False Readings

How the Gross Domestic Product leads us astray

It is 7:30 a.m. in washington and a bevy of reporters files into the Department of Commerce, which is kitty-corner from the Treasury. They take their seats, and the door is locked behind them. For the next hour, no one can go in or out. An official from the Bureau of Economic Analysis distributes the latest GDP estimates—that’s Gross Domestic Product—and answers questions. Then the reporters get an hour to file their stories.

This monthly event is called the lock-up, and in most times it is a metronome in the cycle of Washington economic news. The GDP is essentially a tally of the money that Americans spend over a given period. In a commercial culture, such transactions are alpha and omega, and the GDP updates are like utterances from the oracle. Amid the market turmoil that besets the country as I write, the GDP will loom as a harbinger of good times or bad.

The resulting stories have a strange combination of opacity and authority, a journalistic equivalent of the Latin mass. The specifics vary, but the script remains pretty much the same. There are upticks and downturns. Growth is robust or anemic, exceeds expectations or disappoints them. That is the story, in its Mr. Potato Head variations, along with portentous comment from those ubiquitous Wall Street analysts whose institutional interest in spinning the numbers somehow goes without mention.

Critics have noted how adjustments to the GDP over the years have tended to make the figure more propitious. But my concern here is more basic. Beneath the fixation upon GDP is a single assumption: an increase in spending will be cause for celebration. “Sluggish” growth, by contrast, will provoke alarums and demands for policy purgatives and stimulants to get things moving again. This is the master narrative, and it makes no difference what the “growth” consists of, or who gets what portion of it, or the effects. Reporters embrace an abstraction as economic reality. Product—as in gross domestic—becomes a theological concept, a metaphysical absolute, rather than a statistical lump that has to be broken down into specifics before anyone can say what is going on.

Thus the news accounts on May 1 of this year of the Commerce Department release the previous day. The economy “continued to stagnate,” The New York Times reported. Consumer spending was up just 1 percent over the previous quarter, and in the prevailing script, this must mean that life is getting worse.

But wait—what is this? On another page of the same edition, the Times reported that American mothers are breastfeeding more and using formula less. This is good news for babies. By most accounts, mom is the best source of sustenance, emotionally as well as physically. Yet there is a problem. Americans spend somewhere between two and three billion dollars a year on infant formula. To the economic mind—the one embedded in the GDP—a drop in sales for formula makers could mean “the economy” is in decline. mothers’ milk threatens economy—newspapers wouldn’t run such a headline. But it’s implicit in their take on “growth.”

The disconnect between “the economy” of statistical abstraction and the one that people actually live in is a recurring if unrecognized theme. On the front page of the Times that same day, alongside the GDP story, was another on how Latino immigrants in the U.S. were remitting less money to their families back home. The money not sent will boost spending here, but that just means more poverty in Mexico. The Times ran another story that day on how Asian Americans were buying rice in large quantities, for fear of looming shortages. The quarterly GDP figures will get a boost, but it’s not the cheery prospect that such upticks typically suggest. And so it goes. In recent months there have been reports of Americans growing more food in their gardens, walking more, and burning less gas. All of these send the official economy downward, even as Americans often experience them as gains in well-being.

By the same token, expenditures for credit-card interest, obesity medications, gambling, disaster cleanups, even price gouging and fraud are included in the tally of what the media report as economic advance. Car crashes, cancer, and divorce must be economically auspicious because they cost so much. BusinessWeek reported recently that Americans pay at least $1 billion a year through an illegal medical-billing practice called “balance billing” that makes them pay what insurance companies don’t. If you are among those so gouged, then congratulations. You are helping the economy to “stagnate” a little less.

Suppose the mayor of your city held a press conference tomorrow and announced that “activity” on the city streets was up 5 percent over the previous year. Most reporters probably would have questions. Exactly what was this “activity”? Was it drug dealing and prostitution? Drive-by shootings? Or was it block parties, farmers’ markets, neighborhood watch efforts, and the like? Unless you know what the “activity” is, in concrete terms, you cannot begin to say whether more of it has been good or not. The point seems obvious. Yet somehow, the subject of the economy casts a spell over the reportorial mind. Reporters glom onto the worldview of economists, who want to be esteemed as scientists, and so deal in abstract categories upon which they can hang their math.

This is not an arcane Beltway matter. GDP defines the economic storyline more than any other single thing. When people say that a measure will help “the economy” or hurt it, they mean it will make the GDP go up or down. We hear, for example, that proposals to halt climate change could jeopardize the economy. Does that mean that if people use mass transit more and so spend less on gas to sit in traffic and go nowhere (currently $9 billion a year), it’s bad?

This is where the logic leads. The passive acceptance of the underlying narrative can make reporters and commentators seem out of it. Last June 18, for example, a writer for The Washington Post wondered in print why Americans were so disgruntled. “According to most broad measures of how the economy is doing,” he wrote, “it’s not all that grim.” The story proceeded to quote various economists in an effort to fathom this strange phenomenon—Americans who felt miserable when the economy, by the conventional measures, wasn’t so bad.

Such reporters need to read the papers. The day the Post story appeared, USA Today reported that Kellogg’s and General Mills were reducing the sizes of their cereal packages, so Americans would pay the same prices but get less for their money. Manufacturers of soap, paper towels, ice cream, and other products were doing the same.

The growth narrative is especially misleading in regard to what are called “developing countries” (a phrase that implicitly trucks it in). In such contexts, GDP is mainly just a measure of urbanization. Move from farm to city and you spend more cash for food and the like. Whether that’s “progress” is another matter. Consider my in-laws, who live on the outskirts of Manila. Three of their four children developed asthma a few years ago, probably because of the city’s rancid air. They endured drug treatments for an entire year, which cost a fortune by Philippine standards. That’s GDP. But it doesn’t make them better off than their cousins on the farm who, though they spend less money, don’t have trouble breathing.

There is a story lurking here that goes beyond the environmentalist critique. That version is based on the notion of “externalities”—which is to say, side effects from consumption otherwise assumed to be benign. Increasingly, however, people are dealing with what might be called “internalities” that are part and parcel of the consumption itself. The evidence is in the news daily. Take the San Francisco Chronicle last July 28. One story reports on a new form of protection from identity theft. Another is on efforts of parents to “push back” against their kids’ cell-phone use; a third is on a new kind of power meter that restrains “power hogs”; yet another is an op-ed by a pediatrician who advocates cholesterol drugs_._._._for kids.

All of these concern efforts either to restrain consumption or to remedy the ill effects of consumption already made—not on others but rather upon the consumers themselves. What the master narrative assumes is a happy jaunt up a mountain of more is turning into an iatrogenic spiral, in which spending—i.e. growth—begets problems that beget more spending, ad infinitum.

This would not have been a total surprise to Simon Kuznets, the economist who devised the national accounts that became the GDP. When Kuznets set up shop in the Commerce Department in 1933, he had no intention of developing a barometer of the economy. It was rather a planning tool to help the government cope with the Depression—and later to manage the production surge during World War II. In his report to Congress in 1934, Kuznets explained in detail why, as he put it, the “welfare of a nation can scarcely be inferred from a measurement of national income” such as he had constructed.

Politicians and the media made the inference anyway; and Kuznets, who went on to win a Nobel, watched with concern. Eventually, he came to view the fixation on GDP as fundamentally misguided—which is borderline heresy for an economist. It had become necessary, he said in a private memo, “to deny from the start that, in and of itself, the over-all rate of per capita growth means much” (emphasis his).

The media are not likely to pay heed any time soon. The grooves of the GDP narrative run deep. Reporters would feel adrift without it. But then, it isn’t necessary to abandon the number entirely. The GDP does serve a purpose. Bankers and corporate planners need to know how much expenditure is sloshing around in the economy. The government needs to project tax revenues.

The GDP is a financial story, something for the back of the business section. It just isn’t the gauge of economic performance that the media have made it. The answer is simply to do what reporters are supposed to do, and look at life in the concrete. They need to shed the abstractions of economics—growth, product, consumption, and the rest—with their embedded metaphysic, and look at life with empirical eyes.

If kids are spending more on junk food, and then their parents are spending more on obesity meds as a result, don’t just add the two together and call it “economic recovery,” or “advance” simply because the GDP does. Don’t serve as stenographers for advocates who say measures to combat climate change will “hurt the economy,” if what they mean is expenditures for treating asthma in young children—among other things—will go down. This is on top of the need to look at the distribution of the nation’s wealth, which the GDP ignores as well.

Kuznets saw the challenge. “Goals for ‘more’ growth should specify more growth of what and for what,” he wrote. It’s a good point to keep in mind amid efforts to restore the nation’s economic health. The question isn’t just how much the economy is growing. Equally important is exactly what is growing, and to what effect.

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Jonathan Rowe is a contributing editor to the Washington Monthly and YES! magazine. The Glaser Progress Foundation provided support for this article.