What Really Is the Difference – and For Whom?

A recent article in The Economist questions our reliance on the Gross Domestic Product as an adequate measure of our economy’s over-all health.  According to the GDP, the recession has now been officially over for more than half a year.  But is it really over?  Does one measure help us know how well the economy is really working?  And why that measure?

The crux of the problem, not surprisingly, is jobs:  As the article pointed out, “during the second half of last year the economy still managed to lose more than a million jobs.”  The bad news was disguised by the fact that the rate of the loss declined somewhat, though the total number of jobs lost continued to rise.  Oh?

“One explanation for the divergence of output and employment,” suggests The Economist, “is that firms are now able to wring more productivity out of their workers,” increases of 7.6%, 7.8%, and 6.9% in the last three quarters.  That’s extraordinary, and most likely achieved by squeezing workers to make up for the empty jobs not being filled.  (See, “Slow Going.”)

But there are other measures of economic progress:  “A theoretically equivalent but less commonly-cited indicator is Gross Domestic Income, which adds up wages, profits and taxes . . . and a growing body of research hints that GDI, rather than GDP, should be given more weight in computing an estimate of the economy’s true direction.”

The Economist points out that: “in the third quarter of 2009 (the most recent for which income data are available), GDI continued to contract while GDP notched up the increase that led many economists to announce the end of the recession.”

“The picture painted by GDI throughout the downturn is . . . one more in line with the employment data and with the experience of most Americans.”

So why do we continue to use the measure of GDP almost exclusively?  What psychological sleight of hand is involved here?

Clearly we would all like to believe that the recession is over.  Moreover, the purchase of stock is essentially a bet on future growth, and investor optimism can be a self-fulfilling prophecy.  But it seems clear that the lens of GDP is one that belongs to economists, businessmen, and members of the financial industry.  That’s how they see it.

From that perspective, unemployment is regrettable, but it can be compensated for by getting others to work harder.  Mortgage defaults are a problem, but then Wall Street can find other industries to invest in.

One thing we don’t know we know about our economy is how we are seeing it through selective and distorting lenses.