an arcane rule or two. And -- poof! -- GDP grew by an extra 10th of a percent. Software isn't the only such quirk: Specialists point to others that may have influenced GDP even more.

At heart, though, the accounting rules aren't the real problem. The real problem is that, as a society, we read too much into GDP. The conventional wisdom holds that rising GDP means rising well-being. But at best, GDP tells us what we're spending, not how we're really doing. GDP math only adds, it never subtracts. So a dollar spent on prisons, cancer treatments, or divorce lawyers counts as much toward GDP as a dollar spent on a picnic lunch. We can be spending at a record pace, even as our quality of life and the integrity of the natural systems that support and nourish us degrade.

GDP isn't even a good proxy for how well ordinary people are faring. Recent figures, for example, show that GDP has "recovered" from its recessionary dip -- even as unemployment and poverty rates have continued to rise. In an increasingly stratified economy, GDP seems to have less and less to do with the conditions of people's actual lives.

I see I'm nearing the limits of my daily word count, and of my patience -- and perhaps of yours. So now that I've trashed the prevailing economic indicators, what do we at Northwest Environment Watch propose? Stay tuned.

*Clark Williams-Derry is research director at Northwest Environment Watch, a nonprofit research and communication center that promotes sustainability in the Pacific Northwest. *