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OECD: Politicians put too much trust in the GDP

| Text: Björn Lindahl

Do we have the necessary statistics to govern our societies in the best possible way? Or is a blind trust in statistics to blame, at least indirectly, for the collapse in trust in authorities after the financial crisis? Before dismissing this as a conspiracy – the theory was presented by none other than the OECD.

In a new report – ”Beyond GDP”– economists like Joseph E. Stiglitz, Jean-Paul Fitoussi and Martine Durand ask whether politicians have been blinded by focusing too much on GDP. The three have led a special group within the OECD working on how to measure economic development.

After the 2008 finance crisis, it only took a few years before United States’ growth was as high as before the crisis. But the GDP told us nothing about how this growth was distributed:

“In the United States, 91 percent of all the gains in income in the first three years of recovery (2009–2012) is estimated to have gone to the top 1 percent,” the economists write. 

A majority of households saw no improvement whatsoever.

“There was a similar phenomenon in Europe, most visible in countries most affected by the crisis. In those same three years of supposed recovery, growth in average household income in Europe, as measured in the national accounts, lagged GPD growth." 

Out of sync with reality

If the measurements we rely on are out of sync with how citizens experience their lives, a lack of trust in authorities will develop:

“Some would argue this is what happened in the United States and in most other industrial  countries in recent years, when the GDP statistics said the economy was in recovery and yet most people felt otherwise.

Photo: OECD

Joseph E. Stiglitz is an American social economist and a professor at Columbia University. Stiglitz won the Nobel Prize in Economy in 2001.

The researchers behind the report have long been arguing for creating a new measure of growth, which also shows how a country’s welfare in reality is being affected. But is it not exactly that which the UN is about to do, with its global goals for sustainable development?

Yes, the researchers admit, but the UN has no less than 17 goals, with a total of 232 global indicators which will then be complemented with national indicators to measure the work – “far too many to achieve a meaningful understanding,” they believe. 

Green GDP

Instead, the researchers want a broad selection of instruments, with only a few indicators. This is no easy feat, scientifically or politically. When Joseph Stiglitz was an economic advisor in the Clinton administration in the United States, he argued for the introduction of a green GDP number, to take into account the damage economic development does to the environment. 

Coal production might add to growth, for instance, but it also has an adverse effect both on the local environment, with air pollution from when coal burns and contributes to climate change. Not surprisingly, the coal lobby struck back and Congress threatened to cut off financing to the federal agencies undertaking this work if they continued to develop these metrics.

In the OEVD report “Beyond GDP”, it is not only argued that current GDP figures exaggerate economic growth. Existing figures also underestimate how serious the finance crisis was.

Fewer learned on the job

“The easiest to see – and to understand as something that we typically fail to take account of – is the change to human capital. While statistics on human capital typically focus on formal education, learning on the job is just as (or perhaps) more important.”

When there are high levels of unemployment, large numbers of people are simply not learning on the job. We can only indirectly get an inkling of the magnitude of these losses by looking at what happens to young people who enter the labour force during a recession, and the effect longer periods of unemployment has on their total life earnings. 

The researchers point out that when a company invests in in-work training, it is counted as a positive on the balance sheet. 

The same should be done in national budgets, the researchers argue:

“If the increased government expenditure takes the form of higher investments – whether in people, technology or infrastructure – its balance sheet should not deteriorate, as assets and liabilities increase by the same amount. It is simply a mistake to look only at the liability side of a balance sheet,” write the researchers.

In conclusion, they argue that politicians put far too much trust in GDP as a measure for economic development, and therefore failed to recognise that the crisis was about to hit in 2008. When the crisis came, the politicians concentrated on the wrong indicators, and made the wrong political choices, with serious and long-lasting consequences for many people.

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