Job Outlook and Is GDP The Right Gauge of Growth?

Today’s weekly data for new claims for unemployment insurance can be read in a number of ways. New claims dropped by 12,000, so if your are optimistically inclined you could argue that this is more evidence that the economy is now recovering – there is plenty of anecdotal support for this contention and yesterday’s report from the Philadelphia Fed district that manufacturing is perking up certainly bolsters that view. This is the mode we have entered as inventories continue to decline and put pressure on suppliers to re-stock shelves.

The pessimists, however, can point to the continuing size of the new claims: 545,000 last week. This brings us back down to where we were in mid-July when a few folks were making the case for a rapid recovery. Since then things became stuck, and progress has been minimal. The good news is that we are now seeing rates of new claims 125,000 below the peak we reached in the early part of the year. The bad news is that we don’t seem able to get the figures to dwindle to a level indicative of a healthy economy. Obviously something continues to be very wrong.

For my part, as you know, I look at unemployment as an indicator not just of the economy’s immediate vitality, but also of the sustainability of the recovery.

Which means that I am inclined more towards pessimism than optimism based upon this data.

It looks very much as if businesses are highly skeptical about the recovery and the chances of it lasting. That drives them to avoid making a commitment to rebuilding their workforces. The private sector is a long way short of being able to maintain healthy growth, if for no other reason than it is locked up in fear. This, of course becomes self-justifying: the longer businesses hold off hiring, the longer consumers fear unemployment and save rather than consume. This lowers sales and thus validates the decision of businesses not to hire.

There is nothing unusual about this syndrome: it is normal during a recession. What is odd this time is the depth of the cuts that were made and the much larger number of unemployed now waiting new jobs. The longer this situation lingers the more risk we run of falling back into recession. So numbers like these are not a cause for much joy, even though they represent a move in the right direction. Were manufacturing cranking up more aggressively we should be seeing the new claims data dropping quickly down into the 150,000 range. Instead we have continuing claims, i.e. longer term unemployment, rising steadily.

We are nowhere near out of the woods, despite the recession having ended in the textbook sense.

Which bring me to a different topic:

Many commentators are now suggesting that GDP is a very inaccurate measure of what is going on in the economy. The reason for this is that GDP measures the production and consumption activity of an economy, but completely ignores a whole slew of ‘softer’ and more difficult to measure notions like well-being, quality, sustainability, and so on. A good example of this problem is our current situation: the recession is most likely ended because a classic inventory cycle appears to be unfolding. Stocks are depleted below acceptable levels and producers are being forced to increase activity, even though sales are still weak. The problem with touting this turn of events as a solid achievement is that we still have huge imbalances and a vast sea of distress: not just unemployment, but record foreclosures and bankruptcies as well. Any concrete measure of well-being would surely indicate we are still mired in trouble. This casts a shadow across the credibility of the claim that things have turned around. Studies of public opinion reveal that an increasing number of people regard figures like GDP as wrong, rigged, or simply irrelevant. This undermines support for public policy actions when they are needed to boost the economy and things like GDP are used as factors in the discussion.

We could put this public skepticism down to it being simply part of the general cynicism that has settled onto public discourse, but even so we need to think hard about why it that the public looks at GDP and other statistics as being nonsense.

One reason is that the wide distribution of incomes and its increasing concentration in a very small number of households has made the average person feel disconnected from the average growth in wealth. Obviously if the growth tends to go disproportionately to one group, others, who receive a smaller share, will view the overall change with a healthy disbelief. The American economy has undergone a rapid and historic shift in its distribution of wealth: the top tier garnering almost all the increase for years. This makes public statements by politicians about how well we are all doing ring hollow for more and more people.

Likewise when politicians sing the praises of the recovery they are talking to a population still reeling from the loss of wealth in their home values, and in ongoing fear of losing their job. Not just this but large numbers of people face poverty despite being fully employed.

The disconnect will inevitably grow as long as wealth is distributed the way it is here.

And the political process will become more extreme as various sections of the population steadily lose their ability to keep up with what they hear is a healthy overall economy. Populism and extremism are almost always associated with wide disparities in income because the middle class finds itself falling into ‘working class’ conditions. This tendency is exaggerated by an economic downturn. And is even more exaggerated by a downturn where a primary cause of the crisis was a bunch of vastly overpaid bankers whose jobs were saved by the very people losing their own jobs as part of the crisis.

Getting back to GDP: the French government commissioned an international study of ways to make GDP more responsive to actual outcomes in life and the way in which average people perceive their lifestyles being affected by economic changes. The study has recently been released and the French have announced that they will adopt the new measures. The effect will be to raise French GDP quite a bit. The driver of the increase is largely the way the new measures take into account some of the ‘soft’ issues. The average French person gets a much longer vacation: this obviously has value to them but this value is not measured in GDP. Similarly work at home and do-it-yourself activities are not counted in GDP – if you mow your own lawn that activity has no value in GDP; but if you pay to have in done, it will count because it is a ‘productive’ activity. This is clearly nonsense, but that’s the way GDP works.

Perhaps an even odder example of the way GDP distorts things is the example of a traffic jam: all those idling cars are consuming gasoline which adds to GDP via sales of gas. But nothing is being created that we can look at and say, credibly, that society is better off. Quite the contrary. Likewise Hurricane Katrina wipes out New Orleans, which is surely a social disaster, yet the re-building adds enormously to GDP. Where is the sustainable social benefit from reconstruction of devastated cities?

The French study was undertaken by a group of very well known and respected economists including Joe Stiglitz and Cass Sunstein form the US. It remains to be seen whether other countries adopt the new measures – I think it likely most of Europe will because of the new environmental components being proposed.

How would the US do with these new measures?

Our GDP would fall. I wonder if this has anything to do with the French haste in adopting the new standards? No it couldn’t be!

On a more serious note: this topic will not go away. Many economists have been arguing for years that GDP is only one measure of well-being and a not very good one at that. Household wealth and income may be one better measure as long as it includes a measure for leisure and work at home. Plus environmentalists have argued for a quotient for sustainability. The Europeans also want to include the benefits of socially provided services more accurately: if someone receives health benefits, but does not pay for them directly GDP undervalues that activity. If the same person purchases the same service and pays out of pocket then GDP rises accordingly. But the same social value has been created in both cases. The Europeans argue that GDP undervalues their standard of living as a consequence of things like this. And they are right.

But right now we are stuck with GDP – it is relatively easy to compute and nearly everyone worldwide does it the same way. So those obsessed with international comparisons will still prefer GDP until there is consensus over the alternative.

Meanwhile the French, never afraid to be unique, will start to produce a new version of GDP soon. And we have an economy that is recovering when measured the good old way.