Mar 19, 2019

The global push to reinvent GDP

Illustration: Aïda Amer/Axios

When GDP became the dominant measure of economies in the 1940s, the internet was still a half-century out. Today, the internet drives a major chunk of economic activity, but GDP misses much of it. This has widened the gap between the closely watched metric and actual economic health.

Driving the news: Economists are working on alternative measures that they say will more correctly gauge national prosperity, accounting for relatively new industries, plus intangibles like income inequality and clean air and water. But the pace of technological advances may be enlarging the gap even as they work to close it.

Why it matters: The problem with GDP is not merely academic. For instance, reliance on the economic benchmark deserves part of the blame for the 2008 financial crisis, according to a 2009 report from a commission led by Nobel laureate Joseph Stiglitz.

  • If economists had been watching other metrics, too, like indebtedness, they would have had an earlier warning of trouble ahead, the commission wrote.

Among the proposed alternatives:

  • In the early 1990s, a "green GDP," developed at the U.S. Bureau of Economic Analysis, suggested that the mining sector's positive impact on the economy was being overstated. A congressman from the coal mining state of West Virginia led the successful drive to squash this attempt, its former director told NPR in 2004.
  • In 2016, a measure of contentment, akin to Bhutan's "gross national happiness" score, was boosted by USC economist Richard Easterlin.
  • In 2018, an "extended GDP," suggested by University of Maryland's Charles Hulten and Leonard Nakamura of the Philadelphia Fed, would have captured more spending on the internet.

The latest proposal comes from a group of economists including MIT's Erik Brynjolfsson. In a forthcoming working paper, they propose a measure called GDP-B, adding in the benefits of free digital goods and new technology.

They estimate that hidden benefits from Facebook alone have added 0.05–0.11 percentage points to GDP every year since its 2004 launch. That would have totaled 1.54 percentage points from 2003 to 2017 — a result "too large to be ignored," according to Hulten, who was not involved in this research.

  • How it works: The economists ran experiments in which they offered people varying sums of money to stay off of Facebook for a month, then extrapolated its total value based on the average amount people accepted. This is the willingness to pay test, a method for determining the hidden value of something that’s free.
  • Right now, when an old-school product gives way to a digital substitute, only half of the trade-off shows up in GDP, says Avinash Collis, an MIT researcher who co-authored the GDP-B paper. The decline of landlines is captured, for example, but the rise of its replacement — social media and free messaging apps — is not.

What's next: GDP has solidly hung on despite its critics, but Hulten, who advises the Bureau of Economic Analysis, says the body is now again considering alternatives. "Agencies are very aware of the need to change," he says, but are burdened with a busy schedule — plus many decades of inertia.

But, but, but: Some economists are skeptical of the degree of angst over GDP.

  • Free goods aren't totally unmeasured by GDP, says Laurence Ales, a Carnegie Mellon economist. When Facebook pays salaries, makes a profit, or sells ad placements, all that money is accounted for, he says.

Go deeper: The trouble with GDP (The Economist)

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