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GDP and Beyond

GDP and Beyond

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Published by Paul Smalera
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Published by: Paul Smalera on Aug 30, 2011
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12 April 2010
GDP and Beyond
Measuring Economic Progress and Sustainability
By J. Steven Landefeld, Brent R. Moulton, Joel D. Platt, and Shaunda M. Villones 
T
HE United States provides some of the mosthighly developed sets of gross domestic product(GDP) accounts in the world. These accounts—whichare collectively known as the national income andproduct accounts (NIPAs) or national accounts—havebeen regularly updated over the years and have wellserved researchers, the business community, and poli­cymakers alike. However, since their inception in the1930s, the economy has continuously evolved, and is­sues have been raised about the scope and structure of the national accounts (Bureau of Foreign and Domes­tic Commerce and National Bureau of Economic Re­search 1934). Simon Kuznets (1941), one of the early architects of the accounts, recognized the limitations of focusing on market activities and excluding householdproduction and a broad range of other nonmarket ac­tivities and assets that have productive value or yieldsatisfaction. Further, the need to better understand thesources of economic growth in the postwar era led tothe development (much of it by academic researchers)of various supplemental series, such as the contribu­tions of investments in human capital and natural re­sources to economic growth.More recently, concerns have been raised about theadequacy of the national accounts in capturing the dif­ferential impact of the current recession across house­holds, industries, and regions of the country. Concernshave also been raised about the failure of the nationalaccounts to highlight and provide adequate warningabout the imbalances that developed in housing and fi­nancial markets.This article explores each of these issues and relatesthem to the need for expanded or supplementary mea­sures for the national accounts, highlighting what suchestimates might reveal relative to the conventional sta­tistics presented by GDP and other aggregate statisticsfrom the accounts. In particular, it explores how theaccounts might be extended to provide new measuresof (1) the distribution of growth in income acrosshouseholds, other sectors, and regions and (2) the sus­tainability of trends in saving, investment, asset prices,and other key variables important to understandingbusiness cycles and the sources of economic growth.
Broad Social Accounts
Kuznet’s concerns about the exclusion of a broader setof activities from the national accounts has been ech­oed over the ages, notably by Robert F. Kennedy in hiseloquent critique of GDP as a measure of society’sprogress.Too much and too long, we seem to have sur­rendered community excellence and community values in the mere accumulation of materialthings. Our gross national product,
1
if we should judge America by that, counts air pollution andcigarette advertising, and ambulances to clear ourhighways of carnage. It counts special locks forour doors…. Yet the gross national product doesnot allow for the health of our children, the qual­ity of their education, or the joy of their play … itmeasures everything, in short, except that whichmakes life worthwhile. And it tells us everythingabout America except why we are proud that weare Americans.
Robert F. Kennedy Address,
University of Kansas, Lawrence, Kansas, March 18, 1968This concern has remained an issue, and at his inau­gural address, President Barack Obama saidThe success of our economy has always de­pended not just on the size of our gross domesticproduct, but on the reach of our prosperity; onthe ability to extend opportunity to every willingheart—not out of charity, but because it is thesurest route to our common good.
President Barack Obama,
Inaugural Ad­dress, Washington, DC, January 20, 2009The recent
Report on the Measurement of Economic Performance and Social Progress 
addressed these issues.The big question concerns whether GDP pro­vides a good measure of living standards. In
1. Gross national product is the market value of goods and services pro­duced by labor and property supplied by U.S. residents, regardless of wherethey are located. It was used as the primary measure of U.S. productionprior to 1991, when it was replaced by GDP, which is that market value of goods and services produced within the United States.
 
 
13April 2010
S
URVEY OF
C
URRENT
B
USINESS
many cases, GDP statistics seem to suggest thatthe economy is doing far better than most citi­zens’ own perceptions. Moreover, the focus onGDP creates conflicts: political leaders are told tomaximize it, but citizens also demand that atten­tion be paid to enhancing security, reducing pol­lution, and so forth—all of which might lowerGDP growth.
Stiglitz, Sen, Fitoussi 
(2009)The Chair of the Commission that produced the re­port, Joseph Stiglitz, summarized the conclusions asfollows:The fact that GDP may be a poor measure of wellbeing, or even of market activity, has, of course, long been recognized. But changes in so­ciety and the economy may have heightened theproblems, at the same time that advances in eco­nomics and statistical techniques may have pro­vided opportunities to improve our metrics.
 Joseph Stiglitz 
(2009)Work by Alan Krueger and others (2009) is the mostrecent comprehensive attempt to develop a broadermeasure of social welfare.
2
Their “timeuse accounts”develop a measure of happiness based on survey dataon time use and happiness in different activities. Theiraccounts represent a significant step forward in thelong quest to develop a broader measure of social wel­fare. They illustrate the progress that can be made by having such research conducted by a multidisciplinary team of independent researchers from academia. Theirwork also is an example of how various problems canbe avoided by developing an entirely new measure withits own framework, concepts, and methods rather thanby trying to expand GDP.Past efforts to expand conventional GDP have foun­dered on the inevitable problems of subjectivity anduncertainty inherent in measuring health, happiness,and the environment.
3
Critics feared that the inclusionof such uncertain and subjective values in GDP wouldseriously diminish the essential role of the national ac­
2. “National Time Accounting: The Currency of Life” includes analysesand critiques of the timeuse accounts, including one comparing the timeuse accounts to existing national accounts (Kruger and others 2009); see“National Time Accounting and National Economic Accounting” (Lande­feld and Villones 2009).3. Work such as Nordhaus and Tobin (1973), the Genuine Progress Indi­cator (2007), the World Development Indicators (World Bank 2009), andthe Index of Sustainable Economic Welfare are examples of the range of efforts that have been designed to spur further work on the regular produc­tion of broader measures of social welfare. While these efforts have beenmuch discussed and debated, there has never been sufficient consensus onthe difficult issues involved to produce a common set of concepts or meth­ods or a widely accepted regular set of estimates that were used for analytcal or policy purposes.
counts to financial markets, the Federal Reserve Board,the Treasury Department, and Congress in measuringand managing the market economy.In recognition of these difficulties, several NationalAcademy of Sciences studies on accounting for the en­vironment (Nordhaus and Kokkelenberg 1999) andnonmarket production (Abraham and Mackie 2005)and the
System of National Accounts 
(1993) guidelinesfor compiling GDP have all concluded that an expan­sion of the GDP accounts should take place in supple­mental, or satellite, accounts that extend the scope of the accounts without reducing the usefulness of thecore GDP accounts. They also conclude that such anexpansion should focus on economic aspects of nonmarket and nearmarket activities—such as energy and the economy’s use of natural resources, the impactof investments in research and development (R&D),health care, or education—and not attempt to measurethe welfare effect of such interactions.Finally, such an expansion of work would requireinterdisciplinary research between economists andsuch subject area experts as epidemiologists, physi­cians, geologists, and engineers in other governmentagencies to measure the relationship among air pollu­tion and human health and medical expenditures oramong petroleum extraction and changes in technol­ogy and reserves. It would also require the design, de­velopment, and collection of data from new surveys. Inan environment of large competing demands on scarceresources, it is critical that such an expansion of thescope of the accounts not occur at the expense of fundsneeded to maintain, update, and improve the existingGDP accounts.In recognition of the subjectivity, uncertainty, andresources involved in producing expanded welfare andnonmarket accounts, there is increasing interest in“new” estimates that could be produced with informa­tion currently used to produce the existing accounts.For example, the StiglitzSenFitoussi commission(2009), which explored expanded welfare measures,has suggested a number of ways that “classical GDP is­sues” can be addressed within existing GDP accountsor through an extension and improvement of measuresincluded in existing accounts.
What Can Be Done Within the Scope of the Existing Accounts?
Although the Bureau of Economic Analysis (BEA) hasconducted research on a number of nonmarket satel­lite accounts and is currently at work on several mar­ketrelated satellite accounts (for health care andR&D), relatively little attention has been paid to whatcan be done within the scope of the existing accounts
 
 
14
GDP and Beyond
April 2010
to produce more relevant statistics.
4
For example, formany households, the performance of GDP over thelast economic expansion (2000–2007) does not seemto square with their personal experience. The growthin their takehome pay and bills seems to be very dif­ferent from the growth of officially reported “real” dis­posable income. Yet data are available from BEA’snational accounts and other data sources on the break­down of incomes, taxes, consumer outlays, and theprices households confront. That data can be used toconstruct cash and other alternate estimates of incomethat come closer to what most households are experi­encing. Further information from Internal RevenueService (IRS) and other existing data could providefurther insights into the distribution of household in­come.Using statistics from BEA’s accounts and other exist­ing data, it is possible to construct new measures—andto highlight existing subcomponents of GDP—thatwould provide better indicators of, among otherthings, the differential impact of GDP growth acrossstates, the sustainability of U.S. GDP growth, the ade­quacy of saving and investment, and emerging risks tothe economy.The next section of this paper discusses potentialnew measures of the distribution of growth acrosshouseholds, across regions of the country, and acrossdifferent types of businesses. The last section of the pa­per discusses potential new measures of sustainability of trends in investment, saving, asset values, and fi­nance.
Income Growth Distribution AcrossHouseholds, Regions, and Businesses
Household income
The explanations for many of the differences betweenthe individual experiences of households and the pic­ture of the economy captured in GDP, personal in­come, and other aggregate statistics can be found by drilling down below those aggregates in the nationalaccounts and looking at the components and support­ing detail.
Compensation.
Growth in real GDP, real income,and real compensation must be first put on a per capita
4. For more information on BEA’s satellite account work, see the follow­ing: “Integrated Economic and Environmental Satellite Accounts” (Lande­feld and Carson 1994b), “Accounting for Household Production”(Landefeld, Fraumeni, and Vojtech 2009), “Accounting for NonmarketHousehold Production” (Landefeld and McCulla 2000), “U.S. Transporta­tion Satellite Accounts” (Fang, Han, Okubo, and Lawson 2000), “An Own­ershipBased Framework of the U.S. Current Account” (Lowe 2009), “BEA’s2006 Research and Development Satellite Account” (Okubo, and others2006), and “Toward a Health Care Satellite Account” (Aizcorbe, Retus, andSmith 2008).
or per worker basis to reflect something closer to theaverage worker’s experience. Part of the growth in pro­duction and income simply reflects the growth in thelabor force and the larger wage bill that must be dis­tributed across a larger labor force.Workers and households also confront differentprices than producers, and at times, these priceschange at quite different rates. For example, betweenthe first quarter of 2007 and the third quarter 2008,rapid increases in energy costs resulted in consumerinflation, as measured by BEA’s personal consumptionexpenditures price index, which rose at an average an­nual rate of 3.8 percent. In contrast, overall GDP infla­tion, which is a measure of domestic production andexcludes the prices of imported petroleum and otherimported products, rose at an average annual rate of 2.4 percent. Due in large part to these different pricesmeasures, growth in real GDP was 1.0 percentagepoint higher than the growth rate in real disposable in­come.Taxes and noncash benefits also drive a wedge be­tween the aggregates and the typical worker’s experi­ence. BEA’s measure of disposable income addressesthe tax issue by deducting taxes paid by households ontheir income. However, an alternate cash measure of disposable income would also deduct employer contri­butions to pension funds and contributions for healthinsurance and other benefits.
5
These payments by em­ployers are a real cost of production (which must be re­corded in the doubleentry NIPAs as income) and areal value to the employee. But when constructing ameasure of cash income, noncash payments by em­ployers that are not available for current consumptionshould probably be deducted along with taxes. Becauseof the strong growth in employer “supplements,” pay­ments by employers for pensions, health insuranceplans, and government social insurance, the differencebetween total compensation and takehome pay is of­ten large. Between 1967 and 2007, supplements, afteradjustment for inflation, grew at an average annualrate of 3 percent, while real wages and salaries grew atan average annual rate of 1 percent.Chart 1 illustrates the different perspectives on theeconomy that emerge by looking “below” the headlinenumbers. Between 2000 and 2007, the headline num­ber for real GDP grew at a 2.4 percent annual rate, andreal compensation grew at a 2.1 percent annual rate.
6
In comparison, over the same period, the below­theheadline numbers grew more slowly, with real
5. It would also exclude the interest and dividends earned by pensionfunds, which are included in personal income as part of personal interestand dividend income.6. The period of 2000–2007 represents the peaktopeak annual growthfor the last business cycle.

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