14 Sep 2010

GDP: are economists too obsessed with the figures?

A report published by the Office for National Statistics shows even the number crunchers are at whether there is too much focus on Gross Domestic Product (GDP) figures, writes Neil Macdonald.

Economists focus on the economic output of Canary Wharf, but now questions are raised about the usefulness of GDP (Getty)

Here is the problem with relying on national output figures as a measure of our happiness.

Imagine hiring a firm of demolition experts to blow up a building. This increases the Gross Domestic Product of the country. Then imagine you hire a construction firm to come and put the building back up again – perhaps you require them to put it back together exactly as it was prior to the activities of the demolition experts.

This also increases the Gross Domestic Product of the country. Most of us would feel instinctively that this makes no sense whatsoever. This may be economic activity but it is also completely pointless.

But paradoxes about GDP figures abound. Building thousands of tanks would increase it even if we never used them (or indeed used them to invade another country).

More parents deciding to work part time to spend more time with the children would decrease our GDP even if it meant our children had better upbringings.

Sitting in a traffic jam burning petrol will increase our GDP. Turning off the lights when you do not need them will reduce our GDP.

Of course the media likes GDP figures because it is something to tangible to report on, but environmentalists have been leading the attack for years, pointing out that consuming more of the world’s resources may boost growth now but will not be sustainable in the long run.

You would imagine that the people at the Office for National Statistics (ONS) would be the staunchest defenders of GDP. But today, the ONS joined the critics in a report entitled: “There’s more to life than GDP but how can we measure it?”.

On the face of it, economic output has nearly doubled with precisely zero impact on our life satisfaction levels.

So why bother pursuing economic growth?

Signs of new thinking at the ONS run counter to the long-running obsession of politicians with economic growth.

A quarterly rise in the GDP figures is the ultimate stamp of economic success. Gordon Brown as Chancellor proudly announced that under his stewardship, Britain had enjoyed the longest period of unbroken growth for more than 100 years.

Just for good measure, Mr Brown then had Treasury boffins look more carefully at the numbers and concluded he had actually delivered the longest period of unbroken growth for 200 years.

Quarterly growth in GDP was taken as the judge and jury of Mr Brown’s stewardship of the economy. Of course, that record was broken spectacularly by the worst recession in British post war history.

But even ignoring the credit crunch, why should we treat an uptick in GDP as being of much interest to anyone?

There is an extraordinary chart in today’s ONS report. It shows just two lines.

First, we can see GDP per head in Britain, growing fairly constantly over the last three decades. It then shows the number of people who say they are satisfied with their lives. This number has barely budged over the same time period.

On the face of it, economic output has nearly doubled with precisely zero impact on our life satisfaction levels.

So why bother pursuing economic growth?

Britain is not alone in starting to question the tyranny of the GDP number. Last year, President Sarkozy asked a Commission to look into alternative ways of measuring economic progress, chaired by a leading American economist, Joe Stiglitz. You can read the whole thing here.

It concluded it was time to think less about measuring production and more about measuring well-being.

The Stiglitz report has had a big influence on today’s article by the ONS, so does this mean that in future Channel 4 News will be reporting on “a 0.3 per cent increase in societal well-being” rather than Gross Domestic Product? Not quite.

The ONS does not plan to replace economic growth figures. But it is thinking about whether it should start to ask us all about how we feel about our lives as well as counting up the cars we build or the clothes we buy.

That in the end may prove one reason why politicians continue to focus on GDP rather than “societal well-being”. They probably think they can just about deliver on higher economic growth.

Promising to make us all feel better about ourselves is surely a recipe for failure.