Global statistical dislocation: the multiplication of tools for measuring economic reality

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Within the global systemic crisis that we are now experiencing, our experts have been talking for some years about “statistical fog” to qualify the inability of today’s tools to measure real economy, or even the way to manipulate them in order to match results to the political speech (or vice versa). Leaving aside the temptation to manipulate, this “statistical fog” also derives from the fact that the economy is evolving profoundly, and yesterday’s indicators (GDP, unemployment, etc.) are no longer relevant in today’s world. After a few vain attempts to transform these old time indicators, we are able to see new initiatives which we anticipate to be sustainable this time, and which in the short term will form some confusion before harmonizing themselves by 2025, pushed by international bodies such as the G20.

Limitations of the two flagship indicators

The debates or proposals made within electoral campaigns show this sufficiently: only the GDP growth rate on the one hand and the unemployment rate on the other seem to count. This is hardly surprising in a system where work, as well as the increase in “wealth”, are both central. These two indicators have guided politicians for many decades and in many ways with quite satisfactory results. Nevertheless, if every growth point is more and more difficult to reach and the unemployment rate constantly stays so high, it is with a reason. Society is radically changing and these two indicators, which do not reflect those evolutions, are becoming obsolete. We shall see that their limitations have several causes: statistical on the one hand, political or ideological on the other, but above all and more fundamentally, those indicators do not originally measure the harmonious development of societies[1]

They are so emblematic that they are obviously subject to intense political pressure and are constantly the subject of international comparisons. And here the first problems arise. How to compare economies using different currencies, the exchange rates of which are extremely volatile[2]? We have already seen the perverse effects linked to the use of a single standard, the dollar: here we have a new illustration of that. Thus, the United States is by far the largest country for its nominal GDP expressed in dollar terms, while being behind China in purchasing power parity (PPP).

fig geab112 1Fig. 1 – The countries GDP on a PPP Basis, 2014. Source: The Conversation.

Another example is how to objectively compare GDP growth in the United States, with a population growth of 0.7% per year[3], with that of the euro zone, where the population grows by only 0.3% per year[4]? Or why compare per capita incomes between countries where essential services such as education or health are costly, and those where they are free?

With regard to the unemployment rate, comparisons are even more difficult because the calculation methods between countries differ considerably. We regularly quote the ShadowStats site for its alternative calculation of the US unemployment rate, most certainly more faithful to the “reality” (at least that’s what the majority of Americans feel): it gives a singularly different image of the US labour market…

fig geab112 2Fig. 2 – The unemployment rate in the US. Red: official / Grey: U6 / Blue: ShadowStats.
Source: ShadowStats.

In the case of the unemployment rate, statistics do not measure what they purport to measure (or rather what is commonly meant by “unemployment”) and are, therefore, pretty misleading. The same goes for the GDP, which is only a poor reflection of the “wealth” of a nation. This is all the more damaging when they serve as a guide for economic policies, such as wage moderation in Germany to the detriment of its European partners, or the Irish tax dumping to attract multinationals.

The world before versus the world after

Those shortcomings would do little harm if the problem did not come from the very significance of the indicators. Some wonder whether the GDP can survive the technological change[1] (how to measure an economy where €10 can buy a CD but also a one month unlimited musical streaming?). The problem goes even deeper, although it is partly linked to the emergence of the internet:

– the explosion of online services maintains structural deflation, by making it possible now to make for free, or at a ridiculous price, what previously required one to call a professional;

– the explosion of the market for second-hand goods and services between individuals, unaccounted for and difficult to account for in calculating the GDP, is subtracting a part of economic activity from official measurements;

– slow ecological awareness lead people to be shocked that an oil spill in the Gulf of Mexico has a positive impact on GDP[2], or that the threat of less growth enable governments to avoid tackling environment problems; or more simply that the destruction of non-renewable resources is encouraged when looking to maximise the GDP;

– new forms of activity such as collaborative economics or voluntary activities of all kinds are largely outside those statistical tools;

– inequalities[3], ignored in GDP calculations (or even, from a certain threshold, amplified if the only short-term goal is to increase the GDP[4]), weigh on the cohesion of societies, and so on.

To summarise, the problem about GDPs is that they measure only a part of the societies’ economic activity (a phenomenon amplified by the present paradigm shift), whilst also ignoring negative externalities; the GDP was actually designed for a very specific use, whilst nowadays being used incorrectly[5].

fig3Fig. 3 – Size of successive frequent revisions of annual GDP growth in the US, 2010-2016. Source: Bloomberg.

Furthermore, in a world where only very few jobs are not threatened in the medium term by automation, artificial intelligence and robotisation, and where the lack of labour (in its current form) is constantly increasing, where unemployment is changing, where we speak more and more of universal income, … the unemployment rate is also beginning to suffer from the same evils, just like the GDP does: it is an indicator of the world before, which is less and less adapted to the new realities. To summarise this roughly, the more efficient a modern society is, the less it needs people to work for it, and this is one of the reasons why the unemployment rate is no longer an appropriate indicator.

There is a certain urgency to thoroughly revise these indicators, or simply change them, in order to guide those policies consequently serving man and the future.

Initiatives which are less and less vain

Many leaders seem to have ultimately understood that GDP is too cumbersome and inappropriate, so there is a need for it to be replaced by another indicator that reflects the current reality much better. Nevertheless, it is not easy to change what has been used universally for decades: until recently, all initiatives in this direction have proved unsuccessful or only local based. One of the most publicised was the one made by Nicolas Sarkozy in 2009 (French president at that time) who, at the first shock of the global systemic crisis, asked a panel of famous economists to find an alternative to the GDP[6]. In 2007, the European Parliament[7], and the OECD, had also launched reflections to improve that lame indicator, and a little later, so did the United States[8], and so on. None of the latter initiatives seems to have succeeded by the way. Yet, the situation is changing.

Since 2002, Australia has published a series of complementary indicators; The United Kingdom followed in 2011 and Belgium in 2014[9]. For four years now, the Italian Statistical Institute has published many such indicators to guide national policies[10].

fig4Fig. 4 – Synthesis of the 9 Italian indicators calculated on a three year basis (basis 100 in 2010, then 2013 and 2015/2016). Source: ISTAT.

More recently, we have seen the Republic of Ireland decide to modify its statistical measurements[11] because the GDP calculation is regularly grossly distorted by the huge activity of those multinationals which have their headquarters there.

China has been trying for some time on more comprehensive indicators than GDP to measure the “power” of a country. Thus it created the Comprehensive National Power (CNP) which combines economic, military, demographic, cultural, diplomatic powers, etc., and is more representative than the GDP alone, at least it shows less obvious limitations[12].

fig5Fig. 5 – The CNP of various countries calculated by CASS (China). Source: Wikipedia.

Another interesting and promising alternative measure encompassing, besides economic criteria, environmental and social considerations, appeared under the name genuine progress indicator (GPI) used now in Canada, and which the European Union also closely follows; even several states in the USA adopted it, such as Vermont, Maryland, Washington and Hawaii[13].

fig6Fig. 6 – Real GDP and GPI per capita at global scale, 1950-2004. Source: Boston university.

It is impossible to be exhaustive on this topic, of course, but the trend is clear: we are witnessing the emergence of a large number of alternatives to the GDP, aiming to better measure the “development” of societies.

Slowly towards global standardisation 

One question occurs: will these more modern indicators replace the GDP? Good and bad reasons are going to help the transition, most probably. The ecological impasse that the world is becoming aware of will encourage China and Europe, at least, to adopt faithful measures of environmental problems. On the other hand, the isolation of large regions such as the United States will encourage leaders to better measure what is happening in their countries, whilst ignoring international standards, or even taking advantage of the ability to blur the cards, so that we cannot closely follow the potentially negative developments of these countries; they will also obviously choose the right tool which makes it possible to highlight the strengths of the national economy. Take the example of the Republic of Ireland which, unwittingly, has shown the way by changing the GDP calculation to suit its particular situation.

Initially, the proliferation of uncoordinated and inconsistent initiatives will continue; but the fact that major international institutions (such as the OECD) are very interested in this issue, that China, the EU and the United States are beginning to give a thought to these alternative measures, that Gabriela Ramos, Cabinet Director and sherpa of the OECD to the G20, has for instance written an insight note in favour of these new measures, that the post-crisis world needs a unified framework to measure its development… all that leads us anticipate that these disparate initiatives will, in the coming decade, be gradually standardised, probably under the impetus of the G20 or a similar international political body, to give rise to new post-GDP tools for assessing the harmonious development of the world.

It is rather difficult to foresee the form that these new tools will take, but several common features can be identified from the initiatives we have just seen, such as taking into account the environment, and especially the human being (it would be high time, wouldn’t it?). Indeed, to be credible, these indicators will have to place the human being, not the economy, at the centre of their concerns: education level, access to health, housing sanity, social mobility… all of which are totally absent from the current GDP will finally take the place they deserve. The Internet, no doubt, is also a tool capable of aggregating simple and relevant indicators of the individuals’ quality of life, of all individuals for that matter.

We estimate that by 2025, the world will be endowed with new instruments for observing reality and finally accompany the 21st century paradigm that the global systemic crisis will have helped to put in place. To anticipate the coming world, we need to start observing and studying these new indicators which reflect “reality” better and will furthermore guide national and international policies.

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Notes:

[1]    We cannot resist the temptation to share with you this well-known GDP quotation of Robert Kennedy, made in 1968 : « it measures everything, in short, except that which makes life worthwhile ».
[2]     For your information, the US dollar was worth 0,62 euro at the end of 2008, and is worth 0,94 now… meaning a 50% variation!
[3]     Source: Wikipedia
[4]     Source: Trading Economics
[5]     Source: Bloomberg, 21/08/2016
[6]     « JPMorgan Chase calculated that oil spill clean-up efforts actually boosted the economy in 2012 ». Source: The Balance, 09/11/2016
[7]     The times are definitely not comparable, but 160 years ago, Victor Hugo was denouncing the work of children in similar terms : « Travail mauvais qui prend l’âge tendre en sa serre, / Qui produit la richesse en créant la misère » (« Melancholia », Les Contemplations, Victor Hugo, 1856).
[8]     « As GDP increases, overall quality of life often increases up to a point. Beyond this point, increases in GDP are offset by the costs associated with increasing income inequality, loss of leisure time, and natural capital depletion ». Source: OECD, 2009.
[9]     For a good synthesis, read the following report: Beyond GDP: The Need for New Measures of Progress, Boston University, 2009 (the website of the OECD).
[10]     Source: New York Times, 15/09/2009
[11]     See the initiative Beyond GDP.
[12]     Source: WRI, 14/04/2010
[13]     Source: IDDRI, 24/12/2014
[14]    Source: ISTAT, 13/12/2016
[15]    Source: Irish Examiner, 04/02/2017
[16]    Read on this topic for instance China’s Comprehensive National Power and Its Implications for the Rise of China: Reassessment and Challenges, Naresuan University, 2016.
[17]    Source: Wikipedia