On 30th September 2015 the Office for National Statistics announced that revised GDP figures showed the UK was the fastest-growing advanced economy in the world in both 2013 and 2014. But how exactly do we measure GDP – and should we allow it to have so much control over us? Loes Witschge charted the unstoppable rise of the world’s most powerful measure
Illustrations: Christian Tate
30th September 2015 (Taken from: #20)
In a nondescript office in a squat red building under a perma-drizzling Welsh sky, Dominic Fludger is calculating the economic value of home-based ironing to the nation. The building is the UK’s Office for National Statistics (ONS) and Fludger is arguably the country’s foremost – and perhaps its only – laundry economist.
In the absence of solid data, he starts with an assumption – that ten percent of all clothing that is washed is also ironed. Data for how many loads of washing are done per household is readily available: Fludger adds the number of households that own a washing machine to his formula and discovers that the UK irons 3.3 billion kilogrammes of clothing a year. Using the price list from a launderette, he concludes that if all ironing were outsourced to professionals rather than being handled at home, it would increase the country’s GDP by £5 billion.
When all production, repair, washing and drying of clothes are added in, the market value shoots up to £97.2 billion, nearly six percent of GDP. “Imagine if everyone had to pay for it – it would be an enormous amount of production in the economy,” says Fludger.
Such are the breed of tasks undertaken under the auspices of the Measuring National Well-being programme of the ONS. In a building where about 2,000 people crunch the numbers on the British economy on a daily basis, the 35 men and women working in this particular room are allowed a bit more creative leeway in finding statistical approximations for the quality of life rather than just its bare production value. The programme’s director, Glenn Everett, is a cheerful man with keen brown eyes and a penchant for making jokes and following them up with gales of boisterous laughter. “I get in trouble when I call it the Joy Division,” he says when I ask if his team is considered the feel-good department by others at the ONS.
One of the ONS’s key jobs is calculating the Gross Domestic Product, a mighty statistic which, despite being shot through with questionable assumptions and hedged about with approximations, holds an iron grip on our minds. “GDP has become a proxy for living standards, a proxy for seeing how the country’s going,” Everett tells me. “But it’s not all about GDP.”
He argues that it’s important to put a number on things like ironing: doing the work ourselves rather than paying for it will negatively impact the GDP, even if our quality of life would remain the same. “In a recession you might find people’s well-being is no worse. It might even be better, mowing your own grass and doing your own laundry,” he claims. “The well-being department is giving more information and trying to push people not to focus on just one number. It’s complicated. So is the world, so is life. How do you distil all that in one number? We’re sort of saying you can’t.”
On 18th March 1968, less than three months before his assassination, Robert F Kennedy addressed an ecstatic crowd of 20,000 at the University of Kansas. With his baby-faced good looks which, according to the University Daily Kansan, had led “an all but swooning group of freshmen women” to greet him on the runway of the Lawrence Municipal airport, the presidential candidate was interrupted by applause 38 times as he lashed out at GDP. “It counts air pollution and cigarette advertising and ambulances to clear our highways of carnage,” he said. “It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armoured cars for police who fight riots in our streets.”
“Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.”
The idea behind GDP is fairly simple: it’s a tally of the value of all goods and services produced over a set period. If the number increases, your country is becoming more productive. The actual process of calculating GDP, however, is so intricate and arcane that virtually no-one knows how to do it from A to Z. The methodology for calculating GDP has been internationally standardised by the UN through its System of National Accounts. Its first iteration, published in 1953, was 57 pages long. Its latest edition, published in 2008, runs to 722 pages.
In the US, the nation’s productivity is worked out by a group of economists who are secluded in a suite of rooms without access to mobile phones, landlines or the internet, facilitating maximum concentration on their tricky sums. In the UK the process is considerably less dramatic. “Most of the time there’s no stress, it’s a fairly enjoyable process actually,” says Andrew Walton, the deputy director of the ONS national accounts coordination division. Crunching the numbers involves computers carrying out four evenings of six to ten-hour “supertasks”. But the key moment in determining the first GDP numbers is a surprisingly human affair: a three-hour-long meeting in which statisticians discuss the data they’ve received and make adjustments when something seems off.
There’s so much uncertainty around the figures and it’s not a real thing. It’s a frustration that GDP has become such a totem”
“The system will produce the numbers, but then it’s about rationalising and saying ‘OK, why has this one done that, why do you think this one is so high on the early returns?’” Walton explains. I ask him about the set-up in the meeting. “In the good old days we used to get lunch while we worked, they used to give us some sandwiches in there,” he says. “Thanks to budget cuts we don’t get lunch anymore – but we do still get biscuits.”
Even without a sandwich stimulus, Walton proudly claims that the ONS files some of the most accurate GDP bulletins in the world. But the numbers should nevertheless be considered with caution. As Diane Coyle, author of GDP: A Brief But Affectionate History, puts it, “Everybody focuses on the quarterly GDP figures that come out – is it up 0.2 percent, or is it up 0.3 percent – when actually there’s so much uncertainty around the figures and it’s not a real thing. It’s a frustration that GDP has become such a totem.”
GDP was born out of the turmoil of the Great Depression: as the US government tried to get a grip on the unprecedented financial collapse, it needed solid data on the country’s levels of production. Enter economist Simon Kuznets, a Ukrainian émigré who saw his task as a moral one and advocated that the parts of the economy which he considered to be of no use to society – including spending on weapons, marketing and “financial and speculative activities” – should be left out of the accounts. But when the country entered the Second World War, it became necessary to measure the impact of wartime production on private consumption, and a new formulation of GDP came to include all government spending.
The event which ended up catapulting GDP to global importance happened later during the war. From 1st to 22nd July 1944, 730 delegates from 44 countries gathered at the hastily spruced-up Mount Washington Hotel in Bretton Woods, New Hampshire. Their task was to design the framework for international economic co-operation after the war, and in three short weeks they created the International Monetary Fund (IMF) and the World Bank. The British delegation was led by John Maynard Keynes. In ill health at the time, the celebrity economist had only grudgingly accepted the gig, warning the undersecretary of the Treasury that the conference had too many delegates and would be “the most monstrous monkey-house assembled for years”. He thought that too much time had been allowed for the meeting and predicted morosely that it would swiftly descend into an intercontinental piss-up. “It is not easy to see how the main monkey-house is going to occupy itself,” he wrote. “It would seem probable that acute alcoholic poisoning would set in before the end.”
Keynes was not entirely wrong. The hotel’s Moon Room bar swiftly became the place for the largely ageing group of senior academics and economists to let off steam by necking booze and watching exotic song and dance routines. In his fascinating book about the conference, The Summit, journalist Ed Conway wrote about one commission which often held late-night meetings and was led by Canadian delegate Louis Rasminsky. Rasminksy wrote in his diary that he made sure to schedule a break in the Moon Room every night at 1.30am to “observe the titillating gyrations of Conchita the Peruvian bombshell… Thus refreshed and reinvigorated, we were able to carry on with renewed vigour for another hour or more.” And the delegates were not averse to busting a few of their own moves – Time magazine recorded how China’s lead representative, HH ‘Daddy’ Kung, liked to break out a “stamping, lurching, conga-like version of a 14th-century Ming dynasty dragon dance” when he was in the party spirit.
Keynes clashed early and often with his US counterpart, the career statistician Harry Dexter White. “The pair would shout at each other in meetings, bully each other in an attempt to get their way and, afterwards, abuse their rival to their friends,” wrote Conway. Ultimately, Keynes had to give in to many of the US demands – they held most of the money after all. As a result, both the IMF and World Bank got headquarters in the US and the dollar became the central currency in the new exchange rate regime. With many of the decisions at Bretton Woods informed by GDP, it became the go-to statistic for measuring economic achievement across countries, and was formally adopted by the UN three years after the conference.
“When GDP was first formulated it was just a measure of economic activity and over time it’s become taken to be a measure of well-being,” Joseph Stiglitz tells me. “And actually, increasingly, it’s a poor measure of both.” The Nobel Prize-winning American economist has been at the forefront of a movement that has sought to find better gauges to capture how societies are progressing, rather than quantifying just what they are producing.
“In terms of economic activity,” says Stiglitz, “a large part of GDP is imputed – just numbers that are made up. So there’s a whole set of things like government services and housing services [that] we don’t measure very well. And then we don’t measure lots of things like leisure activities or insecurity. Those are important aspects of well-being that are not brought into our matrix.”
“This is really important because what we measure really does affect what we do. When the government says, ‘Oh, this reform is going to lead to more growth,’ what they really mean is more measured growth by GDP. But if that reform actually led to more insecurity or a worse environment, well-being will go down.”
“And once you start thinking about inequality, I’d say GDP in the United States is a terrible measure of how the economy is doing. In terms of the experience of most individuals, the median income has stagnated for a quarter of a century. That’s a far better measure of how our economy is doing than GDP. The presidential campaigns ought to be saying something’s wrong with our economy, nothing’s been delivered for most Americans for a quarter of a century. But they don’t do that, they focus on GDP. [That’s why] one of the criticisms of having a better environmental policy is that it will cost us in GDP. It’s because we’re not measuring performance in the right way.”
If you really want to get GDP going, it’s great to go to war. Crime is also good for GDP because you end up with more alarms”
In 1972, Bhutan adopted Gross National Happiness as its main measure of national progress at the initiative of Jigme Singye Wangchuck, the country’s fourth Dragon King. Although it was widely mocked at first, the idea of emphasising well-being over production has gained traction in recent years. In 2011, the UN adopted the Bhutan-sponsored resolution 65/309, which put “happiness” on the organisation’s development agenda.
One of the big arguments in the case against GDP is that the statistic is too pliable to play such a large role in shaping policy. In 2010, Ghana increased its GDP by 60 percent overnight, after its statistical agency changed the base year from which economic growth was calculated. The revision meant Ghana enjoyed an instant upgrade from a low income to a lower-middle-income country, with the unintended consequence that it could no longer get concessional loans from the World Bank.
Some aspects of the economy are also notoriously difficult to measure, potentially skewing GDP results. Last year, the ONS started including the money made from illegal drugs and prostitution in its GDP figures, to comply with new UN regulations. Fludger remembers when the ONS was working on making the change. “You had people in the ONS saying, ‘I can’t believe I’m trying to work out the street price of crack cocaine’,” he says. Adding the £11 billion in illicit transactions didn’t end up making that much of a difference for the UK, but when Italy started taking its shadow economy into account in 1987, its GDP promptly shot up by 18 percent. As a result, the Italian economy leapfrogged its British rival in an event that’s come to be known as Il sorpasso – the overtaking.
But even if the numbers were 100 percent complete and accurate, GDP growth isn’t necessarily good growth. “If you really want to get GDP going, it’s great to go to war,” Glenn Everett explains at the ONS. “Crime is also good for GDP because you end up with more security, like more alarms.”
By far the biggest catalyst of the current drive to measure well-being is the ‘Report by the Commission on the Measurement of Economic Performance and Social Progress’, published in 2009 by Stiglitz and fellow economists Amartya Sen and Jean-Paul Fitoussi at the request of then-president of France Nicolas Sarkozy. The report argued powerfully that GDP is a system which has been consistently misused, and suggested that one of the reasons why the global financial crisis took so many people by surprise is that “government officials were not focusing on the right set of statistical indicators… Perhaps had there been more awareness of the limitations of standard metrics, like GDP, there would have been less euphoria over economic performance in the years prior to the crisis; metrics which incorporated assessments of sustainability (e.g. increasing indebtedness) would have provided a more cautious view of economic performance.”
In recent years, a host of statistical indices focusing on more than just economic output have sprung up, often taking the Stiglitz report as their philosophical and methodological backbone. The OECD’s Better Life Index measures its member countries’ well-being across 11 factors including civic engagement, life satisfaction and work-life balance. While the US is well ahead in terms of income, Ireland enjoys the highest sense of community and Denmark is the place to go for a satisfying work-life balance. The Happy Planet Index offsets life expectancy and experienced well-being against ecological footprint to assess countries’ efficiency in creating long happy lives for the smallest amount of environmental damage. Out of 151 nations, Costa Rica comes first. The UK and the US trail behind in 39th and 104th place respectively.
The ONS well-being department was also launched in the wake of the Stiglitz report. Twice a year, Everett’s team updates its “Well-being wheel”, which details the ups and downs in how Britons experience their lives, ranging from trust in the government (up from 25 percent to 37 percent between 2014 and 2015) to whether people feel safe walking alone after dark (86 percent of men do according to the most recent figures, compared to 62 percent of women) to happiness levels (34.1 percent of Britons currently claim to be “very happy” – the best score in four years). In many cases, the department’s work is a matter of highlighting existing figures to supplement GDP – for example by simply dividing it by the population size. When in 2014 UK chancellor George Osborne excitedly spoke of a “major milestone” when the UK’s GDP bounced back to its pre-recession levels, he and much of the media failed to mention that population growth meant that GDP per head was still down.
In her book, Coyle concludes that “we are in a statistical mist” and compares GDP to a bright light shining through fog. “The reason it’s still important is the reason it was important in the first place, which was just measuring the aggregate macro economy so that governments could do demand management and know how to set monetary policy and fiscal policy,” she tells me. “We need something and GDP is as good a something as anything.”
Still, Coyle asserts that GDP is becoming increasingly unreliable in measuring what it sets out to measure. Since the days of Simon Kuznets, the basis of the British economy has changed completely. Variety and quality for example – both crucial in an economy where 70 percent of output derives from services – don’t factor in much at all. “In 20 years we’ll have something different,” she says with confidence. “The fog is getting thicker.”
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