The Never-Ending Quest to Replace GDP

Maybe the Bhutanese show us the way by adopting "Gross National Happiness"?

I've often featured these sorts of articles concerning how we would be better off moving past gross domestic product (GDP) as a measure of economic welfare. But, what is becoming interesting is that many of today's mainstream economists seem to be agreeing instead of the left-leaning crowd which dominates this discussion.

Take former IMF chief economist Olivier Blanchard:

“The single focus on GDP or GDP growth in many policy discussions is misleading,” Olivier Blanchard, a former International Monetary Fund chief economist who’s now a senior fellow at the Peterson Institute for International Economics, wrote this month. “Distribution effects, or distortions that affect the composition rather than the size of output, or effects of current policies on future rather than current output, may be as important for welfare as effects on current GDP.”

Blanchard’s exhibit 1: the increasing discussions around inequality in America. Exhibit 2: China’s shift from investment toward consumption.

The Americans and the Japanese also warn that GDP readings--which are prone to significant revisions--may give an inadequate description of where economies stand at various points in time:

In the U.S. last week, Federal Reserve Bank of Atlanta President Dennis Lockhart questioned whether official data that showed growth of just 1.2 percent in the three months through June represented a true reflection of activity on the ground. “If you look beyond the troubling headline GDP growth number for the second quarter and study real final sales, a more consistent picture of economic momentum emerges,” he said...

In Japan, a new analysis by the central bank found that rather than contracting in 2014, the economy actually enjoyed robust growth. The contradiction between the government’s data comes as the Bank of Japan steps up its efforts to get better readings, such as by starting its own consumption index. Governor Haruhiko Kuroda has called for better numbers.

The same idea goes for the UK, EU and India:

In the U.K., an independent review in March by former Bank of England policy maker Charles Bean recommended a transformation of the nation’s data. “We need to take economic statistics back to the future or we risk missing out an important part of the modern economy from official figures,” Bean said in a press statement accompanying the report’s release in March.

It’s a similar story around the world. Yves Mersch, a board member of the European Central Bank, warned of the impact of technological change in a February speech. The New Zealand government has a well-being framework, while the European Commission has had a project for almost a decade to look beyond traditional GDP measures.

India’s outgoing central bank chief Raghuram Rajan has warned of the difficulty in measuring growth in the face of aging populations. GDP numbers there have come under scrutiny since a new methodology last year showed a booming economy outpacing China. Ruchir Sharma, head of emerging markets and chief global strategist at Morgan Stanley Investment Management, says such readings demonstrate “incompetence because the statistics bureau there is applying a new methodology not having tested it well.”

So far, though, the problem has been that nobody has come up with a workable replacement to GDP despite everyone criticizing its inadequacies. Replacing it with a new measure will be difficult, and getting the international community to adopt a new system of national accounts for compiling economic data will require much cooperation besides.

Still, why stick with something nobody is particularly fond of just because it's been hard to come up with something better?