Treasury Admits GDP Used Inappropriately

...much hilarity about this, as the official's name is Gruen, as in Gruen Transfer!

'The Gruen Transfer is a show about advertising, how it works, and how it works on us...[it] is named after Victor Gruen, the guy who designed the very first shopping mall. The term describes that split second when the mall's intentionally confusing layout makes our eyes glaze and our jaws slacken... the moment when we forget what we came for and become impulse buyers...'

Reposted in full from ABC Online, 17 September 2010

A senior Treasury official has admitted that his department has been guilty of overusing gross domestic product (GDP), after recognising that it is a flawed measure of economic wellbeing and social progress.

The Treasury's macroeconomics director Dr David Gruen told an audience at the NatStats conference in Sydney today that the body uses gross domestic product to measure economic wealth despite knowing its limitations.

"Economists and statisticians have long known that GDP is not and was never intended to be a measure of wellbeing or progress. While we have long known its limitations, we as a discipline, have not done enough to discourage its use in inappropriate places," Dr Gruen admitted.

"In fact, we arguably, if inadvertently, do much to promote GDP as a measure of progress. For example, speaking of my own institution, in the budget papers we present detailed analysis on the level and growth of GDP as well as its determinants."

As Dr Gruen reflected on the use and importance of the GDP, he cautioned institutions to be more mindful of how it is utilised.

He went on to say that the GDP has a lot of limitations, particularly because it does not take into account most household production.

It also does not factor in many goods and services produced by the public sector, thus in effect favouring the private sector and privatisation.

"It is largely a measure of market production and therefore misses a significant amount of household activity as it excludes home production of goods and services other than imputed rents," Dr Gruen explained.

"It doesn't appropriately measure the goods and services produced by the public sector, and it can also sometimes give a misleading picture of how well the economy is performing."

Dr Gruen's views were echoed across the NatStats panel which included OECD chief statistician Martine Durand, United Nations statistics division director Professor Paul Cheung and Griffith University's Associate Professor Geoff Woolcock.

Ms Durand preceded Dr Gruen's speech by saying that governments need to stop using GDP as the primary measure of wellbeing and instead use a range of indicators with broader coverage.

She also added that whilst statisticians recognise the limitations presented to them by using GDP as a measure, they should not be hasty to replace it with another indicator, but rather to find measures that complement it.

"We know GDP is not a good measure of wellbeing. What we need now is not something to replace GDP, but to compliment GDP in order to address the right issue," Ms Durand said in her address.

"Don't start by saying throw away GDP and replace it with something else, I think that will be wrong."

Professor Cheung reinforced this notion by urging governments to first define progress in a way that can be applicable across the country.

He said the same should be done with sustainability.

Professor Cheung says people should not leave it up to statisticians to define such complex and politically charged words that ultimately have a resounding impact of the way in which we view the economy.

But he said that broadly, GDP does its job well.

"Is there a conspiracy to get us in trouble?" Professor Cheung joked.

"We all know what GDP is about. It is a measure of output, it has its problems, but as an index it serves its purpose. So why don't we just leave it at that?"

He reiterated that the job of the statisticians is to ultimately provide undisputed benchmarks for national trends and not be coerced in to the political process.

Dr Gruen also addressed the global financial crisis, saying the lead-up was perversely masked by the use of GDP.

"In the lead-up to the global financial crisis, measures of GDP did little to warn us of the increasing fragility of the global financial system," he told the audience.

"In the period before the crisis, much of the strong growth in GDP in many countries was driven by unsustainable asset price inflation and strong growth in consumption, funded by increased borrowing that turned out to be unsustainable."

Such distortions are visible in the way GDP measures activity in the banking sector.

Dr Gruen drew the conference's attention to the fact that when using GDP, compensation for bearing risk is included as output in the finance sector.

"When banks increased interest margins in late 2008, in response to a radical reassessment of expected defaults and liquidity risks, this increase was booked as an increase in the output of the financial sector rather than a correction in the price of risk as it should have been," he told the audience.

This essentially overstated the output from the financial sector.

This distortion is not only limited to the finance sector, but also extends to the natural resources sector.

"The value of natural resources when they are extracted is treated as production and an increase in GDP. However, natural resources are assets already owned by the community. Their extraction and sale represents the transformation of an asset, the natural resource, into another asset - cash."

"By not counting the depletion of the natural resource asset, production or value added is measured by GDP is overstated, possibly at the expense of the wellbeing of future generations," Dr Gruen stated.