And this is only for one product. Imagine if similar breakdowns were done for hundreds of thousands of other products that are traded. What might that do to our perceptions of where value is flowing and who is benefitting? The OECD is attempting to reframe global trade data to take such factors into account, but that remains a long way off. Imagine what would happen if better information revealed that the U.S. trade deficit with China was a fraction of what we thought. What would that do to the politics of blame or to the assertions by economists everywhere that global imbalances are imperiling the future? What if the imbalances are a statistical mirage?
What’s left out of GDP
This isn’t just a hypothetical “what if.” More research and increasing efforts by academics and organizations such as the OECD and economists at various U.S. Federal Reserve banks point unequivocally in that direction. And it’s true not just for trade numbers, but also for the granddaddy of all economic indicators: GDP.
Gross domestic product is a universal numerical proxy for the economy (well, except in Bhutan, which uses “gross national happiness” instead). Politicians worldwide use GDP as a gauge of whether their countries are doing well or badly, and the number is deeply woven into our collective understanding of economic health.
Its weaknesses are well known yet bear repeating: It measures only output, and only output whose worth is recorded. So, it misses domestic work, volunteer work and black-market activities; none of those count toward GDP. Output is measured regardless of whether it improves quality of life, and contraction of output is counted as negative even if it improves quality of life. A factory that pollutes a river and whatever local or national government spends to clean it up add to GDP. Buying long-lasting light bulbs that use less energy detracts from it.
Perhaps more important, GDP also falls short as a measure of all sorts of “free goods” that manifestly improve daily life and make both work and play more efficient and less expensive. At MIT, Erik Brynjolfsson and his colleagues have been doing groundbreaking work studying such free goods, especially services readily available on the Web: Google, Wikipedia, LinkedIn and a host of others. (Although much of the time spent using these tools goes to entertainment, they clearly facilitate commerce as well.)
Because the effect of free goods is virtually invisible to the calculation of GDP, statistically, they add almost nothing. Yet by helping us find what we want and need, they clearly add something to our daily lives. How you calculate what they add is a matter both arcane and complex, and, therefore, scholars like Brynjolfsson work to find ways to account for what is currently uncounted.
Brynjolfsson’s conclusion is that we may be doing somewhat better than GDP numbers suggest, to the tune of tens or even hundreds of billions of dollars a year. That benefit, however, isn’t distributed evenly. Those with smartphones and computers who use their tools most effectively benefit disproportionately.
The result is that GDP may simultaneously underestimate how well some people are doing – those with the means and the savvy to buy and use technology – and how much others are struggling. The limitations of trade statistics also undermine GDP. Negative trade balances subtract from GDP, and if American trade deficits are, in fact, substantially less than calculated, then GDP is significant higher.
The entire lattice of numbers we use to determine our economic health is subject to similar limitations. That would be of only academic interest if it didn’t matter so much to our collective sense of how we are doing and if that impression, in turn, didn’t shape so intimately our perception of what we can do, what we might spend, and what the future might hold.
If you were given a 1950s road map to get from point a to point b, you would either get hopelessly lost or take an inordinately long time to reach your destination. New roads wouldn’t be marked, and old ones wouldn’t be relevant. Yet in fundamental ways, we navigate the global economy of the early 21st century with an equally antiquated statistical map, and it’s no wonder that so often events unfold in ways we didn’t expect with consequences we didn’t anticipate.
Karabell is president of River Twice Research, where he analyzes economic and political trends. His next book “The Leading Indicators,” will be published by Simon and Schuster in 2014.