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GDP & Beyond: Measuring Economic

Progress & Sustainability

SGE Annual ConferenceSeptember 21st, 2009

J. Steven Landefeld, Director

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Long Standing Issue▪ Kuznets original concerns regarding the scope of the original

accounts

▪ "Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product, if we should judge America by that, counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors…

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 measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans."

-- Robert F. Kennedy Address, University of Kansas,Lawrence, Kansas, March 18, 1968

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Long Standing Issue

▪ “The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on the ability to extend opportunity to every willing heart -- not out of charity, but because it is the surest route to our common good.”

-- President Barak Obama, Inaugural Address, Washington D.C., January 20, 2009

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Long Standing Issue▪ “The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximize it, but citizens also demand that attention be paid to enhancing security, reducing pollution, and so forth - all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognized. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.”

-- Joseph Stiglitz, Economist.com, September 10th 2009

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What Can We Do Within The NIPA’s: Economic Progress & Sustainability

▪ Measures of Economic Progress: Households Regions Business

▪ Measures of Sustainability: GDP Investment Asset Prices Leverage

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Real GDP, Real DPI & Real Compensation

2.4

0.4

2.7

0.5

2.1

-1.0-1.5-1.0-0.50.00.51.01.52.02.53.0

Avg. growth, 2000-2007 2008

Perc

ent

Real GDP Real Disposable Personal Income Real Compensation

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Household Income: Alternative Estimates

2.4

0.4

2.7

0.5

1.8

-0.4

1.5

-1.4-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Avg. growth, 2000-2007 2008

Perc

ent

Real GDP Real DPI Real DPI per capita Real DPI less transfers per capita

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Spendable Income: Cash Measures

1.8

-0.4

1.5

-0.5

1.1

-0.7-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Avg. growth, 2000-2007 2008

Perc

ent

Real DPI per capita Real Compensation per worker Real Wages per worker

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2.4

0.4

1.8

-0.4

1.9

-1.4-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0

Avg. growth, 2000-2007 2008

Perc

ent

Real GDP Real DPI per capita Real discretionary income per capita

Household Income: Cash Income*

* Cash income refers to income generated from the economy available for discretionary spending by households. This measure of Income excludes spending on such basics as food, shelter, clothing, child care, utilities, out of pocket medical care expenses, transportation and interest payments on consumer debt. Source: BEA NIPA data, deflated using PCE less food and energy price index.

** The slightly higher average annual growth rate in real DPI versus real discretionary income reflects the different deflators used to deflate each measure. The total PCE price index (used to deflate DPI) increased 2.3% from 2000-2002 and the PCE less food and energy price index (used to deflate discretionary income) increased 2.0%. Nominal DPI and discretionary income over the same time period increased 5.1% and 4.9%, respectively.

**

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Regional Household Income

Source: BEA Regional data.

Adjusting for regional price differences

7,423

-7,403-10,000

-8,000-6,000-4,000-2,000

02,0004,000

6,0008,000

10,000

West Virginia New York

$ Di

ffere

nce

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Regional Household Income

Source: BEA Regional data.

Impact of classifying retirement income in state of residence

12.5

-4.7-6.0-4.0-2.00.02.04.06.08.0

10.012.014.0

Florida Maryland

$ Di

ffer

ence

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Sustainability

▪ Measuring Sustainability: Long-Term Examples from Recent Experience

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Business Income: Real GDI & NDI

Source: BEA NIPA data

2.2

-0.4

2.0

-0.9-1.5-1.0-0.50.00.51.01.52.02.5

Avg. growth, 2000-2007 2008

Perc

ent

Real GDI Real NDI

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Business Income: Real Gross & Net Domestic Investment

Source: BEA NIPA data

1.5

-5.5

-1.9

-21.9-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

Avg. growth, 2000-2007 2008

Perc

ent

Real Gross Domestic Invest. Real Net Domestic Invest.

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Housing & Personal Income

Source: BEA NIPA data & Federal Reserve Board Flow of Funds data

Ratio of Residential Fixed Investment to Personal Income

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

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Equity prices, NIPA profits & GDP

0

10

20

30

40

50

60

70

80

90

100

1 949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

19

49=

1

Nom inal GDP "S&P clos ing prices" Domestic Profits from Curre nt Pdn.

Source: BEA NIPA data, Standard and Poor’s data

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Household asset values & savings

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

55000

60000

65000

80Q1

81Q1

82Q1

83Q1

84Q1

85Q1

86Q1

87Q1

88Q1

89Q1

90Q1

91Q1

92Q1

93Q1

94Q1

95Q1

96Q1

97Q1

98Q1

99Q1

00Q1

01Q1

02Q1

03Q1

04Q1

05Q1

06Q1

07Q1

08Q1

Bill

ions

of d

olla

rs

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Inde

x, 8

0Q1:

1.00

Net worth Personal savings rate Net worth as % of DPI

Source: BEA NIPA data & Federal Reserve Board Flow of Funds data

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Business Sector Leveraging

Source: BEA/FRB Integrated U.S. Macroeconomic accounts

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Financial Business TL / TA

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Missing the Mark

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What Else Should We Highlight?

▪ The thrust of the Economist cover story (and others like it) is that economists failed to adequately incorporate risk and the financial sector into their models of the real economy

▪ We need to provide them with the toolkit to help do that.