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What should rule the world after GDP?

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[amazon_link id=”0691166528″ target=”_blank” ]The Little Big Number: how GDP came to rule the world and what to do about it[/amazon_link] by Dirk Philipsen is out next month. As a GDP-afficionado, I was eager to read it and found it an enjoyable read and generally thought-provoking, although not agreeing with the author on all points.

[amazon_image id=”0691166528″ link=”true” target=”_blank” size=”medium” ]The Little Big Number: How GDP Came to Rule the World and What to Do about It[/amazon_image]

My main disagreement was more about tone and exaggeration in what is a rather emotional book. There are for example assertions like: “It is safe to say our ancestors, for some 200,000 years prior to the agricultural revolution, engaged in labour only to the very extent to which it helped them survive.” Really? No cave paintings, ancient jewellry, religion? Was Stonehenge essential for survival? Or, because of our “fixation with the accumulation of things”, trying to capture the reality of late 18th century life “by saying that people were poor would represent a fundamental misread.” So were they not less well-nourished than us with more illnesses and shorter lives and many children dying in infancy? Did women (and even men) not spend hours in domestic drudgery? I don’t hesitate to call people in the 18th century poor on this basis; it’s nothing to do with a passion for accumulating cars or handbags. I don’t want more than one washing machine but wouldn’t be without the one – just like Hans Rosling’s mother.

Many readers will like the polemical tone of [amazon_link id=”B00V943S3W” target=”_blank” ]The Little Big Number[/amazon_link]; it’s obvious I didn’t. Apart from that, this is an interesting book looking at the history of GDP, its inadequacies as a measure of social welfare, and the environmental consequences of seeking continuing economic growth. It covers some of the same ground as my own [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link], with additional detail. The book identifies the turn to growth rather than levels of national income as a policy aim in the 1950s. Philipsen attributes this to American optimism as the victor in World War 2. I wonder if it isn’t more related to the dawning Cold War, and the need to demonstrate over and over again that the American system was superior to the Soviet one? Geoff Tily (pdf) pinpoints an OECD document of 1961 as the first official reference to targetting growth, so quite a while after the end of the Second World War. (And as ever for anyone who hasn’t read it, I highly recommend Francis Spufford’s [amazon_link id=”0571225241″ target=”_blank” ]Red Plenty.[/amazon_link])

The Soviet bloc used Net Material Product as their definition of ‘the economy’. The statistics were highly suspect, even those calculated as a best effort by the CIA; it wasn’t really until the mid-1980s, with glasnost, that the true, sustained weakness of growth in the planned economies became evident. There is a nice anecdote in the book: “Once Soviet archives opened to historical research in the years after 1991, we learned that American GDP figures of the Soviet national economy had been far more accurate than estimates provided by the Soviet Union’s own economic planners, who found it near-impossible to come up with reliable data for their centralized planned economy. What did Soviet planners do? They spied on American economists calculating Soviet GDP, and then incorporated what they learned from their American colleagues into their own planning.” Of course, the Americans were spying on the Soviets to get the basic data. Who knows what the figures meant? But the queues and shortages and poor quality of goods were all real.

The second half of the book looks at the ‘Beyond GDP’ debate, although oddly asserting that nobody paid much attention to the issues between Robert Kennedy’s assassination and Congressional hearings in 2001. This is a little US-centric; the global environmental movement kept the candle burning for alternatives all through that period. Philipsen concurs with the kinds of indicator like the Global Progress Index that show progress coming to a complete halt in the 1970s. This always seems absurd to me: even if that was a real turning point in terms of costs to the environment, which gets a heavy weight in the alternative index, there has been a lot of welfare-enhancing innovation and straightforward growth since the 1970s. It’s not just the invention of tamoxifen or the internet, but the fact that more westerners live in houses with phones, indoor toilets and central heating. Sure, there’s a trade-off with the environment but is that really no progress? Nor is Philipsen interested in the issues about defining either market output or social welfare for the growing category of digital goods that are often free and have strong public good characteristics.

As for what to do about it, the book advocates ditching GDP completely, and having a national dialogue about economic goals based on the principles of sustainability, equity, democratic accountability and economic viability. It isn’t clear how this prescription fits with the several ‘dashboard’ initiatives under way now, which are described here. The dashboard approach is attractive, as is public consultation. However, it isn’t yet clear which dashboard is best or what should go in it – it’s easy to end up with a laundry list of good things, and no analytical framework for assessing outcomes or trade-offs. So the real need now is for the hard grind of the kind that Kuznets, Stone and Meade and their many colleagues sustained through the 1930s and 40s in creating the national accounts to make a GDP-plus set of social accounts practical.

I still think dropping GDP altogether would be a mistake – hence ‘affectionate’. How would a government run fiscal policy or a central bank monetary policy without a nominal GDP figure and some of the national accounts detail? The national accounts statistics as a whole also contain a lot of the material that could furnish a meaningful dashboard, so again it would be a waste of an intellectual asset to ditch all of that.

However, the answer to the underlying question, are we going to move ‘beyond GDP’ is: yes.

Lies, damned lies, statistics, and GDP

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On the train to Manchester this morning I finished a terrific book I should really have read long ago. I’m very glad I finally have. It’s Morten Jerven’s [amazon_link id=”080147860X” target=”_blank” ]Poor Numbers: how we are misled by African development statistics and what to do about it.[/amazon_link] The title made me think it was only relevant to African statistics, when in fact anybody interested in GDP and national accounts should read it.

[amazon_image id=”080147860X” link=”true” target=”_blank” size=”medium” ]Poor Numbers: How We are Misled by African Development Statistics and What to Do About it (Cornell Studies in Political Economy)[/amazon_image]

The book is short and non-technical, but includes a number of important arguments and examples. Here are the conclusions I take from it:

1. Statistics are the ‘facts’ “states collect to get knowledge about their own economic or social conditions.” Having reliable statistics is a marker of an effective state – “the ability to collect information and taxes are closely related” – and the statistics chosen reflect the power structures and political priorities of states. African states are not effective, their statistics are not reliable. (But this also made me reflect that there is a lot happening in the developed economies for which we have no statistics – and no ability of the state to understand or influence change.)

2. African GDP statistics in the key online databases used by economists – the World Bank, the Penn World Tables, the Maddison database – are inconsistent because of different interpretations of the underlyaing national data, different base years, different price indices. The sources even rank African countries differently in terms of GDP per capita. Econometric work will get different results depending which is used.” Jerven argues that economists need to have a much more detailed understanding of both the data they download and the specifics of individual countries’ circumstances to be able to interpret the numbers.

3. The underlying national level data are unreliable because of a lack of resources and statistical capacity. Surveys are rarely carried out, there is much guesswork, base year changes happen too infrequently, there is political influence.

4. 2 and 3 together mean little reliance can be placed on the standard cross-country regressions using the standard data sets. “These problems undermine any general conclusions drawn about what stimulates or hinders economic development in Africa.’

5. The standard national accounts concepts don’t apply well to developing economies with a large informal sector. The distinction between production and consumption or working and not-working is not as clear. (And may be becoming less clear in developed economies too, as technology blurs these boundaries and working patterns change.)

The book argues that the standard outline of African growth – a dismal 1970s, a better outcome post- structural adjustment remedies, and a recent acceleration in growth is largely ‘illusory’. The recent uplift in particular comes from the World Bank/IMF splicing recent rebased GDP figures onto an earlier series, as Jerven describes it. He argues that more data needs to be collected, in regular surveys, to enable both good statistics and an effective state knowing what is happening in the economy and to its tax base. He also argues strongly for greater transparency by national statistical offices but especially by the international agencies such as the World Bank and IMF, whose say-so determines the methods used to create the statistics and the world’s interpretation of what is happening in each economy.

“Accounting for the national economy is fundamental for government accountability. Without reliable macro data, political transparency is hard to imagine. …. Numbers are too important to be ignored and the problems surrounding the production and dissemination of numbers too serious to be dismissed.”

So don’t make my initial mistake of thinking this is a bit of a specialist book. It’s a fascinating and important read.

Ephemeral value and everlasting rubbish

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It’s been quite a week and as a reward I read a book I picked up a while ago, [amazon_link id=”0954221745″ target=”_blank” ]Findings[/amazon_link] by the poet Kathleen Jamie – another in the revived genre of nature writing, I suppose, along with books like [amazon_link id=”0099575450″ target=”_blank” ]H is for Hawk[/amazon_link] and [amazon_link id=”0701176016″ target=”_blank” ]Nature Cure.[/amazon_link] Not surprisingly for a poet, this book evokes amazingly sharply the places and times she visits – mainly the Scottish Highlands and islands, but Edinburgh too, and the way they feel in specific lights and weathers. I really enjoyed the book.

[amazon_image id=”0954221745″ link=”true” target=”_blank” size=”medium” ]Findings[/amazon_image]

One passage set me thinking about value. On a remote island she wanders the beach looking at the washed up debris: “The islands are a 21st century midden of aerosols and plastic bottles, and I was thinking of what we’d valued enough to keep.” The party had collected a quartz pebble worn by the sea into an orb, a bleached whalebone. The things nobody valued, the plastic rubbish, thrown away and never gathered by beachcombers are, alas, indestructible.

There is a book whose title I’ve forgotten about a lost cargo of yellow plastic ducks carried half way around the world by ocean currents when their container fell overboard. There’s plenty of plastic in my life but I’m becoming increasingly disturbed by it. And why is it so cheap? Never mind a carbon tax, how about a plastic tax?

Aggregating is not adding up

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I’m browsing through Alfred Marshall’s [amazon_link id=”1932512136″ target=”_blank” ]Elements of the Economics of Industry[/amazon_link]. He wrote that earlier economists:

“Paid almost exclusive attention to the motives of individual action, But it must not be forgotten that economists, like all other students of social science, are concerned with individuals chiefly as members of the social organism. As a cathedral is something more than the stones of which it is built, as a person is more than a series of thoughts and feelings, so the life of society is something more than the sum of the lives of its individual members. It is true that the action of the whole is made up of that of its constituent parts; and that in most economic problems the best starting point is to be found in the motives that affect the individual….. but it is also true that economics has a great and increasing concern in motives connected with the collective ownership of property and the collective pursuit of important aims.”

And still increasing, given the public good characteristics of digital goods. The problem of aggregation seems to me an important one, rarely discussed, and exactly where the rational expectations revolution and real business cycle theory went wrong. It isn’t only a question of heterogeneity. There’s the fundamental question raised here by Marshall, that you don’t simply add up individual preferences or outcomes to get aggregate versions.

[amazon_image id=”B00882NQLM” link=”true” target=”_blank” size=”medium” ]The Economics of Industry: By Alfred Marshall and Mary Paley Marshall (Classic Reprint)[/amazon_image]

Debt, no brainers and no-nos

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Yesterday I attended the launch of a new CEPR (free) e-book, A New Start for the Eurozone: Dealing with Debt. Written by some of Europe’s most distinguished macroeconomists, it notes that a return to sustainability requires a reduction in the legacy debt burden. It proposes using the seigniorage revenues from the Euro to finance a one-time debt buyback for the most indebted Eurozone countries, reducing their debt-GDP ratios to a sustainable level. This would be combined with a stronger regulatory structure to prevent future debt build-ups (and mitigate the unavoidable moral hazard involved in the first step), and the creation of a safe asset, a synthetic European bond.

A New Start for the EurozoneThis is very far from my area of expertise, so it sounds a promising package of measures but I’m not in a good position to evaluate its details. Among the audience at the launch, the questions centred almost entirely on political economy questions: how could European governments be persuaded to do anything now the markets are calm? how would the new measures sit within the existing institutional framework? could northern Europe (Germany) be persuaded to allow the seigniorage revenues to be used in this way?

In short, an economic no-brainer – that the debt legacy has to be tackled – is a political no-no. The fact that the economic hurdles are huge but the barriers to reform are political was brought home by Gillian Tett’s Financial Times column this morning. She writes: “On the eastern side of the Atlantic, policy makers are now at pains to suggest that a Greek default, or even a eurozone exit, would not be disastrous; at last week’s International Monetary Fund meetings German officials argued that the chance of a Greek exit had already been priced into the markets, and that shocks could be contained.”

She argues – and I agree – that the Eurozone could yet go very pear shaped, and the dangers of renewed systemic financial crisis are non-zero. At least if the pessimistic view is correct, the political economy of reform along the CEPR or other lines will become more favourable.