Home Les bulletins GEAB GEAB 112 Global statistical dislocation: the multiplication of tools for measuring economic reality

GEAB 112

The monthly bulletin of LEAP (European Laboratory of Political Anticipation) - 15 Feb 2017

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

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. 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. 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[5] (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[6], 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[7], ignored in GDP calculations (or even, from a certain threshold, amplified if the only short-term goal is to increase the GDP[8]), 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[9].

Fig. 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[10]. In 2007, the European Parliament[11], and the OECD, had also launched reflections to improve that lame indicator, and a little later, so did the United States[12], and so on. None of the latter initiatives seems to have succeeded by the way. Yet, the situation is changing.

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