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Review: Dismal Statistics

February 05, 2018

Is Gross Domestic Product—the preferred measure of growth for most economists—still useful for gauging the health of economies? Diane Coyle reviews ‘The Growth Delusion’ by David Pilling.

Is Gross Domestic Product, GDP, history? Judging by the torrent of recent books proclaiming the end of its usefulness, such as Ehsan Masood’s “The Great Invention” (2016) and Eli Cook’s “The Pricing of Progress” (2017), its days are surely numbered. Like most other offerings in this genre, David Pilling’s “The Growth Delusion” celebrates the predicted demise of our headline measure of how well the economy is doing—and along with it the end of Western capitalism’s obsession with “endless” production and consumption. Unlike most of the others, he has some constructive suggestions for replacement measures of economic success, and these are not as naive as the book’s swipes at economics and statistics might lead the reader to expect.

Review: Dismal Statistics

PHOTO: VISUAL CHINA GROUP VIA GETTY IMAGES

By 

Diane Coyle

Feb. 4, 2018 3:40 p.m. ET

Is Gross Domestic Product, GDP, history? Judging by the torrent of recent books proclaiming the end of its usefulness, such as Ehsan Masood’s “The Great Invention” (2016) and Eli Cook’s “The Pricing of Progress” (2017), its days are surely numbered. Like most other offerings in this genre, David Pilling’s “The Growth Delusion” celebrates the predicted demise of our headline measure of how well the economy is doing—and along with it the end of Western capitalism’s obsession with “endless” production and consumption. Unlike most of the others, he has some constructive suggestions for replacement measures of economic success, and these are not as naive as the book’s swipes at economics and statistics might lead the reader to expect.

The statistical construct of GDP has been the subject of important critiques since its invention, not least by economists and statisticians. GDP, and the framework of national accounts, grew out of the 20th-century imperatives of the Depression and world war, when for the first time governments needed to track the capacity of the economy in the aggregate.

Our contemporary policy focus on GDP growth (rather than the level), meanwhile, is an artifact of the Cold War: President Kennedy first set growth targets in response to aggressive boasting about Soviet growth by Nikita Khrushchev.

From the start, prominent critics underlined the failure of GDP to account for the environmental costs of economic growth, a theme struck most forcefully in the 1972 Club of Rome report “The Limits to Growth.” Less prominently, although no less accurately, feminist scholars highlighted GDP’s failure to account for economic value created in the home—which meant that post-1950s GDP and productivity growth statistics were flattered by the new tendency of women to take paid work and purchase items such as microwaves and ready meals.

These familiar criticisms are well made by Mr. Pilling, although it is always irritating to read that economists have ignored them. The people who work with GDP data know, far better than most, how much uncertainty arises from compiling the statistics, seasonally adjusting them and comparing them over time or across countries.

Review: Dismal Statistics

PHOTO: WSJ

THE GROWTH DELUSION

By David Pilling 
Duggan, 291 pages, $26

The most intriguing parts of “The Growth Delusion” stem from the author’s experiences in Asia as a reporter for the Financial Times. When it turns to China, the book raises the issue of the environmental price that the country is paying for its astonishing increase in GDP. Mr. Pilling describes the cultural effect of a hit TV series, “In the Name of the People,” in which the local party chief is obsessed about the GDP figures: The show, he suggests, reinforces the popular demand for growth at all costs. Mr. Pilling also interviews the Chinese creator of a measure called “green GDP,” Niu Wenyuan of the Chinese Academy of Sciences, about the failure to get the measure officially adopted.

Writing about Japan, Mr. Pilling raises questions about the boost to GDP growth created by Prime Minister Shinzo Abe’s drive to get women into paid employment, asking whether merely shifting the economic value of production in the home into the marketplace actually creates true economic welfare. He also argues that, although measured productivity in Japan’s retail services is low, the quality of those services far exceeds that of comparable experiences in the United States or the United Kingdom.

Despite the book’s title, this chapter does not quite get to the more interesting question of why stagnant GDP in Japan matters. Is economic welfare better served by a high level of output and consumption or is it necessary for it to grow?

In other words: Why does momentum matter? Portugal and Greece have similar levels of GDP per capita now, but after 2007 Greece had a massive boom and then a bust. Greeks have had the extra interim output, but it is not obvious they have had the better experience. The point about Japan is similar: At its level of prosperity, does it need more growth? Is it terrible to be a rich, contented, safe country, where people have long life expectancy, a magnificent culture and high quality services, simply because the chosen measure of total economic output is static?

The answer lies in the fact that GDP—or any alternative aggregate measure—aims to encapsulate the constant innovation and betterment of life driven by competition in market economies. No single number will do it perfectly. Indeed, a new critique of GDP recently has joined the old ones—namely that it fails to capture the role of new technology in our increasingly digital economies. The concept of GDP, an aggregate measure of output at market prices, does not account for all the value of innovations. Yet over time an increase in GDP is the result of innovation, and so to argue against growth is to argue for an end to innovation. Those who think growth is “delusional” need to explain what they think should be taken away from people when a new product or service they want comes along, to prevent GDP from growing.

It is not obvious what sort of measure will dethrone GDP from its top statistical billing, but to me it seems clear that criticism of the measure, and the way it is used, is reaching a pitch that will prompt change. A new measurement framework will emerge from this generation’s experience. Mr. Pilling’s lively canter through what’s wrong with GDP hardly demonstrates that growth is a “delusion” because of how it is measured. But he ends with some sensible suggestions for alternatives: report GDP per capita, track median income in order to keep track of the distribution of gains, and have a sense not just of income flow but of the national balance sheet, including natural assets. These modest proposals are far from a statistical revolution, but they might have significantly changed the story we told ourselves about the economy in the 21st century so far.